Time to Buy American...Stocks?

By Joe Ponzio on October 23, 2008  |  5 comments

I was invited back on WBBM's Noon Business Hour the other day to discuss the economy and whether or not (or when) people should get into the markets. You can listen to the full 6 minute 16 second clip below.

(Don't be too critical — I caught myself making a mistake or two; but, the overall ideas are, in my opinion, sound.)

Lessons From the Banking Meltdown

By Joe Ponzio on September 15, 2008  |  21 comments

So...Merrill sells to Bank of America, most likely to avoid bankruptcy, Lehman files for bankruptcy, Bear Stearns sells to JP Morgan, again most likely to avoid bankruptcy. Major financial institutions — once revered as the "crown jewels" of the financial community — are failing. And all I can think is...Are you kidding me?!?

Aren't these supposed to be the greatest financial minds and businesses in the world?

WBBM Noon Business Hour in Chicago

By Joe Ponzio on September 10, 2008  |  10 comments

On August 20, 2008, I was interviewed on WBBM-AM's Noon Business Hour here in Chicago. If you have been through the site, you won't find too much new here. We discuss Graham Corporation, Nutrisystem, Apple, Starbucks, and the overall markets and investing.

You can listen to the 5 minute 13 second clip below.

Value Investing vs. Value Pretending

By Joe Ponzio on August 16, 2008  |  16 comments

For more than fifty years, great "value" investors — Warren Buffett, Benjamin Graham, Charlie Munger, Seth Klarman, to name a few — have been touting the benefits of investing when there is blood in the streets, buying businesses when they are on sale. At each turn, somebody would ask them: Aren't you concerned that, by constantly talking about how you became so successful, you'll create a following that will, in turn, increase competition and reduce your potential investment returns?

It is said that value investing is more popular today than ever before. I tend to disagree.

Phil Fisher on Profit Margins, Part II

By Joe Ponzio on July 20, 2008  |  6 comments

As I mentioned in this post, three of Phil Fisher's 15 Points to Look For in a Common Stock are directly related to profit margins. Companies with slim profit margins often feel tough economic or business cycles more vehemently than those with fat margins. Of course, there is a flip side to that coin: When coming out of tough times, companies with thin profit margins tend to rebound much more than those with fat margins.

Value Investing vs. Business Investing

By Joe Ponzio on July 10, 2008  |  7 comments

In his 1934 book Security Analysis, Benjamin Graham laid out the definition for investing versus speculating. In the 74 years since he and David Dodd penned the book, nothing in the definition has changed. That said, BPal asked a very interesting question. I answered it in the comments, but I figured I should post about it as well.

Predicting The Future of a Troubled Business

By Joe Ponzio on July 2, 2008  |  5 comments

A visitor just sent this email to me and I figured (as per his last line) that it would be better suited in a post rather than in a private email response. The question: Should I use the owner's margin on lowered sales as I project the intrinsic value of a company rather than sticking with historical growth and projections?

What You Should Be Looking For

By Joe Ponzio on July 2, 2008  |  9 comments

Folks — as you can imagine, I have been busy ripping through annual reports and financial statements like crazy. Hence the irregularity to my posting. Back in October of last year, I had a lot of time on my hands — the effects of a high market and few opportunities. That situation has reversed.

What am I looking for? The economy has been putting a squeeze on a lot of companies, slamming profit margins, revenues and earnings. When this happens, companies have to start shedding assets — human and physical — in an effort to return to normal levels of profitability. When profit margins are thin, the business' are at risk (think GM, Blockbuster). When profit margins are fat under normal conditions, the business is sound, even if it takes a substantial hit to sales.

The Art of Selling Your Stocks

By Joe Ponzio on April 17, 2008  |  11 comments

Jeff pointed out that the overwhelming majority of the posts on F Wall Street have discussed the "buy side" of being an investor. (And, of course, psychology and when not to buy.) Okay — now we own businesses. What's the next step? (Grab some coffee; this is a looooooong post):

Your Commitment to Business Investing

By Joe Ponzio on April 14, 2008  |  10 comments

Folks — it's great to be back. A lot has happened over the past few weeks; then again, you should not have been surprised by any of it. The airlines are shutting down (you could have seen it coming from a mile away — serious note: my heart goes out to the employees); Bear Stearns has fallen (someone had to — serious note: my heart goes out to the employees...again); GE missed Wall Street's optimistic earnings estimates (with more than 35% of 2007 revenue from GE Money and a sever credit crisis? No way!)

(Oh, and someone stole my identity. Moving on.)

With the markets in a dizzying undulation — not quite ready to plummet, not quite ready to soar — it's common to ask yourself, "Did I make the right decision? When should I reevaluate? If it's going to get worse, should I stand on the sidelines for a while and look for a bottom or the signs of a recovery?"

What is a No-Brainer investment?

By Joe Ponzio on February 29, 2008  |  18 comments

A few weeks back, I sent an e-mail to our advisers talking about the "no-brainer" type investments we are looking for. I wrote a nice, long e-mail (in true Joe fashion) about discounted cash flow and valuing businesses, about speculation versus investing - it was practically a novel in and of itself. Then, I deleted the whole thing, and started from scratch.

The way I figured it, you shouldn't have to be a rocket scientist to understand "no-brainer" investing. Here's a recap of what I wrote:

What Is The Best Asset Allocation Strategy?

By Joe Ponzio on February 8, 2008  |  11 comments

A common question among investors — both conventional and non-conventional — is: How should I allocate my portfolio so I am best prepared to capitalize on (or protect myself from) the coming years in the markets? Mutual fund, which were designed to, in part, shield people from volatility, aren't living up to their promises and even "well-diversified, long-term" mutual fund investors are finding it difficult to "stay the course" like their advisers instructed.

Here's how to do it.

Stocks Stink. Buy Bonds!

By Joe Ponzio on February 6, 2008  |  19 comments

How much is today's gut-wrenching, hair-raising volatility worth? Let me ask a different way: After 40 years of investing in markets like these, how much more money would you expect to have versus investing in bonds and ignoring the markets altogether? $500,000? $1 million? $10 million? What if I told you the difference was just $40,000?

Is all this crazy volatility, nail-biting terror, and self-doubt for forty years worth just $40 grand or less?

Before You Back Up The Truck On Adobe

By Joe Ponzio on February 2, 2008  |  9 comments

Ever since I posted the analysis on Adobe yesterday, I've had this looming feeling that a little clarification was in order. Some of you are looking for reinforcement on your long-term, buy-and-ignore portfolio; some are really trying to find those heart-pounding, mouth-watering, back-up-the-truck deals in the markets.

At today's prices, I believe that Adobe is appropriate for the former — it is a great company that appears to be selling at a moderate discount. Allow me to explain:

When To Watch Out For Insider Selling

By Joe Ponzio on January 29, 2008  |  21 comments

Somebody send Angelo Mozilo to jail. I can only think that it is a matter of time. If you think investing in stocks is as simple as looking at past earnings (or cash flow) and buying, you have another thing coming. As a silent partner in business, you have to dive into the financials and filings, and determine whether or not your management is acting like partners...or thieves.

Countrywide's Angelo Mozilo? Let's explore the tell-tale signs of a thief.

Make Your Loved Ones Get It

By Joe Ponzio on January 10, 2008  |  19 comments

This post is totally out of sync with my 1950s & 1960s Buffett discourse; however, Night ran into a problem that needs fairly quick solving. His sister gave him a sum of money to begin investing and, after explaining how the markets work, that price follows value, etc., he purchased a stock for her. In just days, she was down 15% (though it rallied again after hours to bring her loss to just 1% or 2%.

How can he convince her to stay the course over the long term? Buy her a Happy Meal!

Intrinsic Value, With Short-Term Results

By Joe Ponzio on January 8, 2008  |  18 comments

If you recall from an earlier post, I showed a quick potential profit from Sharper Image — in that case, a few-day return of more than 40% because the stock was trading so far below its break-up value. As time marches on and the ability to generate cash seems a distant goal, the value of that company continues to slip, as does its break-up value. (Remember: Every day that it can't generate enough cash is another day that the company will need to dip further into savings, assets, or debt to finance operations.)

Quick, large profits can come from buying companies for well below their break-up value. I was revisiting some of Buffett's early partnership letters (no, I can't send them to you and I won't post them without Buffett's express permission), and I came across this 1960 play that resulted in massive, short-term profits from conservative value investing.

Buffett On Mr. Market

By Joe Ponzio on November 6, 2007  |  10 comments

People are always asking me about "must read" books on business, investing, and other topics to help with their investing. One of the finest "Buffett" books on the market is Lawrence Cunningham's The Essays of Warren Buffett: Lessons for Corporate America. Unlike most books that try to pick apart Buffett's investment style, The Essays of Warren Buffett organizes Buffett's annual letters, reports, and other teachings in an easy-to-read format.

If you are not entirely, 100%, unwaveringly confident in your investing, buy this book. Let's take a look at what Buffett has said about Mr. Market.

Noise vs. News: Fed Meetings and Rates

By Joe Ponzio on November 2, 2007  |  10 comments

Sorry all — the Chicago cold kicked my butt for two days. Let's get back to business. The Federal Reserve cut the federal funds rate by 25 basis points (0.25%) and pumped $41 billion of short-term reserves into the markets — the biggest liquidity infusion since September 11, 2001. One would have expected stocks to do anything but drop — the Dow having lost 360 points (2.6%) yesterday.

So...

News vs. Noise: Board Changes

By Joe Ponzio on October 30, 2007  |  7 comments

Shortly after posting the biggest quarterly loss in the company's history, Merrill Lynch fired CEO Stan O'Neal. On the news, shares of Merrill Lynch (MER) dropped 2.1% before today's opening bell — immediately wiping out $1.2 billion of market cap.

Come on — did Merrill's business really take a $1.2 billion hit this morning? Or is this noise that looks like news?

News vs. Noise: Sifting Through News Advertisements

By Joe Ponzio on October 29, 2007  |  4 comments

We all know that the markets are driven by fear and greed. We know that, on a daily basis, we are bombarded with information and news about stocks and the markets. As investors and casual internet surfers, we are flooded with information and advertisements about "The Ten Best Stocks For 2008," "How To Retire Wealthy," and "Oil Sets New High—Stock Market Outlook Is Gloomy (or Rosy)."

In the end, the news sources, the advertisers, the brokerages, etc. have one goal: They want to sell you something. The company with the scariest or most optimistic news will likely attract our attention, and hopefully our dollars, to buy their "protection" or their "solution".

How do we sift through the garbage to find real gems of information—the edge we need to profit greatly?

Pabrai's Law of Large Numbers

By Joe Ponzio on October 22, 2007  |  6 comments

Thanks all for the well wishes. Everyone is doing great! Now, back to business as usual (with a hint of less sleep).

In 1939, Sir John Templeton borrowed money to buy stock in 104 companies selling under $1, 34 of which were in bankruptcy. In time, four of those stocks ended up worthless, but Templeton turned massive profits on the portfolio as a whole.

Should we be looking at small- and mid-cap stocks? Pabrai thinks so.

Have You Read Buffett?

By Joe Ponzio on October 11, 2007  |  5 comments

By now we've all (should have) been to the Berkshire Hathaway site to read the various annual reports and letters to shareholders, and we all (should) have the Owner's Manual memorized. When Warren Buffett writes something, we should listen. After all, the tone of his writings have gone from serious and secret to educational and fun—the musings of a man likely sitting at his desk, typing letters, and laughing because everyone reads them but few follow his billion dollar advice.

Let's take a look at a 1984 article he wrote for Hermes—the Columbia Business School Magazine.

Pabrai Week: The Kelly Formula

By Joe Ponzio on October 4, 2007  |  13 comments

Some 50 years ago, John Larry Kelly came up with a formula to determine how much you should bet on a gamble or investment to optimize your bankroll. Now known as the Kelly Formula, the equation determines the optimal percentage of your cash to bet on a favorable bet.

Mohnish Pabrai talks about it. Pabrai applies it to some of Buffett's past purchases. I guess we should take a look at it too. Heck, in this game, it pays to be a copycat.

Mohnish: On Noise, Emotion, Gold And Change

By Joe Ponzio on October 2, 2007  |  4 comments

Before we ever crammed into the conference hall for the meeting and Q&A session, Mohnish was chatting it up with investors and prospective investors (and fans) in the half hour meet-and-greet. I arrived 15 minutes early and the room was already half full (or half empty if you are a pessimist).

Why Ask Me? Ask Mohnish.

By Joe Ponzio on October 1, 2007  |  14 comments

I went to the Pabrai Funds annual meeting on Saturday, armed with some of your questions. It is often good to bounce ideas and questions off other business investors, and you can't argue this Buffett disciple's 30+% average annual return for the last eight years. Mohnish Pabrai—manager of a $600 million hedge fund, lunch guest of Warren Buffett, business investor, and generally nice (and accessible) guy.

Here's what he had to say.

Stock Buybacks: What That Means For You

By Joe Ponzio on September 27, 2007  |  8 comments

When buying a business, you are essentially becoming a silent partner in that business. Sure, you have a say in the meetings and you get the annual reports; still, you don't have any real control over the day-to-day operations or the allocation of the company's (your) cash.

When a company buys back stock, it is using your cash to increase your ownership by reducing the number of outstanding shares. You end up with a bigger piece of the pie. That's a good thing, right?

When Should I Sell My Stock?

By Joe Ponzio on September 20, 2007  |  8 comments

The decision to buy stock in a company is fairly straightforward. Is it a great business? Is it trading at a significant margin of safety (MOS)? Am I confident in my valuation and assessment? Answer "yes" to those questions and you're on your way to business ownership.

But when do you sell?

Just Because You Know The Value...

By Joe Ponzio on September 18, 2007  |  3 comments

Let's get back to the basics—Warren Buffett and his teachings. We know that every company has an intrinsic value. Calculating that value is simple—it is the discounted cash that can be taken out of the business during its remaining life. In fact, that calculation can be used to value everything—businesses, CDs, bonds, cars, real estate, the list goes on and on.

The Psychology Of Investing In Stocks

By Joe Ponzio on September 11, 2007  |  7 comments

When you buy stock in a company, what do you feel? Anxiety? Excitement? Do you immediately second guess your decision? Or regret it? Let me guess: refresh, refresh, refresh the screen to see if the price has gone up...then check it every chance you get, but no less than daily.

Fishing For Profits

By Joe Ponzio on September 10, 2007  |  5 comments

80 degrees. Sunny. I'm getting a killer tan. And that's about all I'm getting because the fish aren't jumping in my boat the way I had hoped. In fact, we've caught nothing but two small perch for the day, and nary a nibble more. Some guys are sleeping; some are getting frustrated and angry. I'm standing at the back of the boat, sipping a glass of wine and watching the water.

Then it dawned on me: I know exactly how these guys see investing and the markets, and they fish just like they invest.

Valuing a Financial Services Company

By Joe Ponzio on August 23, 2007  |  16 comments

We're in a tough spot—financial services companies, particularly banks, are getting hammered right now because of the sub-prime mess. When a stock gets hammered, the underlying company may become very attractive at the new price. Unfortunately, Morningstar doesn't give us the free cash flow data for these companies, so we have to dive into the annual reports.

What Discount Rate Should I Use?

By Joe Ponzio on August 17, 2007  |  4 comments

When valuing a business, you discount the expected future cash back to today to get an idea of what the company is worth. Of course, predicting future cash flows is part art, part science. Piled on top of that is the fact that the discount rate you use greatly affects the intrinsic value calculation. So, what rate should you use?

The Graham And Dodd Method

By Joe Ponzio on August 14, 2007  |  7 comments

In 1934, David Dodd and Benjamin Graham (Buffett's teacher) wrote what would later be known as the foundation for value investing. Security Analysis knocked Wall Street for focusing on reported earnings and pointed the finger at the brokerages for dismissing their fiduciary responsibilities to clients, ultimately causing the Crash of 1929.

(In reading the latter section, if you didn't know the book was from 1934, you would think he was describing the dot-com boom and bust of the early 2000s. It's actually scary.)

Big Moat Business Part II

By Joe Ponzio on August 6, 2007

When a business changes your language, it likely has a good moat. Still, plenty of businesses have huge moats—and it is just a matter of understanding and uncovering them. Why do you need a moat? As Buffett says,

to protect you from the guy who is going to come along and offer [your product] for a penny cheaper.

How To Recover Losses

By Joe Ponzio on August 1, 2007  |  3 comments

Hope. It can kill a portfolio. The more rational, cold, and calculated you are in your investing, the more confidence you can have in your portfolio. Each emotion you introduce only digs you further into the hole. You can hold a company because you love their products; but, you better be sure that the business is generating enough cash to keep those products rolling off the lines.

Sometimes, hope is enough and things pan out the way investors wish they would. And sometimes, hope makes people lose money.

Buffett's Timeless Advice To Stock Investors

By Joe Ponzio on July 31, 2007

In his 1996 Letter To Shareholders of Berkshire Hathaway, Warren Buffett offered investors some pretty rational advice. I'll take you through it, but let's paraphrase his first words of caution: If you aren't going to own individual stocks, buy index funds—not Wall Street's mutual funds. Considering that most of Wall Street's mutual fund managers lose to the markets in the long-term, and if you don't want to own individual stocks, that's pretty sage advice from the Sage Of Omaha.

Have You Been Swimming Naked?

By Joe Ponzio on July 30, 2007

I don't like to write about the stock market. Why? It's simple—whatever I write on Sunday night may very well be outdated by Monday's lunch. It is much easier, safer, and more comfortable to buy stocks in wonderful businesses and ignore the stock market than it is to trade stocks, analyze what the gamblers are doing, and try to predict the direction of the markets.

The Importance Of Earnings

By Joe Ponzio on July 16, 2007  |  7 comments

Earnings. The Golden Child of Wall Street. You can't talk about a "growing" company unless you qualify your rant with a discussion of earnings. In fact, earnings are the basis of nearly every one of Wall Street's tests to determine whether a company is healthy and whether or not it belongs in your portfolio.

F Wall Street...and their earnings.

Investing And Poker, Be Great At Both (Part 2)

By Joe Ponzio on July 14, 2007

In Part 1, shortly after my brother, Ben Ponzio, won a World Series of Poker bracelet, I decided to draw a comparison between poker and investing. In reality, the similarities are scary. If you are great and one, you can (and should) be absolutely great at the other. The traits of a successful, long-term poker player and those of a successful long-term investor are almost identical.

Let Me Tell You About Patience

By Joe Ponzio on July 12, 2007  |  7 comments

One thing that Wall Street wants you to believe is that you have to get your money into the markets today—or you are never going to retire the way you hope to. Why? How else will they get you to buy their investments today?

In reality, you have time. You absolutely have to start saving money today, but you do not need to get it into the markets just because you have it. Let me explain:

Should I Reinvest Dividends? WWWD?

By Joe Ponzio on July 11, 2007  |  6 comments

Conventional wisdom on Wall Street says that you should definitely reinvest any dividends you get. Then again, look how well Wall Street's conventional wisdom has done for you over the years.

If you are blindly speculating in stocks or putting money into Wall Street's mutual funds, reinvesting your dividends may very well be the only thing that saves your portfolio. But, if you are buying wonderful businesses at a discount, reinvesting suddenly becomes silly. After all, Warren Buffett doesn't do it. He's pretty smart, right?

Investing And Poker, Be Great At Both

By Joe Ponzio on July 7, 2007  |  2 comments

On June 17, 2007, my brother won a World Series of Poker bracelet, nearly $600,000, and a spot in poker history. As my family and I watched the final table online (thanks to Bluff Magazine), I could not help but think about the amazing similarities between poker (in this case, Texas Hold'em) and investing.

» Continue reading

Investing Made Simple by Warren Buffett

By Joe Ponzio on July 6, 2007  |  5 comments

Investing isn't all that difficult—at least, it doesn't have to be. With the universe of investment opportunities available at the click of a mouse, why bother to try and invest in companies or in ways that you do not easily understand?

Risk Versus Reward

By Joe Ponzio on July 3, 2007  |  2 comments

Let's face it—there is risk in everything you do. From driving a car to eating at a restaurant, from walking down a flight of stairs to shaking someone's hand, you are risking your life every second of every day. Why? Hey, you can't control everything and you have to take some chances in life.

What are we to do? Go agoraphobic and confine ourselves to our homes? Not quite—the building could collapse, germs could creep under the door. Where is all this going? Right here: The more risk you take in life, the more likely you are to die. Maybe not the first time...but definitely the last. The same is true in investing.

The Dangers Of Overdiversification

By Joe Ponzio on June 29, 2007  |  5 comments

When the markets crashed in the early 2000s, Wall Street was quick to run to the television and tell America that investors were too aggressive and should have been more diversified. And yet, not a person in the world can tell you how much diversification you should have...or how much is too much.