Speculation Will Never Disappear

I took a break from the various Market Wizards series books to finish up Reminiscences of a Stock Operator, by Edwin Lefevre. It is believed that this book is a fictionalized account of the stock trading life of Jesse Livermore. Livermore was an amazing "stock operator", who correctly called quite a few market crashes, and made and lost several multi-million dollar fortunes throughout his life.

Here is a great quote towards the end of the book, where the "Larry Livingston" protagonist character begins to criticize the practice of stock tips, the source of which is often institutional manipulation:

"Speculation in stocks will never disappear. It isn't desirable that it should. It cannot be checked by warnings as to its dangers. You cannot prevent people from guessing wrong no matter how able or how experienced they may be. Carefully laid plans will miscarry because the unexpected and even the unexpectable will happen. Disaster may come from a convulsion of nature or from the weather, from your own greed or from some man's vanity; from fear or from uncontrolled hope. But apart from what one might call his natural foes, a speculator in stocks has to contend with certain practices or abuses that are indefensible morally as well as comercially." - page 285

Buying Value and Selling Hysteria

Yes, I am going out of order in the three-book series by Jack D. Schwager, but I just finished reading the first book of the series, simply titled: Market Wizards. I had previously discussed Schwager's books in the last post, Latest Read: The New Market Wizards. I had discussed some other financial books I've recently read in the post, Some Great Financial Reads.

Again, I read through some of Jack D. Schwager's insightful interviews with some of the world's best traders. My favorite chapter of this book would have to have been under Part III: A Little Bit of Everything. It is the section titled "Buying Value and Selling Hysteria", where Schwager interviews James B. Rogers, Jr. I suppose Rogers' style is the one of all the traders Schwager has interviewed so far which I would most want to emulate in my career. Rogers actually left at one point to start his own fund with a man by the name of George Soros: it was the Quantum Fund.

There are some very interesting quotes in this chapter that should be trading aphorisms to live by:

"I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, "I just lost my money, now I have to do something to make it back." No, you don't. You should just sit there until you find something." - page 286.

Rogers on trading rules to live by:

"Look for hysteria to see if you shouldn't go the opposite way, but don't go the opposite way until you have fully examined the situation. Also, remember that the world is always changing. Be aware of change. Buy change. You should be willing to buy or sell anything. So many people say, "I could never buy that kind of stock," "I could never buy utilities," "I could never play commodities." You should be flexible and alert to investing in anything. - page 315

On couseling the average investor:

"Don't do anything until you know what you are doing. If you make 50 percent two years in a row and then lose 50 percent in the third year, you would actually be worse off than if you just put your money in a money market fund. Wait for something to come along that you know is right. Then take your profit, put it back in the money market fund, and just wait again. You will come out way ahead of everybody else." - page 315

On the magnitude of the deficit problem (as of 1989):

"The basic problem in the world today is that America is consuming more than it is saving. You need to do everything you can to encourage saving and investment: Eliminate taxation of savings, the capital gains tax, and dual taxation of dividends; bring back the more attractive incentives for IRAs, Keoghs, and 401ks. At the same time, you need to do everything you can to discourage consumption. Change our tax structure to utilize a value added tax, which taxes consumption rather than saving and investing. Cut government spending dramatically - and there are lots of ways of doing it without harming the economy too badly. We would have problems, but the problems would not be nearly as bad as when they are forced on us. If we don't bite the bullet, then we are going to have a 1930s-type collapse." - page 295.

This last statement by James B. Rogers, Jr. seems foreboding and eerily prescient. I wonder what Rogers thinks of the current federal deficit, 17 years later...

Latest Read: The New Market Wizards

I had last discussed relevant financial books in my post Some Great Financial Reads. You can keep up-to-date with my financial reading at the toolbar on the lower right-hand side, the section labeled "Financial/Investment Books."

Well, I recently finished The New Market Wizards: Conversations with America's Top Traders, by Jack D. Schwager. This is one of a three-book series in which Jack D. Schwager interviews some truly remarkable and legendary traders. This was truly an eye-opening read, and it seems to certainly poke at the efficient market theory.

The book starts out with an interview of Bill Lipschutz, in a chapter Schwager aptly titles: "The Sultan of Currencies." Already on page 18 we begin to witness the vigilant nature of a currency trader:

"The interviews I held with Lipschutz were conducted in two marathon sessions at his apartment. Lipschutz has market monitor screens everywhere. Of course, there is the large TV monitor in the living room, receiving a feed of currency quotes. There are also quote screens in his office, the kitchen, and near the side of the bed, so that he can roll over in his sleep and check the quotes - as indeed he does regularly (since some of the most active periods in the market occur during the U.S. nighttime hours). In fact, you can't even take a leak without literally running into a quote screen (there is one conveniently located, somewhat tongue in cheek, at standing height in the bathroom). This fellow obviously takes his trading very seriously."

I also very much enjoyed the chapter under Part IV - Fund Managers and Timers: "Stanley Druckenmiller: The Art of Bottom-Up Investing". However, my favorite section of the book was under Part I - Trading Perspectives: "Hussein Makes a Bad Trade." This quote from page 11 really brings home the nature that market manipulation and supply and demand truly play in policy dictation on the world's stage:

"Hussein's trade was the invasion of Kuwait. Initially, he had solid, fundamental reasons for the trade. (The fundamentalist reasons came later, of course, as Hussein found it convenient to discover religion.) By invading Kuwait, Hussen could drive up oil prices to Iraq's benefit by eliminating one of the countries that consistently exceeded its OPEC quota and by creating turmoil in the world oil markets. He also stood a perceived good chance of permanently annexing part or all of Kuwait's oil fields, as well as gaining direct access to the Persian Gulf. And, last but certainly not least, the invasion provided a wonderful opportunity for Hussein to feed his megalomaniacal ambitions."

Can anyone think of similar market manipulations being played out on today's world stage?

On a Related Note, here is a link to some interesting theories on the potential coming Oil Crash:

Peak Oil: Life After the Oil Crash

MyMoneyBlog's "ShareBuilder Bonus"

In general, this site simply acts as a way to monitor my own performance in my virtual Million Dollar Portfolio. However, I found a post over at MyMoneyBlog that I thought I had to share with The Million Dollar Portfolio readers. It's also a good way for me to make a mental note about a good idea.

The post is pretty self-explanatory. (He even makes a nice plug for Bershire Hathaway!) Basically, ShareBuilder offers a $50 bonus for opening an account with them, so long as you make one trade (commission $4). You can either net $46 in cash, or decide to invest in a few shares of stock in something undervalued (WWY, INTC, JNJ, etc.) that could potentially go up over the long haul, and just hold, hold, hold...

Do your own due diligence on this, but it's a fun way to make some quick bucks and learn something too.

Thought I'd let you know, interesting post and very interesting blog, so here's the link:

Sharebuilder Bonus = Free Berkshire Hathaway!

Mercury General has Potential

Mercury General Corp. (MCY) is a great stock that looks poised for growth. This is the next new company added to the Spring 2006 eFinancial Challenge version of the virtual Million Dollar Portfolio. Mercury General is a small-cap ($2.95 Billion) insurer, headquarted in Los Angeles, California. In this instance the trailing and forward price/earnings ratios are actually very close, at 11.67 and 11.92 respectively. This compared to Allstate's (ALL) trailing price/earnings of 19.58, and one can begin to see the possible upside potential when the street wakes up to Mercury General...

As an aside, 3M Co. (MMM) came out with some great positive news today, boosting the stock price over 5%!
3M Co. was previously mentioned in my post titled:
Three M's for 3M Company

Mercury General Stuff

The Motley Fool.com - Kick Your Stocks Up a Notch - "The catch was that each firm had to earn a high return on equity (ROE), and its debt had to be less than 50% of stockholders' equity, which roughly equals what owners could expect if the firm were liquidated. "

Yahoo! Finance - Mercury General Corporation Increases Dividend 11.6% - "Since dividends were instituted in the first quarter of 1986, Mercury General's dividend has increased at least once each year with the overall compound rate of increase over twenty years averaging approximately 20%."

MSN Money - MERCURY GENERAL CORP Comparison - In a comparison with Allstate (ALL) and The Progressive Corp. (PGR), Mercury General looks pretty good...

IMAX is Fun to Watch

Imax Corp. (IMAX) is the next previously undiscussed holding in the virtual Million Dollar Portfolio. I've always enjoyed going to Imax movies, and it somehow seems like this once strange medium is becoming more and more mainstream. I would imagine that all financially-minded individuals already know the various positive indicators in the near future for Imax.

The most notable trends would include the fact that there is less and less of a draw of blockbuster crowds recently in movie theaters, and more people staying home to watch DVD's on sophisticated home entertainment sound systems. Renting a DVD can now be almost as good as going to a movie theater, at a fraction of the price. This is a very scary trend for theater-owners. Not so for Imax. It would be incredibly difficult to replicate the experience of a movie-screen the size of two blue whales in your living room!

Fundamentally, the company doesn't exactly fit into my traditional categories and screens for value investing. However, once in a while I will tend to make an exception, particularly with regard to small-cap, lower volume companies. Even so, the averaged trailing & forward price/earnings ratio comes out to 21.22, which isn't really that high. The company has a market cap currently of 411.79M. In addition, the company has a net profit margin of 11.5%, and income growth of 62%.

Imax Indicators

CNN Money - You can't spell IMAX without M&A - ' Whether or not IMAX is successful in trying to get multiple parties bidding for it remains to be seen. But Kelman is fairly confident that IMAX's days as an independent company are probably numbered. "I'm not sure if there will be a bidding war," Kelman said. "But I think a deal is likely to happen. I don't think the company would have made it public had they not thought that they already had some offers in place." '

Rotten Tomatoes - Superman to Make His "Return" via 3-D IMAX! - "Releasing select sequences of 'Superman Returns' in IMAX 3D marks a groundbreaking moment in movies," said Dan Fellman, President of Domestic Distribution at Warner Bros. Pictures. "This film is going to give fans an opportunity to be immersed in a major live-action motion picture like never before."

IBM, with a New Spin

International Business Machines Corp. (IBM) has been heavily positioning itself to be a player in the consulting business as of late, which can be noticed in particular by their television ad campaigns. IBM is yet another one of the newer additions to the virtual Million Dollar Portfolio. The stock has seen a 52-week range of 71.85 - 90.62, and is currently priced at 83.06, which with an averaged forward & trailing price/earnings value of 15.09, is pretty good. The company has a low debt/equity ratio of only 0.684, and a cash hoard of 13.69 Billion. Most analysts estimate the stock to appreciate about 16% in the coming year.

IBM Financial Pointers

Morningstar.com - Show me 10 years of valuation history. - The trailing price/earnings hasn't been this low since 1997.

Reuters.com - IBM services unit seeks profit in smaller deals - "IBM's software business, by contrast, had a gross profit margin of nearly 88 percent in 2005. IBM says many services could be standardized in the form of software, boosting profitability as it reduces labor costs."

Forbes.com - Palmisano's IBM Steps Toward Atom-Size Computers - "Lately they've been working on a tool that is based on the spin of electrons and atoms, and could eventually build microscopic computers."

washingtonpost.com - IBM Makes A Play for Microsoft's Customers - "International Business Machines Corp. said it will roll out an aggressive strategy today to lure business customers away from rival Microsoft Corp., offering bounties of up to $20,000 to sales partners who can persuade companies to make the switch."

Cincinnati Financial Looks Good to Me

Cincinnati Financial Corp. (CINF) is another one of the newer additions to the virtual Million Dollar Portfolio. Yes, it's true that the company has been impacted by various catastrophic weather events in the recent news. However, this type of scenario has been previously addressed, in the post Allstate Will Weather the Storm. As with Allstate Corp. (ALL), Cincinnati Financial is in the business of providing insurance, and therefore shouldn't be hurt too badly by short-term events.

Fundamentally, the company looks pretty solid. The trailing price/earnings of 12.38 and forward price/earnings of 13.79 give an averaged forward & trailing price/earnings of 13.085, which is relatively low compared to Allstate's averaged trailing & forward price/earnings of 14.105 (which is also pretty low by the way). In addition, Cincinnati Financial also throws off a nice 3.10% dividend yield. Unlike Allstate, Cincinnati Financial is much smaller with a market cap of 7.32 Billion. This leaves much room to grow and/or possibly even be acquired at a nice premium, considering the company is currently trading at only 1.22 times book-value.

Cincinnati Financial Tidbits

MSN Money - 5 Ways to Profit from Buffett's Forecast - Jim Jubak has pretty favorable comments on Cincinnati Financial: "Of course, even a bad year for Cincinnati Financial would be a good year for most insurers. Commercial property and casualty insurance, one of the fastest growing parts of the company's business, showed a combined ratio of 87% in 2005."

ZACKS - Zacks' High Rank Value strategy highlights - "Many value investors look for stocks trading at Price/Earnings multiples below 15 and Price/Book multiples below 3. Combining these valuation measures with a Zacks Rank of #1 ("Strong Buy") or #2 ("Buy") helps to ensure that a stock is truly undervalued. The High Rank Value Profit Track strategy finds such bargains. "

Business Courier - Hurricane didn't dampen Cincinnati Financial's profits - "Despite a hit from Hurricane Katrina, Cincinnati Financial Corp. posted record net income for 2005. Its fourth-quarter results suffered somewhat, but still beat analysts' expectations."