Deep Value Letter - Banner Ad / Email Capture

Friday, July 06, 2007

fourth of july, belated

The fourth of July is upon us once again. This great holiday celebrating the birth of the United States is celebrate in many different ways. There will be backyard bbqs with family and friends gathered around, ;and arguing the same childhood slights and injuries as ever, complete with aunt Edna drinking white zin and passing out into the cole slaw and Uncle frank setting the new neighbors house on fire with his fireworks display; Family trip to the beach with the kids and all the really cool sandy crotched bathing suits and sun burnt 3 year olds, spilled ice cream cones and body surfing you can stand; fireworks from coast to coast(I once flew west to east on fourth of July evening and it was probably one of the coolest things I have ever seen. It was clear with only very high cloud cover and you could see the displays from the hundreds of towns we overflew). There will be war movies, Turner classic will show the wonderful musical 1776 multiple times over the next few days and it is a neat way to look at the birth of our nation. There will be baseball games, softball tournaments, picnics in the park, roller coaster rides as americans of every size,shape,background, color and origin turn out to celebrate independence day.Me? I ll be skipping over the waves at 70 MPH in a boat driven by a bakd guy half crazed on tic-tics and miller lites with at least one half naked peruvian diplomat and any other female in whatever form of dress or undress we can entice to join us in our twisted insane little adventures. There will be fireworks and rock and roll at the dock bar, a bunch of good friends around. I ll get half baked on orange crushes, completely burnt by the sun because I lack one of those girl friend devices that come equipped with sun block so I ll forget to wear any, there will friends, music and just a damn good old fashioned American kind of fun to excess. As a bonus, I have enough firecrackers left to thoroughly piss off the neighbors again this year!

Before all this of begins, it is incumbent upon us to realize what this holiday is really all about. On various 4th of Julys through our history, we have had a brave group of men risking hanging for treason, dying in the fields of France to push back the Nazis attempt at world domination, doughboys marching to Lafayette’s tomb to announce that the Americans were there to assist against the boche, dying in the fields of Gettysburg .Jefferson and Adams died on July 4th in 1826, marveling at what they helped to create as they passed on. Our nation was founded on and continued by the heroic efforts of those who were not afraid to stand firm and fight for their freedom and liberty, who put the vision and hope for a nation where men could live their lives free from a ruling class. There has been much sacrifice by many and I think we must remember it before we light the grill and pop that first frosty one.
There has been much success along the way as well. Although there have been bumps along the way, our nations prosperity has grown over the centuries in a manner that is marveled at by the rest of the world. We created entirely new industries and technologies along the way, gave birth to a true middle class for the first time in the history of the world. We have indeed stood as the bright shining city on the hill that Ronald Reagan spoke of, offering hope and opportunity for those who wished to take advantage of it.

At such a time as this I cannot help but think about those inalienable rights out founding fathers discussed in the declaration


We are free here in the United sates to choose our own path through life. The sate does not tell which school we must go to or where we must work we are free to choose. We can choose where we live, how we live, how many children we wish to have, what kind of car we drive. Want to walk down fifth avenue in salmon pant and a blue blazer? Have at it! Want to trade for a living and skip a normal job. Okay by us! Drop out of life, move to La and play poker for a living. Fine! Buy stocks under book value and write? Enjoy! Own a tire shop? Sell software? Be a shacked up free loader that sells rags? We could care less. It is your choice on what, when, where and how you make your living. Keep in mind however that with this right comes a responsibility. It seems all to often that this is overlooked and we look to government for answers and solutions to our problems and failures. If you find yourself living on welfare with nine hungry babies, it is a series of choices you made to get there. If you start an internet based buggy whip business and fail, you have to live with the consequences. If you put on the carry trade and it fails to carry, its on you to be strong enough to pick up and carry on. If your pair of aces is cracked by some idiot with a 3-4 unsuited draws out a straight for you last thousand bucks..its on you. Not society, not the government. You. We are fee to choose our own path. Should your be wrong or not work out as you had hoped it, one must be strong enough, brave enough , American enough to pick up and carry on, reinvent, survive and fins another way to thrive. Want to quit your job and stay home and watch Oprah? Fine. Just do not expect me to pay your electric bill. Want to buy an SUV? Okay but do not gripe to me about the price of gas. Want to be a welfare mom? Okay by me. Just do not expect me to feel sorry for you. It is your choice how you live you life. It is therefore, your responsibility to deal with the consequences of this choices. It has been a characteristic of this country and one we must never lose. Free to choose, to prosper, free to fail, free to get up and try again. The US is truly the land of second chances. Given the stories of many of our top business leaders over the centuries, there probably should be a merit batch for getting knocked out and getting back up.


This actually a tricky one in these modern times. It was Benjamin Franklin who said They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety. Well meaning officials and governments can easily deprive us of enough small liberties for it to become a big problem. Seat belt laws, smoking restrictions in bars, parts of the patriot act that allow domestic spying, all are acts that seem sensible and beneficial. Protecting us from our own dangerous actions and those of others. What a nice, kind government! However, it restricts our actions to act as free men and even begins to inhibit our right to use our property in any manner we see fit, and to earn our living as we choose. Seems sensible but removes small pieces of our freedoms. Liberty is defined as the right to act without restraint and to follow ones will as to their own path of conduct. There is of course an implied obligation to do no harm Your right to swing your fist ends where my nose begins. My right to drink ends at the ignition box. As George Bernard Shaw once quipped, “Liberty means responsibility. That is why most men dread it.” Increasingly we see government restrictions on behavior being passed and even embraced in the name of safety and of health. We must be ever vigilant unless we become like frog in the saucepan. If you drop a frog into boiling water, he will jump out. If you place the frog in a pan of cool water and heat it slowly, there be boiled frogs legs for dinners. Liberty is stolen slowly, in little bits and tiny pieces. Keep this in mind when you head to the voting booth. Free men and women do not need, nor do they allow government to make their personal choices on what they eat, what they drink, what they smoke or who they sleep with. Freedom is not free. It requires and demands vigilance and responsibility.


The big one. Note that the inalienable right is NOT happiness. It is the pursuit of happiness. In his excellent book, the history of happiness, Florida state professor Darrin McMahon examines mankind’s attempts to find happiness. Many turn to religion, others to more earthly forms of hedonistic delights, others to philosophy. Man has looked at philosophy, at politics, in our minds, in our hearts and between our legs in our pursuit of happiness. In the end the professor surmises, as do I that happiness lies in the journey we undertake. To obtain happiness means that we must be content..NO..we must CELEBRATE and delight in the life we live day to day. There are so many moment that make up our lives and to be happy we must learn to find them and celebrate them. A stock that doubles, a first kiss, a ten thousandth kiss, the birth of a baby. Those of you that have children as I do, recall how you felt when you first held your first born. That is the feeling of happiness. To be happy, we must be able to chase our dreams. I think we must be able to take risks and chance to failure as well. I have yet, for example, to meet a happy mid level bureaucrat. To be happy is to be alive and to enjoy all the moments of a lifetime. A walk off home run for the home team, quiet drink with an old friend, a real estate deal that closes quickly, a lawn well mowed, a road trip, a good morning kiss from someone you love, a sunset, a promotion, catching an inside straight or a flush draw, a 12 to 1 pony that wins, a childs high school graduation, a daughter who comes to you in her twenties and tells how much she appreciates you always being there, a loud night at a dock bar with great friends, music, poetry, literature, opening day, the NFL playoffs (if your team makes it of course0, march madness, starry nights, an attaboy for a job well done, a friends wedding, a friends divorce, all of these are the moments that make up a life. Ife itself is the pursuit of happiness. If we are smart enough to know that, to enjoy that and life in such a manner, as Charles Bukwski once said that the gods fear to take us, we shall be happy.

Happy Fourth of July to all. Through your journey through life, your liberty and responsibility, may you find the happiness you pursue!

the search for value

Not too long ago I was perusing some back issues of Outstanding Investor, a quirky publication featuring interviews with top investment managers. In spite of the editors ongoing love affair with Warren Buffet, I enjoy this publication and think it is one of the very best sources of investment ideas. While reading, I found an old interview with Peter Cundill, a value fund manager of some note who hails form Canada ad has much success applying his approach around the globe. In the interview, Cundill mentioned that one of us favorite screening methods was to search for stocks that trade below tangible book value, are profitable and pay a dividend. His reasoning was that if the assets were sound, then one was purchasing the earning power and dividend of the company basically for free and that this would provide a large margin of safety with upside potential. Sounds reasonable, doesn’t it?

I decided to run the criteria through a back test using the programs at, an excellent site for quick and dirty checks on ideas and systems. The only drawback is that you are limited to the value line universe of stocks, but for quick tests it is excellent and easy to use(any suggestions for other backtesting tools welcome). I ran the test from 1986 through the end of 2006 and found that, indeed the results are excellent. The criteria returned an average of 17% versus the SP500’s 12 and had only 2 down years in the last 20. In fact, it has not been down January to December since 1990! Take note, however that 1990 was a doozy of a down year, down almost 30%.

I like this approach to screening. The presence od the dividend means that in all likelihood the company is generating more than enough cash to meet its bills and has enough left over to return to the shareholders each year. The profits make it less likely for the company to burn up assets and cash just too keep itself afloat. As always keep in mind that screening is the start of the process not the end and a more investigation must be done. As Chris Browne once remarked, first underwrite and then investigate.

What kind of stocks can we uncover today using this approach? Not too many household names that for sure. The stocks found here are going to be unloved and undiscovered and not mention of the tv shows until they are taken over or discovered by an eagle eyed analyst. When I ran the screen I included an extra margin of saety characteristics by adding a current ration of more than one. I have found over the years the more ways I prevent myself from being exposed to dangerous dying situations the more likely I am to avoid value traps and value destroyers. The current ratio just assures enough cash and short term assets exist to pay the bills without borrowing or looting the company.

There were as expected a lot of small banks and insurance companies on the list including such gems as Beverly Hills Bancorp (BHBC) which recently hired an advisor to look into selling the bank, Broadway Financial(BYFC) a small bank with a mostly Hispanic clientele in Los Angeles that has had recent insider buying trading at 85% of book value; Eastern Insurance holdings (EIHI) , a small workers comp and group insurance firm that has started getting analyst coverage with Keefe Bruyette rating it a buy with positive comments; Presidential Life a life insurance and annuity concern that has had recent insider buying. There are more but I think that gives some idea of what type of stocks this screen will turn up right now. With the market having had an extended run, its is going to be small and microcap names that turn up.

Among the no financial names were companies like Citadel Radio ( cdl) the company that just purchased ABC radio for Disney and now has over 100 radio stations across the nation; The challenging furniture market has seen the shares of Furniture brands and Haverty Furniture fall low enough to meet the criteria with both of these catching the yes of notable investment firms and activists in recent months; McClatchy News(MNI), the newspaper concern with over 30 daily papers around the country (these shares have been purchased by both Citadel and Renaissance taking good size positions of late. One of my favorite stock LS Starret(SCX) a company in the always exciting handheld tools business shows up as well. Again as with the banks and insurance companies not household names but viable business’ that pay dividends and sell cheaply compared to tangible book value.

In the continuing search for stock ideas the Cundill screens appear to be another viable method for searching out this, tails I breakeven, heads I win big stocks that I have found to work best for me over the years. The returns have always been very “frog” with value sitiing still until something unlocks then and leads to good size gains but it has so far been profitable. Lets hope it stays that way.