Look back at the April 23rd post. Then read the following from Yahoo:
The CRB Index, which measures a basket of 19 commodities, is down 26% due to concerns of a global slowdown and an unwinding of speculative positions during the recent turmoil. The hardest hit commodities include natural gas (-46.9%), soybean oil (-34.4%) and corn (-31.2%). The best performing commodities are lean hogs (+12.2%), sugar (-3.6%) and gold (-5.5%). Crude oil is down 29%.
Tuesday, September 30, 2008
Thursday, September 25, 2008
Bailout?!? What's Really Going On?
I've always been a supporter of free market capitalism, but lately I've had my values tested. Listening to many people much smarter than I am saying we need some sort of "bailout" or our economy will be in jeopardy. But I finally found someone with my same values to help me out and keep things in perspective. He's Brian Wesbury, chief economist for First Trust. You can read his stuff at http://www.ftportfolios.com/Retail/Research/EconomicResearch.aspx . Since he is an economist, I'll try to put things in simple terms.
First, when you get a mortgage, a bank originates that loan. Nowadays, they usually don't hold the loan, they package those up and sell them to investors. In those packages, there are all sorts of mortgages bundled together, it's very hard to determine what the value is of those loans. There are people with excellent incomes and credit history and there are sub prime or liar loans in there. The thing I would like everyone to remember is 96%-97% of mortgages are being paid ON TIME! To me, value is what a buyer is willing and able to pay for something. Since this is a "crisis of confidence", nobody wants these loans and their prices are falling...really fast.
Second, OVER regulation by the government forces companies to use "mark to market" accounting. This means, if "the market" is currently valuing those assets at $0.22 on the $1 and you are an institution currently holding similar types of loans, you need to mark yours down to $0.22. Even though you may want to hold them forever! Again, because of over regulation, federal banking requirements force you to raise more money to shore up your balance sheet. It becomes a vicious cycle and snowballs...thus a "crisis of confidence". Mr. Wesbury uses the example if houses in your neighborhood were all worth $200,000 and you had a loan for $100,000. If one of your neighbors went bankrupt and sold their house for $75,000, your house would now be "valued" under mark to market at $75,000. The bank would come to you and say you need to raise an additional $25,000 and give it to us to even it out. Let's say you do that and then another neighbor went under and sold for $50,000. Now you need to mark yours down yet again and add another $25,000. But you may say, you never even want to sell your home. You'll stay in it forever. You couldn't do this for too long could you. Well neither can the banks.
Mr. Wesbury's idea is to temporarily stop the "mark to market" rules. Let things cool down and the panic to stop. 96%-97% are still paying their mortgages on time so maybe these investors WANT to hold their loans forever and not sell them. They certainly don't want to sell them at $0.22 on the $1.
This won't cost taxpayers one dime. This, along with strong language could prevent further panic.
First, when you get a mortgage, a bank originates that loan. Nowadays, they usually don't hold the loan, they package those up and sell them to investors. In those packages, there are all sorts of mortgages bundled together, it's very hard to determine what the value is of those loans. There are people with excellent incomes and credit history and there are sub prime or liar loans in there. The thing I would like everyone to remember is 96%-97% of mortgages are being paid ON TIME! To me, value is what a buyer is willing and able to pay for something. Since this is a "crisis of confidence", nobody wants these loans and their prices are falling...really fast.
Second, OVER regulation by the government forces companies to use "mark to market" accounting. This means, if "the market" is currently valuing those assets at $0.22 on the $1 and you are an institution currently holding similar types of loans, you need to mark yours down to $0.22. Even though you may want to hold them forever! Again, because of over regulation, federal banking requirements force you to raise more money to shore up your balance sheet. It becomes a vicious cycle and snowballs...thus a "crisis of confidence". Mr. Wesbury uses the example if houses in your neighborhood were all worth $200,000 and you had a loan for $100,000. If one of your neighbors went bankrupt and sold their house for $75,000, your house would now be "valued" under mark to market at $75,000. The bank would come to you and say you need to raise an additional $25,000 and give it to us to even it out. Let's say you do that and then another neighbor went under and sold for $50,000. Now you need to mark yours down yet again and add another $25,000. But you may say, you never even want to sell your home. You'll stay in it forever. You couldn't do this for too long could you. Well neither can the banks.
Mr. Wesbury's idea is to temporarily stop the "mark to market" rules. Let things cool down and the panic to stop. 96%-97% are still paying their mortgages on time so maybe these investors WANT to hold their loans forever and not sell them. They certainly don't want to sell them at $0.22 on the $1.
This won't cost taxpayers one dime. This, along with strong language could prevent further panic.
Wednesday, September 24, 2008
Secrets of Investing
Benjamin Graham, author of The Intelligent Investor and Warren Buffett's teacher, said you need three things in order to become a successful investor:
1. Every time you buy a stock you need to think about it like you're buying the whole business and you're a business owner. Buying one share of Microsoft should be viewed the same as buying the corner pizza shop, let's call it Pizza Express. When you become a business OWNER, all you should care about is how much cash is in the cash register at the end of the day after all the bills have been paid. This is what the great investor Bruce Berkowitz says. That is all you can pocket as an owner.
2. Take advantage of Mr. Market whenever you can. Mr. Market was a man created by Benjamin Graham. He is completely crazy. It used to be every day, but now in the day of the internet it's every second, he is offering to buy you out of your Pizza Express business. He doesn't know what you paid for it. In fact, you paid $100,000 cash and have no debt on the business. He offers you $90,000 right now. Do you accept? Do you panic? You still have the same amount of cash in the cash register today. People are still buying pizzas. So you tell him to stick it where the sun don't shine. But he keeps coming back. $80,000...$75,000...$99,000...$105,000... So you have two choices. One, take advantage of him, buy more Pizza Express stores when the offering is low or two IGNORE HIM. There is no reason to watch the stock market daily, weekly, monthly, quarterly or even yearly. Warren Buffett said they could close the market for years and he wouldn't care.
3. Buy with a margin of safety. If your Pizza Express, which you paid $100,000 for, generates $10,000/year to you (and you don't work in it), that means after 10 years you'll have your investment back and start making money on your investment. This, of course, assumes no increase in your annual income nor any appreciation potential in the business. So buying with a margin of safety would say, I only want to pay $50,000 for this Pizza Express. That way, if people start buying less pizzas, or if costs of ingredients skyrocket or if "fill in your own" happens, then it won't take me so long to get my money back. Buying what you believe is a $100,000 business for $50,000 lowers your chances for a loss.
I think the main point of all of this is in trying to help investors control their behaviors, because controlling your behaviors is of utmost importance. As a business owner (stockholder), focus on the cash in the cash register. Stop listening to Mr. Market (watching stock prices) and buy or use managers who buy with a margin of safety. Then go golfing, fishing or hiking and enjoy your life. You'll only be following the advice of the greatest investor ever.
1. Every time you buy a stock you need to think about it like you're buying the whole business and you're a business owner. Buying one share of Microsoft should be viewed the same as buying the corner pizza shop, let's call it Pizza Express. When you become a business OWNER, all you should care about is how much cash is in the cash register at the end of the day after all the bills have been paid. This is what the great investor Bruce Berkowitz says. That is all you can pocket as an owner.
2. Take advantage of Mr. Market whenever you can. Mr. Market was a man created by Benjamin Graham. He is completely crazy. It used to be every day, but now in the day of the internet it's every second, he is offering to buy you out of your Pizza Express business. He doesn't know what you paid for it. In fact, you paid $100,000 cash and have no debt on the business. He offers you $90,000 right now. Do you accept? Do you panic? You still have the same amount of cash in the cash register today. People are still buying pizzas. So you tell him to stick it where the sun don't shine. But he keeps coming back. $80,000...$75,000...$99,000...$105,000... So you have two choices. One, take advantage of him, buy more Pizza Express stores when the offering is low or two IGNORE HIM. There is no reason to watch the stock market daily, weekly, monthly, quarterly or even yearly. Warren Buffett said they could close the market for years and he wouldn't care.
3. Buy with a margin of safety. If your Pizza Express, which you paid $100,000 for, generates $10,000/year to you (and you don't work in it), that means after 10 years you'll have your investment back and start making money on your investment. This, of course, assumes no increase in your annual income nor any appreciation potential in the business. So buying with a margin of safety would say, I only want to pay $50,000 for this Pizza Express. That way, if people start buying less pizzas, or if costs of ingredients skyrocket or if "fill in your own" happens, then it won't take me so long to get my money back. Buying what you believe is a $100,000 business for $50,000 lowers your chances for a loss.
I think the main point of all of this is in trying to help investors control their behaviors, because controlling your behaviors is of utmost importance. As a business owner (stockholder), focus on the cash in the cash register. Stop listening to Mr. Market (watching stock prices) and buy or use managers who buy with a margin of safety. Then go golfing, fishing or hiking and enjoy your life. You'll only be following the advice of the greatest investor ever.
Signs of the Bottom Continued
1. Investors yanked more than $33 Billion out of stock mutual funds so far this year. This number surpasses the $27 Billion that investors took out in 2002...the year of the last bottom. The last year before 2002 with net redemptions was 1988 right after the crash of 1987. People love to buy high and sell low. They can't control their behaviors. That is why most people won't ever be rich.
2. Warren Buffett (the world's greatest investor if you didn't know) made a sizable investment($5 Billion) in Goldman Sachs. Warren loves to buy low. If these things aren't a buy signal from Heaven...I don't know what is.
3. There is a HUGE discrepancy in operating earnings for the S & P 500 (THE stock market). Top down is showing $58.87 for 2009. Top down takes a macro view of everything and the places a "guess" on what the economy is going to do as a whole. They have talked recession for over a year and we haven't been in one, but we may get there eventually. Bottom up earnings for 2009 are $104.63. This comes from individual analysts researching individual companies from the bottom up. Averaging analyst results for each company individually is showing a pretty darn cheap market right now. Could the media be producing so much misery?
2. Warren Buffett (the world's greatest investor if you didn't know) made a sizable investment($5 Billion) in Goldman Sachs. Warren loves to buy low. If these things aren't a buy signal from Heaven...I don't know what is.
3. There is a HUGE discrepancy in operating earnings for the S & P 500 (THE stock market). Top down is showing $58.87 for 2009. Top down takes a macro view of everything and the places a "guess" on what the economy is going to do as a whole. They have talked recession for over a year and we haven't been in one, but we may get there eventually. Bottom up earnings for 2009 are $104.63. This comes from individual analysts researching individual companies from the bottom up. Averaging analyst results for each company individually is showing a pretty darn cheap market right now. Could the media be producing so much misery?
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