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Tuesday, August 20, 2013

 

I'm Still Here

Sorry for the extended time between posts, but we are still here, still watching a world in chaos, enjoying the show(s), the golf, etc. Hope all my readers are having a good summer too, as we head toward Labor Day. -------------------------------------------------------------------------- We got quite a bit of reaction to that last post that finally provided a complete description of the Redwave investing strategy. We also received one comment, asking what other criteria besides price to book and debt to equity ratios we use to select stocks for the buy/hold list. First, in case there was a misunderstanding, the 70% debt to equity limitation and 2.0 price to book standard applies to value buys, but stocks can be put on the buy/hold list even though they have worse ratios. They will simply be limited to the "zero buy" situation. So what puts a stock on the buy/hold list? Though I don't like stocks that are either wildly overpriced or overleveraged, I select stocks based on the intangibles that I try to glean from my reading and from whatever interaction and observation of the companies we can manage. The intangibles largely relate to management. Are there clear and strong cultural values that all employees share? Is the company driven to provide excellent products and service? Is there a family element to company ownership? Is the strategy shared and well-known to all the employees? Is management clearly overpaid? How does the Board interface with management? These are the questions I ask when assessing a candidate company. I also like to know that the strategy and business model make sense. For instance, I like conglomerates, but not if they're unfocused. When I discovered Alco Standard, what attracted me was that even though the businesses were all over the place, they were mainly focused on distribution. That was the common theme. The businesses they bought were mainly small, family businesses and the selling managers were expected to stay on with Alco and run the business end while Alco provided the staff service support - IT, HR, Legal, Finance, etc. To me, this is the way you organize a conglomerate. I just kept buying those shares until finally the strategy was changed, and then I started selling. Turns out that was a good time to sell too. Another example. I bought IDT, mainly because it had a fledgling energy business in Israel. Can you think of a better place to have an energy business? Do you think running that business there you are going to have a problem with groups frustrating your exploration operations, whether it's fracking, ocean drilling, or recovering gas from farts? At some point, the energy business (GNE) was spun off to shareholders. Now that I have fully assessed IDT's main businesses (prepaid phone cards, long distance services, etc. probably overpriced and exploitive of the poorer classes), I think I would rather not own that. So it's coming off the buy/hold list as soon as the market bounces back a little. But I will keep GNE. So the answer is the numbers dictate the trades, but stock selection is where my intuition, biases, and decision making come in. That's what makes horse races. ------------------------------------------------------------------------ If you still don't know what to do this week and you are somewhere in the vicinity of the New York area, I recommend Saratoga, if you can score a hotel room. The racing is great, there is plenty of music, good food, bars, and the most beautiful summer weather. I would have loved to aqueeze it in. Alas, I am headed for Indianapolis tomorrw, a nice enough town with good beef, a jazz club (Chatterbox), and so on. Of course I am attending a meeting full of regulators. Enough said. ------------------------------------------------------------------------- From the sublime to the ridiculous. Egypt has now joined Syria in civil strife, which seems to be breaking out all over the Islamic world. Much of this represents centuries old enmity between Shia and Sunni, but in Egypt it's between the Sunni Muslim Brotherhood and the secularist military. Though the Egyptians freely elected the Brotherhood, they overwhelmingly supported the military coup that ousted them. Leave it to the Obama Administration to antagonize all parties. So we are for now uninvolved. Frankly, we should be uninvolved everywhere in the Middle East, except to support Israel, the sector's only actual democracy. That means extricating ourselves from Obama's "War of Necessity" in Afghanistan too. If your antagonists insist on killing each other, sit back and watch. ------------------------------------------------------------------------- Meanwhile on the home front, as PPACA gets ever closer to implementation, it is more clear every day that it's going to be a huge mess. The Obama people have delayed the corporate mandate in hopes of getting the act together, and it is likely they will have to delay other aspects of the law. They will never give up on it though, having determined that repealing it would be a permanent shelving. This means they will look bad when the pack of cards collapses on itself. It is interesting that these delays are being implemented by executive or regulatory decree, without authorization in the law. In other words, the Obama administration continues to adopt the tactics of the Chavez regime in Venezuela. I doubt it will be very appealing to live in the U.S, version of a banana republic (pun intended). ------------------------------------------------------------------------ On July 22, we sold 100 shares of Manpower (MAN) at 65. We paid 63.96 on 9/10/07. On 7/24, we bought 100 shares of MAIN, a value buy at 31.13. On 7/25, we paid 26 for 100 shares of Bio Reference Labs (BRLI), a zero buy. On 7/26, we bought 50 shares of Cincinnati preferred (CBB.PR.B) at 45.73. Then on 7/29, we sold 100 shares of FLIR at 31.76. We paid 29.76 on 11/19/09. On 8/2 we sold 100 shares of SEIC at 32.08, a nice gain from the 13.86 we paid on 12/4/08. On 8/2 we bought another 100 shares of MAIN at 30.79. On 8/5, we sold 100 shares of Worthington (WOR) at 36.13. We paid 12.25 on 4/12/99. We'll catch up on the Auguts transactions on the next post. I need to pack.

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