Buffett Gives It Away

What an amazing story. In a Fortune magazine article released today Warren Buffett announced he is giving 85% of his $44 billion fortune to charity with the biggest portion going to the Bill and Melinda Gates Foundation.

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Review of Direct from Dell by Michael Dell

There were a couple key takeaways from the book for me:

1) Michael Dell showed incredible vision and entrepreneurial drive in turning a business out of his college dorm room into the world's largest computer company. It should give shareholders great comfort to know that he is only 40 years old and will be leading the company as Chairman for several years to come.

2) Dell had several short-term stumbles including the excess inventory problem (1989), canceling of Olympic product line (1990), and the first quarterly loss posted in 1993 due to notebook market withdrawal, exit from retail stores, and restructuring of European operations. If a shareholder became nervous during one of these events and sold they would have missed out on on the stock's 2,000%+ return since the early 1990's.

3) The advantages of the Direct Model allow Dell to earn an incredible ROIC in a highly competitive industry. By doing business directly with customers Dell only has to carry 4-5 days of inventory compared to their competitors at 30-40 days. This frees up working capital investments, allows the company to better react to customers' changing technological needs, and lessens the impact of inventory component price decreases. In addition, since Dell outsources the expensive R&D activities of software and microprocessor development (Microsoft & Intel) the company is able to generate $6 of profit for every $1 spent on R&D.

Review of The Little Book that Beats The Market by Joel Greenblatt

One of my favorite books on investing, this incredibly short and entertaining read describes in plain english how to think about investing in stocks. The book provides ample evidence that a strategy of purchasing high ROIC/low PE stocks (The Magic Formula) can generate market beating returns. For beginners this is a great introduction to investing and for experienced professionals its a great refresher on the basic tenants of value investing.

The Superinvestors of Graham-and-Doddsville by Warren Buffett

This is the best speech I have come across on value investing and has really fueled my interest in learning more about the Graham and Dodd approach. Check out the performance of those identified as Graham and Dodd investors. How can you argue with those results?

Here are my favorite quotes:

"Our Graham & Dodd investors, needless to say, do not discuss beta, the capital asset pricing model, or covariance in returns among securities. These are not subjects of any interest to them. In fact, most of them would have difficulty defining those terms. The investors simply focus on two variables: price and value."

"I'm convinced that there is much inefficiency in the market. These Graham-and-Doddsville investors have successfully exploited gaps between price and value. When the price of a stock can be influenced by a "herd" on Wall Street with prices set at the margin by the most emotional person, or the greediest person, or the most depressed person, it is hard to argue that the market always prices rationally. In fact, market prices are frequently nonsensical."

"I would like to say one important thing about risk and reward. Sometimes risk and reward are correlated in a positive fashion. The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it's riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case. The greater the potential for reward in the value portfolio, the less risk there is."

"In conclusion, some of the more commercially minded among you may wonder why I am writing this article. Adding many converts to the value approach will perforce narrow the spreads between price and value. I can only tell you that the secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Securities Analysis, yet I have seen no trend toward value investing in the 35 years that I've practiced it. There seems to be some perverse human characteristic that likes to make easy things difficult."

Individual Stockholder R.I.P

A WSJ artilce written by John Bogle, founder of the Vangaurd Group of Funds. It shows that the % of american households with direct ownership of stocks has declined dramatically over the last 5 decades. Instead, investors are increasingly turning their money over to large money managers with the 100 largest now controlling 58% of all stocks. As a result, Bogle argues that the investment industry is rife with conflicts of interest that limit corporate governance efforts and investor returns have suffered from the high turnover and fees of the average equity mutual fund.

http://johncbogle.com/wordpress/2006/03/15/the-amazing-disappearance-of-the-individual-stockholder-the-wall-street-journal-october-32005/

The 'Noisy Market' Hypothesis

An interesting WSJ article by Jeremy Siegel, finance professor at Wharton. He makes the case for a noisy market hypothesis rather than the efficient market hypothesis. His noisy market hypothesis argues that "security prices are influenced by by speculators and momentum traders, as well as by insiders and institutions that often buy and sell stocks for reasons unrelated to fundamental value, such as for diversification, liquidity and taxes."

http://online.wsj.com/article/SB115025119289879729-search.html?KEYWORDS=noisy+market+hypothesis&COLLECTION=wsjie/6month