UTX: Few Signs of a Global Slowdown
July 17th, 2008 | Posted by stockUnited Technologies (UTX) shares jumped 5.9% Thursday after a solid earnings report.
For weeks, many investors have been worried that a slowdown in overseas economies could hurt big U.S. exporters. (See “A World of Woe for Big U.S. Exporters?”)
United Technologies’ results eased those fears a bit. Executives acknowledged the impact of a slowdown in the U.S. and some other parts of the world, but seemed surprisingly upbeat about the firm’s overall prospects worldwide.
Greg Hayes, UTC’s vice president of accounting and finance, told analysts that parts of Europe were surprisingly strong, especially France, Germany and Eastern Europe. Asia was “very, very strong,” Hayes said. “We’re being very successful in those markets that are expanding, especially in the emerging markets,” Hayes added.
Eventually high oil prices, rising world interest rates and other factors could appreciably slow down global growth. Even so, it’s an open question whether this would significantly slow down the worldwide infrastructure boom, which United Technologies is helping to serve through its Otis elevator and Carrier air conditioning divisions.
Off Balance Sheet Items – FASB is amending the disclosure, another new ‘must know’ vocabulary list
July 16th, 2008 | Posted by stockOverview:
It looks like there is going to be another new vocabulary list come November, and its impact, for better and for worse, may rank up there with FAS 157. Specifically, the FASB is planning on releasing an amendment to FAS 140, Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities (September 2000), which deals with off balance sheet items (OBSI). The issue was added to the full agenda this year and is moving fast. In the current market environment, the words “off balance sheet item” are enough to trigger sell orders.
The FASB is expected to release an exposure draft next month (for Labor Day reading), with hopes of an effective post November 15, 2008 requirement (many of the brokerages are on a November fiscal: GS, MS, LEH). The new rule would change what and when an OBSI must be consolidated into a company’s books and reported publicly, as well as eliminate the ability to create certain types of OBSIs (QSPE). The items in OBSI are typically in a separate corporation known as Special Purpose Entity (SPE), Qualified Special Purpose Entity (QSPE) or Variable Interest Entity (VIE). These OBSIs typically hold transferred assets, from the original owner (corporation) to the new entity (SPE, QSPE, VIE), such as loans or securities from mortgages, credit cards, students,… The value of these assets, along with any obligation of the original company, is the main unknown to investors.
Commentary:
Any change to the requirement could drastically change the ‘known’ position of a company’s balance sheet, quantifying their obligation, and adding valuable management disclosure and analysis. The accounting issues, evaluations and assumptions are complex and the issue is politically charged. There have also been recent discussions of exempting certain companies from the rule. Investor confidence is extremely low and more importantly the creditability of both corporate and elected officials has now been called into question. The proper and timely dissemination of financial information is critical to investors and for our markets to function. The disclosure may cause additional selling, but investors have a right to know. Your health does not change when you see your doctor, only your knowledge and ability to address it.
I will continue to monitor the situation and release additional information after the exposure draft is issued. In the mean time investors should get a basic understanding of the issue and an appreciation for its seriousness.
For addition information you can link to the FASB site here
How Much Time Does Amateur Investing Require?
July 16th, 2008 | Posted by stockIf you invest or trade in individual stocks, how much time do you spend on research before you buy?
Yesterday I was talking to Ron Sweet, the vice president of equity investments at asset manager USAA. After warning that this is a “perilous time” for individual investors, he advised: “You have to spend 40 or 50 hours on a stock to really know it.”
40 hours per stock and a 40 stock portfolio — that’s 1,600 hours. But you’d be foolish to buy all or even most of the stocks you get to know. The whole point of your research is to pick the winners from the losers. So if you’re talking about research on, say, 100 stocks, that adds up to at least 4,000 hours of research. That’s 77 hours per week!
Jim Cramer advises spending about an hour a week for each stock you own. I believe he advises investors have a smaller portfolio, but even if you have just ten stocks, that’s 10 hours every week. And you also should make plenty of time for scouting out new prospects. In his latest book, Cramer steers most people away from do-it-yourself investing. As I wrote in December: “To advise readers and viewers to trade short-term, Cramer says, is like telling them ‘you too can play in the NBA.’ A few might be able to do it, but the vast majority won’t.”
I would guess that most amateur stock pickers are not spending anywhere near the amount of time either Sweet or Cramer advise.
Much of the investing advice on the Internet seems designed to reassure investors that stock-picking is easy. Often they’re paired with some investing method (for sale in a book or over a web site) that offers effortless results.
A financial planner named C.C. Collins writes (in a post found several places on the web for some reason):
“The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.”
One author, Phil Town, says you can invest in “just a few hours per week.”
Some part-time investors do spend a substantial amount of time.
For example, this individual investor named Brad spends as much as 15 to 20 hours per stock “collecting information, studying fundamentals and watching them over a period of time.” After that initial research, “maintaining and updating new information over time becomes quite routine.” A nurse, Brad says he spends far less time on his health care stocks, which he already understands well.
Brad’s method sounds like the most time an employed person could realistically spend on stock picking in their spare time. Do you think it’s enough? How much time is appropriate? Can a part-time investor ever match the time and resources that professionals can spend on equity research?
Another question: Does it matter how much time you spend? Or, as many mutual fund managers find, are you doomed to never outsmart the market over the long term anyway?
Don’t Ignore What Darwin Teaches
July 15th, 2008 | Posted by innovAll animals are equal, but some are more equal than others.
—George Orwell
George Orwell and Charles Darwin got it right, at least when it comes to new product development.
When you are trying to come up with the next big thing, you want to start with as many ideas as possible. In fact, research and experience tell us that starting with hundreds of ideas will dramatically increase your innovation success rate.
So, the first half of the Orwell quote is correct: Initially, all animals (ideas) are indeed equal.
But the problem here is obvious: If you have a couple of hundred potential ideas, you really don’t have any. You need a way to sort through them all to find the ones that, as Mr. Orwell might say, “are more equal than others.”
The least promising concepts must be eliminated as quickly as possible, and since you are leading this charge, natural selection is up to you. So let us give you four Darwinian Innovation rules. Humanely kill the idea if:
The CEO doesn’t like it. It’s as simple as this: “If the Alpha ain’t happy, no one is happy.” It is virtually impossible to gain the necessary support for a new idea if the CEO—or anyone with substantial power in senior management ranks—is against it. You can complain about this until the cows come home, but it is a fact of corporate life. Want to save thousands of hours? Pushing the wrong ideas will waste time and money and turn you into a martyr. Natural selection has already taken place; you just need to realize it.
You can’t build a moat around it. If you can’t protect the idea’s underlying intellectual property through patents, superior distribution, or something else, pat yourself on the back for coming up with a really cool idea—and start looking for a different one. The last thing you want to do is spend a lot of time and money educating the market about how wonderful your new product or service is, only to have 8,327 competitors rush in and knock you off once you gain a toehold. They will be able to sell their version of your great idea for less because they don’t have to recoup development costs. You did the development work for them—for free.
It doesn’t fit your criteria (I). This has two parts. The first has to do with brand alignment and is best explained by example. Say your company sells low-end cosmetics through the nation’s drug and discount stores, and thanks to a remarkable stroke of luck, you have developed a truly effective wrinkle cream that you are absolutely convinced could sell for $500 an ounce. You are clearly a rock star, or at the very least, a chemistry genius. Sadly, unless you are prepared to start a new division, under a new brand name, either license the idea to someone else or forget about it. People will not be looking to your company for high-end stuff.
It doesn’t fit your criteria (II). O.K., the idea fits your brand, but can it pass key hurdles set by you and your management team? Here are some common examples:
A)”We can bring it to market by X date.” If you can’t go from idea to marketplace in a fairly short period, the concept is going to cost you too much to develop, lose momentum, and/or make you vulnerable to being overtaken by the competition.
B)”We can produce it.” Show us an idea session, and we’ll show you an R&D guy with high blood pressure. It is critically important to understand manufacturing possibilities and limitations. Is outsourcing a consideration? Have you brought experts in from outside to help you see possibilities and solve production and operational challenges?
C)”This is a big idea.” Unless it shows the ability to increase revenues substantially—typically 10% of sales for a small company and at least $50 million for a large one—drop it. It will not garner the internal support it takes to drive even the greatest ideas to market. (The exception is an incremental idea within a planned portfolio of new product launches—i.e. the first in a new line of drill bits you are going to bring to market.)
Here’s one last tip. In every organization is a natural pull between safe ideas (evolutionary) and industry-changing ideas (revolutionary.) Push your team to create revolutionary ideas. Then subject them to the four tests above. Big ideas survive; the runts don’t. The weak ideas will die off—thank you, Mr. Darwin—and you will be left with those strong enough to face the fierce competition and ferocious appetite of your waiting consumers.
July 14th, 2008 | Posted by stockSo many things happening in the financial markets today! Not that you could tell by looking at the closing prices of major stock indexes, which after a volatile session ended the day narrowly lower. (The Dow was down just 45 points and the S&P 500 off a routine 0.9%.)
1. M&A activity. For all the trouble that is out there, don’t let anyone tell you that “banks aren’t lending.” For one thing, American homebuyers are still getting mortgages at a historically low 6% interest rate.
For another, firms are still obtaining financing for huge multi-billion-dollar merger-and-acquisition deals. Among the headlines Monday: Anheuser-Busch Companies (BUD) agreed to be acquired by Belgian brewer InBev for $52 billion. Waste Management (WMI) launched a $6.2 billion bid for Republic Services (RSG).
Of course, it’s no coincidence that garbage and beer are two of the most stable industries out there. Banks may be avoiding risky industries, just as they’re clearly shunning homebuyers with lousy credit histories. But in both the mortgage and M&A markets, lenders with good credit histories can still get financing with relative ease.
2. Banks: Waking up to the possibility of bank failures
The failure of IndyMac Bank might have been anticipated, but apparently it really spooked investors today. It was almost like a delayed reaction, with bank stocks starting lower and then plunging by the end of the day. The S&P Regional Banks index dropped 8.77% and the S&P Diversified Banks index fell 7.34%.
Given the damage to banking stocks, it’s impressive that stocks only fell 0.9%. This suggests that, while investors panic about which bank could be next, they aren’t too worried about the non-financial sectors or even the broader economy. (Or at least that worries about the economy, corporate earnings, etc. weren’t made any worse by IndyMac’s news.) It also is a sign of how financial stocks represent a diminishing portion of the overall stock market’s performance.
3. All that attention on Fannie Mae (FNM) and Freddie Mac (FRE) was overblown.
Listening to the news over the weekend, sometimes it sounded like the entire mortgage finance system was in jeopardy. It wasn’t.
This morning, in the midst of this crisis, Freddie Mac was able to auction off $3 billion in debt, which points to a key distinction that many have missed.
Fannie and Freddie’s shareholders have every reason to be worried: A federal bailout need not protect their equity investments. Equity holders are always last in line when a business goes bankrupt.
However, there was never much doubt that the federal government would protect the GSE’s debt holders, and, by extension, the entire system supporting homeownership in the U.S.
As Bill Stone of PNC wrote today:
If the Federal Reserve and policy makers drew a line in the sand at Bear Stearns, they most certainly will do everything possible to prevent the failure of the GSEs. The combination of the implications for the housing market and the fact that many central banks, pension funds, and commercial banks hold GSE debt make it a veritable lock that they will not be allowed to fail.
If the stock market really thought Freddie and Fannie were about to fully collapse, the Dow would be down 1,000 points, not Friday’s 128.
4. Guess what I heard?
Many on Wall Street today are mocking the SEC’s threats to crack down on rumor-spreaders.
(Wait, I’m sorry: Regulators say the problem is “false” rumors. Though of course, one definition of a rumor is that you don’t know if it’s true or false.)
In a post titled “Is the SEC at war with the First Amendment?,” Peter Cohan takes aim at federal policymakers who spread their own fictions.
I’m a big believer in honest information exchange — but the SEC should apply that policy to those who lie about how great things are when they’re really falling apart as well. Unfortunately, that won’t happen because cheer-leading seems to be a requirement for holding high office.
He has a point.
But I also understand where the frustration about rumors comes from. It’s a huge disadvantage for individual investors who trade during the day.
Imagine if today you were an individual investor in Washington Mutual (WM). WaMu shares started the day lower, and then accelerated throughout the day and ended down a whopping 35%.
What caused the slide? A Lehman analyst’s gloomy report? Jim Cramer’s comments? Or rumors? WaMu later issued a statement reassuring investors that it has plenty of capital.
If there were less rumor-spreading, investors without Wall Street connections might have a better idea of whether fears are legitimate or pure speculation.
But maybe, instead of an argument against rumors, this is more of an argument against individuals being involved in trading stocks in the first place. Without institutional backing, is it really possible to stay on top of a crisis as it develops minute by minute? Put your money in an index fund and you can go switch off Cramer and watch the soaps. “Stop trading” indeed.
Male vs. Female Stocks: Who’s Winning?
July 11th, 2008 | Posted by stockIn May I blogged about BW colleague Peter Coy’s fascinating look at how the U.S. economic slowdown is hurting men much more than women. He pointed out that adult women had gained almost 300,000 jobs since November, while men had lost 700,000 jobs.
“You might even say American men are in recession, and American women are not,” Coy wrote. “What’s going on? Simply put, men have the misfortune of being concentrated in the two sectors that are doing the worst: manufacturing and construction. Women are concentrated in sectors that are still growing, such as education and health care.”
What are the investing implications of this, I wondered? Would “male” stocks like Smith & Wesson (SWHC) and Cabela’s (CAB) suffer, while “female” stocks like Avon Products (AVP), Estee Lauder (EL) and Ann Taylor Stores (ANN) do well?
Another colleague, Suzanne Woolley, suggested I revisit the issue. “It could be fun to keep track of which ‘gender’ is winning,” she said.
Neither gender is winning exactly. All five stocks are way down since May, reflecting the broad weakness in the consumer discretionary space. Consumers are stressed out by high gas prices and a weak economy, so not surprisingly they don’t have the cash to pamper themselves.
But, judging by the stock prices, men are indeed cutting back spending more than women. Smith & Wesson is off 29% and Cabela’s has plunged 30% since May. On the female side, Avon is down 11%, Estee Lauder has fallen 4% and Ann Taylor is off 7% (though it somehow plunged more than 8% on July 10 alone — wow.)
My five stocks are a small selection. If only there was a more scientific way to track this trend. Maybe I should try to convince our corporate cousins at Standard & Poor’s to put together a male stock index and a female stock index, full of companies that aim their marketing and sales effort at one gender. OK, dumb idea.
But do you have any suggestions of other stocks that are particularly male or female? Or do you think the whole idea is sexist? I’d love to hear your comments.
Highly Recommended 2004 Chianti Classicos
July 11th, 2008 | Posted by innovWhile 2004 was a challenging vintage in many parts of Europe, beautiful wines were produced in Tuscany. Demand for these cuvées has been surging as the wine trade as well as consumers have begun to recognize the quality of this vintage. The following reviews come from my highly regarded colleague, Italian wine expert Antonio Galloni.
87 points
Castellare 2004 Chianti Classico Riserva
This is a large-scale wine with attractive notes of earthiness, leather, dark fruit, smoke, tobacco, and wild herbs. Anticipated maturity: now to 2012. $35
87 points
Castello di Bossi 2004 Chianti Classico
Somewhat forward in its color, aromas, and flavors considering the vintage, this wine offers up notes of leather, spices, plums, and prunes. It is a soft, approachable Chianti to enjoy between now and 2010. $20
89 points
Castell’in Villa 2004 Chianti Classico
This estate’s 2004 Chianti Classico offers notable complexity, as layers of spiced dark cherries, spices, and leather develop in the glass, followed by balsamic overtones that add further nuance. This is a lovely wine to enjoy over the next few years. Anticipated maturity: now to 2014. $30
89 points
Piazzano 2004 Chianti Riserva Rio Camerata
Piazzano’s 2004 Chianti Riserva Rio Camerata is a medium-bodied offering endowed with spiced dark cherries and plums intertwined with balsamic overtones. It is a beautifully layered, stylish Chianti to drink now and over the next few years. Anticipated maturity: 2008-2012. $35
90 points
Barone Ricasoli 2004 Chianti Classico Castello di Brolio
The flagship 2004 Chianti Classico Castello di Brolio is a selection of the estate’s best sangiovese. The wine reveals a sweet, layered expression of ripe red fruit, spices, and tobacco. Eighteen months in French oak gives this pretty, medium-bodied Chianti a distinctly contemporary feel. The tannins come across as quite firm, but they should soften with a few years of bottle age. Anticipated maturity: 2010-2022. $60
90 points
Castellare 2004 Chianti Classico Riserva Vigna Il Poggiale
The single-vineyard 2004 Chianti Classico Riserva Vigna Il Poggiale possesses outstanding balance and harmony. Perfumed vibrant fruit, new leather, spices, and toasted oak flow from a deceptively medium-bodied wine. This fresh, elegant, refined Chianti should continue to drink well for another decade or so. Anticipated maturity: 2009-2019. $45
90 points
Castello di Nipozzano 2004 Chianti Rufina Riserva
Nipozzano’s 2004 Chianti Rufina Riserva possesses gorgeous, well-delineated dark cherries, menthol, spices, earth, and smoke in an engaging, slender style that is typical of this appellation. It is a beautifully poised wine to drink between 2009-2016. $23
90 points
Le Cinciole 2004 Chianti Classico Riserva Petresco
This 100% sangiovese is a gorgeous, refined effort revealing crushed flowers, raspberries, licorice and smoke in its silky-textured, layered frame. This generous, medium- to full-bodied sangiovese was fermented in steel, with malolactic fermentation in cement, followed by 18 months in French oak. Anticipated maturity: 2009-2019. $50
91 points
Ruffino 2004 Chianti Classico Riserva Ducale Oro
This remains the bellwether wine from this historic property. The 2004 is a layered, full-bodied wine with attractive notes of tobacco, sweet red cherries, wild herbs, and toasted oak. The wine’s density, persistence, and complexity make it one of the better versions in recent memory. Anticipated maturity: 2010-2022. $40
92 points
Castello di Meleto 2004 Chianti Classico Riserva Vigna Casi
An earthy, powerful wine imbued with dark cherries, tar, licorice, and toasted oak, this 2004 needs another year or two in the bottle to settle down. However, it is a gorgeous, layered wine of considerable potential, with pretty notes of sweetness that linger on the long finish. The Vigna Casi is 85% sangiovese, 5% colorino, and 10% merlot aged in medium-sized barrels. Anticipated maturity: 2009-2019. $46
92 points
Felsina 2004 Chianti Classico Riserva
Felsina’s 2004 Chianti Classico Riserva displays the pedigree of this superb Tuscan vintage in its expansive, layered personality. The wine develops beautifully in the glass as tar, smoke, earthiness, underbrush, menthol, toasted oak, and dark cherries emerge from its medium-bodied frame. This terrific Chianti should continue to drink well for another decade or so. Anticipated maturity: 2009-2019. $30
93 points
Castello di Monsanto 2004 Chianti Classico Riserva Il Poggio
The gorgeous 2004 Chianti Classico Riserva Il Poggio is a layered, finessed wine of notable detail, with tons of potential hiding behind its restrained facade. With air, notes of earthiness, tobacco, spices, menthol, and dark fruit gradually emerge from this classically built wine. Although the wine is beautifully balanced today, it requires additional cellaring to blossom fully. Anticipated maturity: 2014-2029. $65
93 points
Rocca di Montegrossi 2004 Chianti Classico San Marcellino
The 2004 Chianti Classico Riserva San Marcellino is made from 100% sangiovese and spent 18 months in French Allier oak barrels. It reveals a powerful, brooding expression of scorched earth, tobacco, dark fruit, and toasted oak. The layers of fruit need bottle age to gain volume and depth while the building tannins require time to settle down even though the use of French oak is very refined. This wine of superb weight and density offers tremendous potential. Readers looking for a powerful style of sangiovese will love this wine, but patience is required. Simply put, this is a terrific effort from Rocca di Montegrossi. Anticipated maturity: 2012-2024. $60
95 points
Felsina 2004 Chianti Classico Riserva Rancia
This is a serious Chianti endowed with endless layers of sweet dark cherries, smoke, minerals, flowers, and sweet toasted oak. With air, the layers fill out, revealing an expansive, richly textured wine of pure breed. At times the wine has been incredibly primary and brooding, while at other times it has shown the sheer power it holds in reserve. This is a great effort from Felsina. It’s a wine fit for kings and queens. Rancia also happens to be one of the finest values in wine today. It is highly recommended. Anticipated maturity: 2012-2024. $45
95 points
Fontodi 2004 Chianti Classico Riserva Vigna del Sorbo
An explosive wine endowed with a layered, sumptuous expression of sweet dark fruit, menthol, licorice, and floral overtones, this stunningly beautiful wine offers tremendous persistence yet it will require patience as its structural components are formidable. Vigna del Sorbo is made from 80% sangiovese and 20% cabernet sauvignon which was grafted onto the rootstocks of the white varieties that were previously planted in the vineyard. Anticipated maturity: 2012-2024. $69
Who’s Afraid of the Big Bad Bear?
July 8th, 2008 | Posted by stockStocks are just barely in an official bear market, a condition described as a 20% decline from the recent high. As I type this — on the morning of July 8 — the S&P 500 is 19.96% off its Oct. 9th high and the Dow Jones Industrial Average is down 20.5%.
The bear market designation is arbitrary, but it’s not meaningless. Investors, and especially traders, have been trained to act differently in a bear market.
For an example, I pulled off the shelf “How to Make Money in Stocks,” the bible of William J. O’Neil, the founder of Investor’s Business Daily (where I previously worked). William O’Neil is the anti-Warren Buffett in that he eschews buy and hold strategies. With just a glance at fundamentals, O’Neil picks stocks mostly based on technical factors, especially by watching the shape of a stock’s movements on a chart. It’s sometimes called momentum investing, but I know O’Neil doesn’t like that term.
For traders like O’Neil and his disciples, it’s relatively easy to make money in a bull market buying and selling stocks. In a bear market, it’s the reverse: No matter what trading methodology you use, it gets “very frustrating,” Avalon Partners chief market economist Peter Cardillo told me yesterday. Because most stocks keep sliding downhill, “Very little works.”
O’Neil writes: “In the final analysis, there are only two things you can really do when a new bear market begins: sell and get out or go short. When you get out, you should stay out until the bear market is over.”
But how can you tell when a bear market is over? Or when it’s starting? “The typical bear market (and some aren’t typical) usually has three separate phases, or legs, of decline interrupted by a couple of rallies that last just long enough to convince investors to begin buying,” O’Neil writes.
In other words, a bear market is full of head fakes and false signals. Just as it looks like it’s getting better, stocks fall again. Just as the mood is gloomiest, stocks start to recover. Sometimes bear markets are quick and relatively painless; sometimes they drag on for a couple years or an entire decade.
This is the most confusing part of O’Neil’s system (and it’s the same flaw in any trading system that’s not long term): O’Neil provides no easy guidelines for when to jump back in the market, and he admits that he’s made mistakes buying back too early.
Bear markets are tricky terrain for investors. This may not be the wisest move for long-term investors, but it’s easy to understand why some prefer to simply wait it on the sidelines by putting everything in cash.
Investing Lessons from John Templeton (1912-2008)
July 8th, 2008 | Posted by stockJohn Templeton, the philanthropist and legendary investor, died today. It’s difficult to take a comprehensive look at a man who squeezed a lot of life into 95 years, so I’ll focus on Templeton the investor:
1. Templeton’s historic legacy
Many obituaries focus on Templeton’s philanthropy. But I think this is because Templeton lived so long that few now remember his most significant role in history, as a popularizer of the mutual fund.
When Templeton started his career, Americans hated Wall Street. After the 1929 crash and the Great Depression, the stock market’s recent performance justified many of these suspicions. The market seemed to operate for the benefit of insiders and the very wealthy.
Templeton didn’t invent the mutual fund, but he made it popular and reputable.
“It’s fair to say that the evolution of the mutual fund has completely changed the investing landscape,” said Stephen Horan, head of private wealth at the CFA Institute, when I asked him about Templeton’s legacy. Mutual funds now feel like an obvious and indispensable part of the investing landscape. But before the 1950s, the vast majority of stocks were held directly by individuals, most quite wealthy. Templeton “helped popularize [mutual funds] and put [stocks] in the hands of the individual investors,” Horan said.
2. His gutsy investing style
With typical investors wary of Wall Street ripping them off, I’m sure that one thing that reassured investors in Templeton’s mutual funds was his staid, religious persona.
But the main selling point was certainly his investing record. The Wall Street Journal obituary says:
A $10,000 investment in the storied Templeton Growth Fund in 1954 would have grown to $2 million by 1992, when Sir John sold his company to Franklin Resources, the San Mateo, Calif.-based fund giant, for $913 million. That translates to an annualized 14.5% return.
Templeton was a value investor, meaning he was great at picking unfavored stocks and holding onto them long term for great returns. Like another investor in the next generation, Warren Buffett, Templeton was great at ignoring the conventional wisdom.
In his New York Times obituary, this sentence caught my eye:
In 1939, when World War II began in Europe, the 26-year-old investor borrowed $10,000 and bought 100 shares each in 104 companies that were selling at $1 a share or less, including 34 in bankruptcy. A few years later, he made large profits on 100 of the companies; four turned out to be worthless.
Wow, I can’t imagine a scarier time to be investing in stocks than 1939. Still dazed from a worldwide financial depression, the world was embarking on the bloodiest war in its history, and yet Templeton made a big bet on beaten-down stocks — using borrowed money.
3. His worldly outlook
Wall Street has a reputation for conservatism, but the greatest investors are the often the most open-minded. They also often stay far away (either geographically or philosophically) from Manhattan, where the Wall Street herd mentality can obscure your judgment. Templeton embodied these traits, to the benefit of his investing track record. Horan called Templeton one of “the great contrarians of the investment world.”
He renounced his American citizenship and lived in the tax haven of the Bahamas. From the NYTimes:
Sir John said his investment record improved after he distanced himself from Wall Street and no longer worried about the tax consequences of his decisions. He was an early investor in Japan in the 1960’s and later in Russia, China and other Asian markets. He sold large holdings before the technology bubble burst in 2000, and warned several years ago that real estate prices were dangerously high.
Still, maintaining independence from Wall Street groupthink is very difficult, especially as all investors read the same newspapers, magazines and (now) watch the same web sites and cable channels.
I wonder if Templeton’s deep interest in religion — in which he was also famously open-minded — helped him keep a sense of distance and perspective. Templeton was a master investor, but he didn’t allow investing to dominate all aspects of his life.
Surprising Optimism on Fifth Third (FITB)
July 3rd, 2008 | Posted by stockA week ago the financial industry was getting very worried about its own prospects. Bank after bank seemed to be running short of cash as their stock prices plunged, making it harder to raise capital. Wall Street analysts added to the gloom with a frenzy of reports that downgraded big financial firms or at least cut their earnings projections. We likened it to a “circular firing squad,” as analysts from different banks and brokerage houses took aim at each other’s employers.
All those worries remain. But there is some evidence that the stampede of negative analyst reports is slowing.
In the face of his colleagues’ pessimism, R.W. Baird analyst David George bravely put out a note actually upgrading Fifth Third Bancorp (FITB).
Fifth Third spooked investors last month when it said it needed to slash its dividend and raise $2 billion in capital.
But George suggests the worst may be over. “Two of the major risks associated with owning the stock [i.e. a cut dividend and a capital raise] have occurred,” George wrote July 2. Plus, Fifth Third “has some extremely valuable assets that simply aren’t getting much attention in the near term.”
Fifth Third owns a processing solutions business worth $2.5 billion to $3 billion by George’s reckoning, and its wealth management arm might also be valuable. Those could serve as a “safety valve in case the company needs more capital.”
George doesn’t seem to disagree that worries over deteriorating credit quality at banks are real. But if conditions get bad, he is saying, Fifth Third has options.
(For lots more information and perspective on Fifth Third, check out Geoff Gannon’s May 28 blog post here.)
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