Investing Ideas

First lets get a few things out of the way.

1. Sears Holdings is a Holding Company and not a Retailer. The current holdings just happen to be 3 retailers.

2. Same store sales. There is no point in increasing sales if it leads to decreasing profits. Would you rather sell 10 items of clothing with $10 profit per item or would you sell 15 items of clothing with $6 profit per item? The fewer sales give a $100 profit v/s $90 profit from the higher sales. An increase in sales does not mean increase in profits and what counts is PROFITS.

Now that we have that out of the way lets value Sears Holdings

Sears Valuation

Sears Canada - Sears owns 70% of Sears Canada which is worth $2 Billion
Brands - DieHard, Kenmore,Craftsman could be sold in a Bond valued at $1.8 billion.
Lands End - Sears paid $1.9 Billion for Lands End in 2002
Home services
Real Estate - Sears is a 115 year old company. Some of its real estate was purchased before Walmart even existed. The real estate is carried on their books at the price they paid for it 10, 20 and possibly in some cases 50 or more years ago. It currently owns about 110 Million square feet of real estate. A lot of this real estate is in prime locations around the US.

• Sears Mall stores 518 with Avg Sqft of 134,000
• Sears Essentials/Grand 20 with Avg Sqft of 113,000
• Kmart Discount 139 with Avg Sqft of 93,000
• Kmart Supercentres 34 with Avg Sqft of 165,000
• Sears HQ - 2 Million Sqft + 200 Acres of land
• Warehouse and Distribution Centres - 15 Million Sqft

Total = 107.2 Million Sqft * 160 (S&P/GRA Commercial Real Estate Indices) = 17.1 Billion

This gives Sears Holdings a minimum Valuation of 22.8 Billion the company is selling for 14 Billion.
Liquidation Value of SHLD in my opinion is $164+/share.

Additional value that could not be calculated due to lack of sufficient data

• Sears Speciality - Unknown size of stores so counted as zero
• Sears also has extremely favorable leases on a lot of its other stores. They control about 150Million sqft of leased properties usually at below market rates. It could sell its leases or sublease these stores. But detailed data on the lease agreements is unavailable so this has also been counted as zero.
• Valuation for HomeServices and the actual Sears business is also counted as zero

Who else is investing in Sears?
Eddie Lampert - ESL investments
Bruce Berkowitz - Fairholme
Bill Ackman - Pershing Square
Bill Miller - Legg Mason Value

Full Disclosure : I own shares of Sears Holdings and am planning to buy more.

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So i am back with my favourite company. On August 23rd 2006 I calculated that the value of Berkshire Hathaway shares should be at least $120,000. Fast forward to August 23, 2007 and BRK-A closed at $118,800. Not too bad

Market Cap of Berkshire Hathaway = 212 Billion
Value of Individual Berkshire Parts = 246 Billion (Based on the Interim 3nd quarter report. Numbers used are 9 Months Net Profits *(4/3) for full year estimate values)

Recently Buffett has been making a few deals after nearly 1 year of inactivity. The 2 Billion of TXU bonds earning 11.2% and 11.8%. Buying 60% of Marmon for 4.5 Billion. Starting a Muni Bond Insurer. Purcasing ING’s Reinsurance business. All this point to Buffet finding ways to invest Berkshire’s cash hoard. The credit turmoil will create good buying opportunities for Berkshire. Finally at the next Annual meeting Buffet should have a couple of Investment managers lined up to take care of Investments going forward. All of this will add significant value to the shares in 2008.

The A shares of Berkshire Hathaway should sell for $163,000+ and the B Shares for $5400+.
** 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

Disclosure: I own Shares of Berkshire Hathaway

Note: I originally wrote this article late last year after the 3Q Earnings were released but i never published it. It’s a little late since Berkshire will be releasing FY07 earnings soon and Annual Report is due in a month.

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For a founder of a company, the company is usually his/her life’s work. A legacy to leave behind. Its his baby. He/she remembers starting it with a small amount of money, remembers the difficult times, the growing pains. Founders are emotionally attached to their company and it would devastate them if the company ever failed. They will always make decisions that are in the best long term interests of the company. Unlike most managerial morons who are clueless about the company/industry, the founders are usually people that understand the company and the industry inside out. Founders are usually frugal and avoid unnecessary expenses or expensive stock options. They focus on keeping the company profitable, the customers satisfied and the employees happy. They generally stick to what they understand and avoid the dumb mergers and acquisitions that the managerial mercinaries from business schools seem to be so fond of. They take care of the company and the stock follows the growth in the business. Usually companies will significantly outperform the market when they still have their founders as the CEOs.

Here is a list of great companies run by founders.
Apple, Steve Jobs
Berkshire Hathaway, Warren Buffett
Capital One Financial, Richard Fairbanks
Carmax, Austin Ligon
Chesapeake Energy, Aubrey Mcledon
CostCo, James Sinegal
Echostar, Charles Ergen
FedEx, Fredrick Smith
Kinder Morgan, Richard Kinder
News Corp, Rupert Murdoch
Toll Brothers, Robert Toll
Whole Foods, John Mackey

Also watch Dell whose founder Michael Dell is back as CEO.

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One of the best places to get some great investing ideas is the 2nd Value Investing Congress which is in progress as i write this. The Value Investing Congress is a collection of some of the best and brightest value investors in the country. Most of the the speakers at this congress follow the Graham/Fisher/Buffett form of investing and will be sharing their best investment ideas.

This year the Speakers and their investment ideas are

I cannot guarantee the accuracy of the list above since im collecting the information from other articles and blog posts. The table above will keep getting updated as I find out which other investments have been recommended. Any help in gathering this information is greatly appreciated.

Thanks
Ameya Desigar

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Cramer says diversification is the only free lunch. I agree, diversification is a necessity and is very easy to accomplish. In 1999-2000 people bought Dell, Microsoft, AOL and Cisco and thought they were diversified. The tech sector crashed in 2000 and all their stocks dropped in value. The best way to protect against sector downturns is to diversify. One should also try and diversify such that market cycle do not affect their complete portfolio. Say I diversify my holdings into companies involved in Basic Industry, Energy and Precious Metals. Since all three industries tend to perform well at the top of a bull market and do poorly at the bottom my portfolio is vulnerable to an economic/stock market cycle.

To avoid diversification mistakes and to provide a guide I came up with a wheel. The diversification wheel is not meant as a recommendation of any sector or stock. It is just a quick tool to look at which industries/sectors are similar enough that they may be affected by a sector downturn or the economic cycle.

Click here for the full sized image

To use the wheel click the link above for the full sized image and print it out. You can use the wheel to judge if you are diversified by marking your top holdings on it.

Diversified: If your stocks are in sectors that are roughly spread out equally around the wheel then you are diversified.

Vulnerable to sector downturn: If the sectors are very close to one another you may be vulnerable to a sector downturn.

Vulnerable to market/economic cycle: If the sectors are concentrated in one half of the wheel you may be vulnerable to an market/economic cycle.

Pick a stock to diversify: Mark your existing stock picks. The centre of the section on the wheel which is missing from your portfolio would probably make a good addition to help diversify your portfolio.

The Wheel is a work in progress, any suggestions for improvements to the wheel are welcome and I will try to incorporate them.

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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”.

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What if i told you there was a mutual fund with one of the best money managers in the world and had returned amazingly consistent growth every year for decades. What if i said that the fund had the flexibility of investing usually found only in hedge funds. What if i also told you that the fund had no load, administrative or management fees. The fund is diversified across sectors and also invests internationally. It holds stocks, complete companies, bonds and foreign exchange. The fund manager puts all of his own money in this very mutual fund thus completely aligning his interest with the mutual fund holders. As an added bonus the fund will never have distributions which force you to pay tax even if you still hold the shares.

The name of this amazing mutual fund is Berkshire Hathaway but its a stock and not a fund. Lets look at the company in detail regarding the claims I made.

Manager: Warren Buffett Nicknamed the “Oracle of Omaha” or the “Sage of Omaha”, Buffett has amassed an enormous fortune from astute investments, particularly through his company Berkshire Hathaway, in which he holds a greater than 38% stake. With an estimated current net worth of around US$42 billion, he is ranked by Forbes as the second-richest person in the world, behind only Microsoft chairman Bill Gates.

Returns: Since 1965 the company has averaged 21.5% returns in per share book value. This is one of the best returns for any company or mutualfund over any large period of time (10 yrs+). During the same period of time the S&P index has returned 10.8% and most mutual funds perform worse than the S&P.

Expenses: Mutual funds have a bunch of expenses and fees. Initial sales fees, Deferred and Redemption fees cut into your investments. The fees I mentioned are incurred only once. There are also Administrative, Management and 12b-1 fees that are charged anually whether the mutual fund makes you money or not. Since Berkshire Hathaway is a stock there are no fees. Warren buffet recieves no stock options and has an annual salary of $100,000.

Diversification: Berkshire Hathaway by defenition is a holding company owning subsidiaries and stocks engaged in a number of diversified activities.

Major stock holdings: American Express, Ameriprise, Anheuser Busch, Coca-Cola, M&T Bank, Moody’s, Petrochina, Proctor & Gamble, Wal-Mart, Washington Post, Wells Fargo, White Mountain Insurance

Minor stock holding: ConocoPhillips, General Electric, United Parcel Service, Nike, Home Depot, Costco

Major Subsidiaries: GEICO, General Re, National Indemnity, MidAmerican Energy, Iscar Metalworking

Minor Subsidiaries: Clayton Homes, Acme Brick, Ben Bridge Jewellers, Benjamin Moore, Borsheims Fine Jewellery, CORT Business Services, Fruit of the Loom, Garan, Helzberg Diamonds, HomeServices of America, Dairy Queen, McLane Furniture, Nebraska Furniture, Netjets, Pampered Chef, Sees’ Candies, Shaw Industries, Wesco Financial and more

Flexibility: Mutual Funds are restricted in what they can invest. Most funds are restricted by the valuation (Value vs Growth), Geographic (US vs International/Emerging Markets), type of Instrument (Stocks/Bonds/Currency). Berkshire Hathaway has no such restriction. It can invest in any type of Company anywhere in the world. It can also invest in any form of investment.

Taxes: Mutual funds are forced by law to distribute at least 90% of its’ realized capital gains and dividend income each year. You then have to pay taxes on the distribution. In the case of Berkshire since you just buy or sell the stock of a company, you only need to pay capital gains taxes when you sell the stock. In the meantime Berkshire can compound your money for you.

Conclusion: A company run by the best money manager of our time. It has the diversification of a mutual fund, flexibility of a hedge fund and the cost and tax advantages of a stock.

Conflicts - I own class B shares of Berkshire Hathaway.

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