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April 4, 2004 |
| In this issue: Are stocks too expensive? Are stocks too expensive? According to ‘Business’s’ analysis of value investment philosophy, citing Buffett and others, stocks are too expensive at the moment. The on line article calculates that current P/E ratios, using Graham and Dodd methods are about 30 against a long-term average of 17.6, while the Hussman P/E calculation method gives a current figure of 20.6 against a long-term average of 11.7. The Hussman ratio, as we understand it, is the current price of the Standard and Poor’s 500 divided by the peak annual earnings over the past ten years. Chips off the old block We know that Warren Buffett has made significant donations to innovative and worthy projects over the years and now two of his children, Susan and Peter are following suit. They have given $2 million in grants to help fund a Milwaukee social service agency which is intended to become a nation-wide model for early childhood centers. Mr Rogers and Mr Market Steve Butler in Contra Costa Times has a witty review of Charles E Ellis’s book ‘Winning the Loser’s Game’. Butler quite clearly likes the writing style of Ellis and his ability to communicate complex concepts in simple terms, likening him to Mr Rogers from children’s television. The book explains how institutional investors have captured the markets and introduces Mr Value to stand alongside Mr Market, hence the allusion to Mr Rogers. According to Butler, Mr Market is a bit of a tease while Mr Value, on the other hand, ‘does all the heavy lifting’. You can read the full review here. Amazon.com purchase information is here.Winning the Loser's Game Benjamin Graham analyzed ‘Business’ has a good brief analysis on Benjamin Graham’s investment philosophy here. Alaskan oil Mid American Energy Holdings, 80 per cent owned by Berkshire Hathaway, has withdrawn a controversial proposal to build a pipeline to carry gas from Alaska to mainland USA. The reason given for the withdrawal was Alaska’s refusal to give certain guarantees about exclusive rights. Government authorities say that the deal is not yet dead and have hopes that the pipeline, with Mid American, or other suitors, can still go ahead. Buffett down under There is a huge boardroom battle going on in Australia with the resignation of one director of the National Australia Bank, the country’s biggest financial institution, being sought by the other directors. If the pursued director, Cathy Walter, does not accede to the other directors’ wishes, they intend to call a general meeting of stockholders in a bid to oust her. In her hit back statement, the feisty Melbourne lawyer called upon the words of the Sage of Oklahoma, saying: "Too often boardroom atmosphere means that collegiality trumps independence." Let us see what happens. The Rales Brothers We do not know much about these two guys but according to Bloomberg’s, they have clashed with Buffett several times in the past over take over targets and their investment company Danaher has outperformed Berkshire Hathaway over the past three years. Subscribers might like to go to the full Bloomberg article here. Two types of analysis Readers of the Intelligent Investor by Benjamin Graham will know that he offers strategies for both the conservative investor and the more aggressive investor. NBC has a review of a new book, It’s Earnings That Count: Finding Stocks with Earnings Power for Long-Term Profits, by Hewitt Heiserman Jr, that apparently tells you how to analyze balance sheets either from a conservative or aggressive perspective. We have not read the book yet but from the review, the book does sound interesting. Additional reviews and purchasing information can be found from this page at Amazon.com Changes to the Dow There have been changes to the Dow Jones Index. Three former giants – International Paper, AT&T, and Eastman Kodak are out – to be replaced by insurance company American International Group, Verizon Communications, and drug company Pfizer. The changes are said to be in recognition of trends in the market with more emphasis on new-world service stocks and products as opposed to basic materials stocks. The level of the index will not change as the method of calculation has been slightly amended to cater for the different share prices. The changes are to operate from 15 April 2004. An intriguing software package We are currently trialing a software package that provides, and regularly updates, the same sort of information that you can get from Value Line, but for the US, Canadian and Australian stock markets. In addition, the program allows you to find, and analyze corporations, using Buffett type tests such as past returns on equity, debt ratios, growth rates, and use of retained earnings. The publishers, and on line forum contributors, also communicate information about stocks likely to pass the Buffett steps. It is interesting to note that their model US portfolio has risen over 50 per cent in the last 12 months, compared to the 30 per cent or so rise in the Dow Jones 500. We will provide a review of this program in due course. New at Warren Buffett Secrets The latest article at Warren Buffett Secrets is our history of GEICO, the company that has attracted the interest of both Buffett and Ben Graham. You can read it here We are always interested in hearing from our readers. If you have any thoughts, comments, tips, or things you would like to see on Warren Buffett Secrets, email us: [email protected]
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