We's and Whys

You will note the dates on this post are 27, 28, 29 May 2011.  Yes I have started this post at least 5 times but kept getting drawn away to do back to normal chores around the house.  That does not mean we are back to normal it means we are getting back to normal.  We have couches and paintings, and carpet, and a gas range that does not leak gas, and food, and cups that do not say Dixie, and plates that break when you drop them and  coffee mugs with out lids and we enjoy meals from restaurants WHEN WE WANT.  But all of that takes work and is very stressful. 

"We", now that is a very interesting word, "we".  Why is another interesting word.  As we have mentioned before in this blog "WE" can have many meetings.  When my lovely wife says we it can mean various things.  But, so can "I".  Here are few examples.  "We need to go by your office and get some pictures out of storage."  (As a side note, after the flood, we or I stored about 20 painting in my office.)  Now I found out that it actually meant "we" because I offered to go myself and was told no she and I had to go because she know what paintings she wanted.  That was an easy one.  Then there was "I" need to go by the store and get XYZ.  Now I assume that "I" was the "I" that meant her, but found out later that "I" was a "you".  Then there was the "We need to move the couch so the granite guy can get to the fireplace."  Now that was an easy one for me because in living with Devin, I have moved more furniture than Mayflower, so I really thought that "We" could easily be a you so, I moved the furniture.  Well, guessed wrong on that one because she really did want to over see the moving of the furniture and I had already moved it.  That was not my big booboo of the weekend.  We got this beautiful range gas stove thing with 18,500 BTU working on every burner.  When we fire all of them up, the price of natural gas actually goes up because the national inventory drops.  Now this range came with this beautiful bamboo cutting board that covers two of the burners.  Saturday we actually cooked a homemade meal and one of the dishes was a vegetable medley.  We had onions, garlic, zucchini, mushrooms and red peppers.  I was chopping away on our new range cover bamboo cutting board and my lovely wife came into the kitchen and slowly her head spit open and a fire breathing hyda erupted from her skull. 

The hydra explained to me that she had been oiling and caring for the bamboo cutting board for two weeks.  It was not for actual usage, it was for display.  Needless to say, despite my best efforts, I could not wash out the knife marks in the new bamboo cutting board.  That was motive enough for the hydra to take the knife and stab me several times.  I have learned my lesson.

As we mentioned, "Why" is another interesting word.  Men have an X chromosome and a Y chromosome.  Women do not have a Y chromosome, just two X chromosomes.  I think that explains why they are so intrigued by the Why of the situation.  Men have a Y, women do not.

There have been so many times over the last 5 months when my lovely wife will ask Why this and Why that and most of the time I do not have an answer nor do I care because I just want the chore or task done.  She is focused on the WHY.  Here are few expamples.

Why did the contractor take the plate behind the doorknob off of the doorknob?  Why didn't they paint the flash plate under the door?  Why are the screws missing from the electrical plates?  Why haventh they hung the mirror in the bathroom?  Why are there only two working light bulbs in the hall way?  Why is there paint on the ceiling speakers?  Why haven't they put the sprinkler covers on the ceiling? And a hundred more whys?  Now these whys never come at 11:00 in the morning when there are at least 13 people at the house who might actually know why or at least fix the problem.  No these why usually appear after my wife's bath at 9:37 at night when it is just her and I.

It really bother's her that I do not want to know the why, I just want to get if fixed.  I guess it comes down to the fact that she does not have a Y chromosome and I do.  Why do women have two X chromosomes?

Value VS Growth

Value versus growth, protective investing versus predictive investing, it is a struggle to find which is best.  For many years I was a true blue value investor.  Even the early readers of our blog will remember my numerical rating which were built upon strictly value metrics.  We had a scale of 0-100 with 100 being the best and weighted values for ROE, Net Income Before Taxes, Free Cash Flow, Long Term Debt, Margins and the like.  We never bought anything that was not rated less than a 90.  We then revisited our old friend Investors Business Daily that reminded us of the important of market inertia as well as earnings growth (and paying attention to the tells in the charts of stocks.)  All of this is important.

Well, we finished reading Howard Mark's book The Most Important Thing . . ., which reminded us of our sound basis in value investing and made us brush off Graham's The Intelligent Investor.  Although originally written in 1973, the 2006 revision with forward by Warren Buffet still is an incredible investment tool.

Almost every chapter makes it very clear that it is easy to do as well as the market.  (It is even easier today versus 1973.) Just buy an index fund based upon the S & P 500.  There are dozes out there.  Not many people including the vast majority of analysts and financial advisors will do as well as the market.  In fact according to the book Intelligent investors, more than 56% of analysts perform worse thank the market expectations.

The reasons for this are quite simple and defined by Graham as EMH or efficient market hypothesis which means the prevailing price of any stock is the total culmination of all known public information about the company.  Yet despite this theory, if you asked 100 analysts for a list of the top 5 stocks for the rest of 2011, you would  get a couple of hundred stocks because the current value of stocks also includes the prospects of the future as determined by the individual paradigms of the analysts and portfolio managers.  Those current values are driven by the known fundamentals but then projected by the fears, greed, insight, and intuitiveness of the analyst or portfolio managers.

In chapters 14-16 of Grahams book he lays out two approaches to achieving a result as good as the market with the hopes of doing better.  He lays out both approaches by clearly saying, the average investor should not try.  It takes a commitment and a burning desire to do homework in order to beat EMH.  If you are not willing or able to read the financials of a company and scrutinize the SEC filings then buy a mutual or index fund because you can not beat the market without the effort to study a companies financials.

The two approaches are a defensive strategy of looking for a company that has been over looked by the masses and the analysts and is tremendously undervalued, but has strong and stable fundamentals.  The other approach is for the enterprising investor and it takes a very similar approach but is more forgiving in the current value but still looks for strong fundamental foundations.

In essence the two approaches boil down to value versus growth or protective investing versus predictive investing.  Neither is right and neither is wrong.  It is up to the individual and how much risk they want to expose themselves to.  Regardless all we can say is TANSTAAFL.  There ain't no such thing as a free lunch.

I'll Drink To That

Above we made the point that you have to be willing to put in the homework if you want to win at this game.  The stats indicates that 70% of investors do not read a companies annual report and 90% have never seen an SEC filing for the company they own.  Well we have a reader who does not fall in that category.

This person has been extremely impressive in their due diligence and we are convinced will outperform the market and probably me until I stop screwing around with options.

Megan is really combing threw IBD and reading the book "How To Make Money In Stocks, By O'Neil.  She always has good ideas and great questions.  This week she asked about ABV Companhia de Bebidas das Americas AmBev engages in the production, distribution, and sale of beer, draft beer, malt, carbonated soft drinks, and other non-alcoholic and non-carbonated products in the Americas. It also sells bottled water, isotonics, and ready-to-drink teas. The company primarily offers its products under the Skol, Brahma, and Antarctica brand names. Companhia de Bebidas das Americas has a licensing agreement with Anheuser-Busch, Inc. to produce, bottle, sell, and distribute Budweiser products in Canada. It distributes its products through third-party distributors and direct distribution centers. The company was founded in 1888 and is headquartered in Sao Paulo, Brazil. Companhia de Bebidas das Americas AmBev is a subsidiary of Interbrew International B.V.

She has identified it as relatively cheap and likes the Brazilian play because their market is so hot.  We kicked the tires on it and this is what we see.

Fundamentally This is a 95 Billion Dollar stock making it a large cap.  Now for some of you neophytes that is good and it is bad.  Huge companies have lots of institutional buyers like hedge funds and banks and insurance companies and mutual funds.  It also has lots of analysts going word by word thought their every SEC filing.  So that means you won't find an incredible bargain on a huge cap stock.  The pros discover the bargains and us blind folded casino monkeys just tag along if we are inclined.  Their forward looking P/E is about 17, so they are not cheap.  When you look at their price to book value at 6.49, it definitely is not a bargain stock.  If you strip down the stock to its bare bone value it is a 4.50 cent stock selling for $31.00?  One must ask why such a huge premium?