HAPPY BIRTHDAY Warren and CONGRATULATIONS to both of you.
Warren buffet married his longtime companion Astrid Menks on 30th August 2006 which was also his 76th birthday.The 15 minute wedding was hosted by his daughter Susie Buffet at her Omaha Nebraska home. Astride Menks has been Buffetts companion for the last 30 years.
So you’re invested in dollars? You heard on TV or someone told you that the dollar is losing value. Is this true? Yes. The reason is simple. The US trade deficit for the last 12 months is 800 Billion, thats the annual GDP of countriles like Brazil or India. You want to know how to invest to protect against the dollar’s decline? If you want to protect yourself against the dollars decline the simple answer is to invest internationally. There are lots of ways to invest internationally and I will look at each of them.
Currencies: When the US dollar goes down, it reduces in value compared to other currencies. So an easy way to protect against the decline is to invest in foreign currencies. This is an option i do not like because investing and trading foreign currencies is extremely risky. The other reason is buying currencies is a short term hedge, once the dollar declines the trade is over. You get one time returns on the actual decline but that’s all. Investing in companies is a better way to go as i’ll explain later.
A series of new Trusts have started trading on the NYSE that allow people to own various currencies. I dislike investing in currencies and would never recommend them. They are extremely risky. I just included them for completness.
Two mutual fund families have started new funds that protect against the falling dollar. These are professionally managed but still risky especially high risk is the Direxion Dollar Bear which seeks daily invstment returns of 2.5x the inverse of the dollar.
Why Companies over currency?
A declining dollar helps US/Foreign companies that have a lot of international sales. This is because they earn the same amount in international currencies but when its converted into US dollars they earn a lot in dollar terms. Lets take Coca-Cola in a hypothetical example.
| Year | EPS Estimate | US | International | Stock Price | Adjusted EPS | Adj. Stock Price | Increase |
| 2006 | $2.31 | $0.69 | $1.62 | $46.20 | $1.94 | ||
| 2007 | $2.51 | $0.75 | $1.76 | $50.20 | $2.11 | $57.23 | 14.00% |
If the company recieves the same 20 P/E in 2007 as it did in 2006 the stock should rise to $50.20. If the US$ drops by 20% the international profits would be reported as $2.11 instead of $1.76 and the company would be valued at $57.23 thats a 14% increase because of the drop in the US$. Every subsequent year that the dollar remains at the lower level the company would report higher EPS by 14% so you benefit every year that you hold the stock over a 1 time benefit in owning a foreign currency.
US Multinational Companies: The best bet is to look for large multinational companies which do business in all major international markets. When the dollar declines these companies will recieve major increases in EPS.
International Stocks: International Multinationals have the same earnings increase benefit as US multinationals and an added benefit for international stocks is their assets may also get higher value.
Commodities: The last way to play the decline in the dollar is to bet on commodities. Since commodity prices are set in US$ terms they rise in relative value when the dollar declines. All commodities traded in dollars should increase in value if the dollar declines. Companies in the energy, metals and mining industry should perform well.
Mutual Funds : For anyone that would prefer an International mutual fund (Which is the safest way to play the dollar decline). I list my favourite International Funds.
Note: I would stay away from international stocks that get most of their earnings in US dollars. If you find an international stock that gets most of its earnings from the US market. Since the company is paid in USD When the dollar declines the revenue of that company will drop while their costs will remain the same.
Conflicts : I own shares of Chesapeake Energy
Berkshire Hathaway is my biggest stock holding Its “The Security I Like Best”. A lot of people ask me what Berkshire is worth in my opinion. I say the class B shares that are trading at $3100 are easily worth $4000+ (A shares would be $120,000+). How did I come up with the number? Berkshires cash and cash equivalents holdings are valued at cash value. Berkshires equity holdings are valued at market value. Then i value individual business units based on P/E multiples given to comparable companies by the stock market.
Market Cap of Berkshire Hathaway = 145 Billion
Value of Individual Berkshire Parts = 196 Billion (Based on the Interim 2nd quarter report. Numbers used are 6 Months Net Profits *2 for full year estimate values)
The company has a 35% discount to its actual value (I think it should have a 10% Warren Buffet premium).
Based on this valuation class B shares of Berkshire should sell for $4200 and class A shares for $126,000.
* Berkshire has just acquired PacificCorp, Iscar Metalworking and Russel Atheletic but the earnings of these companies is not part of berkshire earnings yet.
** Investment gains or losses are recognized upon the sales of investments or as otherwise required under GAAP. The timing of realized gains or losses from sales can have a material effect on periodic earnings. However, such gains or losses usually have little, if any, impact on total shareholders’ equity because most equity and fixed maturity investments are carried at fair value, with the unrealized gain or loss included as a component of accumulated other comprehensive income. - From the Report
Conflicts: I own Shares of Berkshire Hathaway
Google is the king of search engines but its kingdom under attack. The invaders are Microsoft’s Windows Live, Yahoo and the newly renamed kid on the block Ask.com.
Google’s advantage: At one time most search engines used to display a list of pages containing the search words without ordering the results by importance. The results were like searching for a needle in a bale of hay instead of a haystack, better but still a pain in rear. Then along came Google and its page rankings, the hay was gone. It has taken years for Yahoo, MSN and Ask.com to realise the importance of ordering results by importance and developing the infrastructure and algorithms to provide results comparable to Google.
Search by definition is imprecise since the search engine has no clue what you’re really thinking about. If you type in Apple are you searching for the Fruit or the Company? The search engine has no idea, neither do the advertisers. The only person that knows is you. Google still returns better results but the difference is negligible.
Yahoo: Losing to Google
Lets get this one out of the way. Yahoo is getting its ass handed to it on a plate by Google. Its losing to Google in every aspect from search, functionality, user experience and on the financial side too.
Microsoft: The threat from Vista
The Microsoft threat is not from its search engine but from Internet Explorer 7. Here is a quote from the Internet Explorer features page
“Internet Explorer 7 brings your favorite web search providers to you. With the built-in search box, you can search the web at any time without having to open a search provider page. You can display search results in a separate tab, and then open the results in other tabs to quickly compare sites and find the information you want. You can even customize your search by setting your favorite search provider as the default.“
As most of you have probably guessed the “default search provider” is Windows Live. What a surprise. So every installation of Vista is potentially a lost user for other search engines. Most users wont bother to change search engines if the default one gives results that are good enough. Search engines can negotiate deals with PC manufacturers to get their search engine set at the default. This will cost money since HP, Dell, Sony wont be providing the service for free. Any future re-installs on these computers from a retail copy of Vista will reset the default back to Windows Live.
Easy to access was another minor advantage that Google had. Type in Google and hit Ctrl+Enter to go to the Google site was easier than “search.msn.com”. Now you just need to type in “live” and hit Ctrl+Enter to get to the Microsoft engine.
Ask.com: A better user experience
Search engines are no longer about getting users a relevant result. All search engines do that. Engines need to differentiate themselves by providing unique features and assisting their users manage the results. Ask.com has done a phenomenal job of differentiating itself. Personally I love the binoculars which give a quick view of the site in a pop-up. I also like the “Narrow your Search”, “Expand your Search” and “Related Names” sidebars. Ask.com also has a nice feature (probably from when it was called AskJeeves.com” where you can ask a question and it will try to answer the question along with providing search results. For all of these reasons Ask.com is the fastest growing search
Conclusion: Google is a good company with good earnings and growth but its dominance is under threat from Microsoft and Ask.com. I prefer IACI for its Ask.com search engine which has a better user experience and is growing faster than Google. While Google is a one trick pony IACI has a diversified economic float and a brilliant CEO in Barry Diller.
Conflicts : I own shares of Microsoft and IAC/Interactive Corp
Heres a question. What will be the richest countries in the world in a few decades? If you answered any of the following USA, UK, Germany, Japan you got it wrong. Try again. Did you think it was China, India, Brazil, Russia? Wrong again.
Where does wealth come from?
Wealth comes from natural resources which can be harvested and sold to those who want them. Wealth also comes from material that can be changed into something more valuable through proper application of knowledge, skill, labor and equipment. So we have 2 ways to generate wealth. Harvesting natural resources and improving resources thru knowledge and labor. With world population bursting at the seams there is an ever increasing availability of people and labor. Natural resources on the other hand are finite.
What makes a country wealthy?
If a country consumes everything it produces it creates no wealth. If a country consumes more than it produces its poor. Only countries that have a surplus are wealthy. You may feel that China fits the bill since it has a trade surplus with most countries. China has an extremely large population that is currently living on basic necessities. As the population starts to become more consumer oriented more of their manufacturing and production will be used to satisfy internal needs. The countries that I feel are the richest are Australia and Canada.
Why these 2 countries?
Lets look at some Figures first
USA - Population 300 Million - Area 9.6 Million sq kms.
Canada - Population 32 Million - Area 9.9 Million sq kms.
Australia - Population 20 million - Area 7.7 Million sq kms.
These two countries have extremely large land masses with barely the population of 2 major american cities. Furthermore Canada and Australia are developed countries with good infrastructure and stable governments unlike the middle east and africa. Geographically Canada’s proximity to the US and Australia’s relative proximity to China gives both these countries major customers that need natural resources.
How to invest?
A simple way to get exposure to these countries is to use an ETF.
IShare MSCI Australia (EWA)
IShare MSCI Canada (EWC)
“Water water everywhere but not a drop to drink”
Seventy Five percent of the world surface is covered in water but 97% is salt or otherwise undrinkable. Another two percent of water is held in Glaciers and Polar ice caps. One, just ONE percent of the water on this Blue planet is usable for drinking, household use, agriculture, construction, manufacturing etc. Shocked? It gets worse. Water consumption is increrasing at 2.5 times the population growth. By 2025 two-thirds of the world population will live in water stressed conditions.
What are people supposed to do? Stop drinking water? Stop bathing? Stop agriculture, construction and industry? NO the answer lies in more efficient use of water, better distribution, purification, filtering and increasing the water supply. The companies that deal with water in any form will show good steady growth over the next few decades.
My Personal opinion is that since this is a very long term bet and there are no stand out companies that i can think of the best way to play this would be to invest in PowerShares Water Resource Portfolio (PHO) . If you prefer to invest in individual companies over Mutual Funds or ETFs my favourites are Aqua America, SUEZ, and Veolia Environnement. I have included a list of companies that form the Palisades Water Index.
Conflicts: I do not own shares in any of the companies or funds listed.
A great man once said “If you dont know money, know your money manager”.
If you think you, your money manager or your mutual fund can beat the market youre probably wrong. Sixty five percent of mutual funds wont beat the S&P 500 this year. Most of the ones that do beat it will fall short next year. Why invest in a mutual fund that cant beat the market? You can easily invest in an index fund.
So you still want to beat the market? If you cant beat the market find someone who can. The last thing you want is to be invested in a high flying fund just as its about to dive. You need a money manager who can beat it consistently and has proven it over long periods of time. There are other money managers that i consider superinvestors like George Soros and Bruce Sherman but it is not possible for the average investor to invest with them so they have been excluded. I must mention Masters’ Select Value a mutual fund that is a favourite of mine. Three of its Four money managers Bill Miller, Bill Nygren and Mason Hawkins are in my favourites list. Its a great way to get exposure to multiple superinvestors in 1 mutual fund.
Take a look at my favourite money managers. Most of these superinvestors have beaten the S&P over long periods of time (10 years or more).
Individual Stocks
Warren Buffet: Berkshire Hathaway (BRK.A, BRK.B)
Eddie Lampert: Sears Holdings
My personal preference here is Berkshire Hathaway. It is better than Sears holdings in virtually any comparison.
The 3 dollar Bills
Bill Gross: Pimco Bond Funds (Too many funds to name)
Bill Nygren: Oakmark Select
Bill Miller: Legg Mason
I find it hilarious that my 3 favourite mutual fund managers are all named Bill.
Additional US Funds
William Danoff: Fidelity Contrafund
Joel C. Tillinghast: Fidelity Low Priced Stock
Harry R. Hagey: Dodge and Cox
Ken Heebner: CGM Focus/CGM Realty
Mason Hawking: Longleaf Partners
International funds
Charles de Vaulx: First Eagle Global
Riad Younes: Julius Baer International
There are too many great mutual fund managers and i wanted to keep my list small. I feel that some names need to be mentioned even if they are did not make my favourites list. Here are a few more brilliant managers and management teams
Richie Freeman: LeggMason Partners Aggressive Growth
Christopher Davis: Davis New York Venture Fund
John Calamos: Calamos Growth Fund
Wally Wietz: Wietz Partners Value Fund
Jeffrey Bruce: Bruce Fund
Oakmark International
Dodge and Cox International
Matthews Pacific Tiger
Conflicts : I have investments in Berkshire Hathaway, Fidelity Contrafund and Fidelity Low Priced Stock
Confession: I am the great man who said “If you dont know money, know your money manager”.
India is the seventh-largest country by geographical area, the second most populous country, and the most populous democracy in the world with a population of 1.1 Billion. It ranks 15th in the world by GDP and 4th by GDP-PP (Purchasing Power). With so many people buying items its no wonder that its one of the worlds biggest markets.
Background : India has the largest middle class in the world, a billion consumers and half a billion strong well educated workforce.
The population of India till now have had a saving mentality. The new generation is more consumer oriented, they buy more and they buy often. The current generation is not against using credit to fund their purchase. Credit cards usage has increased significantly and sales of mobile phones, gadgets, cars, designer clothing and footwear, electronics, computers are going thru the roof. Companies like Reliance telecom, Tata Motors, Maruti Udyog, HDFC will benefit from these changes.
The country lacks infrastructure which has become the major hurdle for foreign investments into India. The government is focusing on the infrastructure so companies in the steel, cement, construction and infrastructure industries like L&T (Larsen & Toubro) and ACC(Accociated Cement Companies), TISCO (Tata Iron and Steel Company) will do well.
The biggest advantage India has is a large, young, highly educated english speaking workforce with the average person studying till a Masters degree.. The key here is english speaking. China has a larger workforce but the majority of them do not speak English. Language is a very big factor that influences the success of any outsourcing initiative. The biggest outsourcing companies in India are TCS (Tata Consultancy Services), Infosys, Cognizant, Wipro and Satyam. All off these should perform well.
Investment options : Very few indian companies trade on the US Stock. Some of my favourites like TCS, L&T and HDFC (not HDFC Bank, there are 2 different companies) are unavailable. The best ways to invest in the indian stock markets is thru ETFs or Mutual Funds. Ive listed the good companies and Funds and have highlighted my favourites.
I like Infosys and Cognizant because they are the best outsourcing companies. These two companies attract and retain the best talent in the country. They have excellent growth and profit margins and have performed consistently well in the past. The stocks are priced for perfection however so any miss could cause them to drop significantly. My other favourite is Tata Motors. The Tata brand has a lot of goodwill in India. They run a lot of highly profitable businesses. The brand name stands for quality and is highly respected in India. They treat their employees like family which is in turn gets them highly motivated and productive employees.
US ADRs :
DR Reddy’s Laboratories (RDY)
HDFC Bank (HDB)
ICICI Bank (IBN)
Tata Motors (TTM)
Infosys (INFY)
ETFs :
Morgan Stanley India Investment Fund (IIF)
India Fund (IFN)
Mutual Funds :
Eaton Vance Greater India Fund (ETGIX/EMGIX)
Matthews India Fund (MINDX)
Conflicts : I do not own any of the listed stocks or funds but i will be purchasing some soon.
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