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?

Continue Reading News vs. Noise: Board Changes ››

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?

Continue Reading News vs. Noise: Sifting Through News Advertisements ››

In the earlier years of his investing career, Buffett is said to have had more ideas than cash—a situation that has reversed itself as Berkshire's asset base has swelled. In 1999, Buffett reportedly claimed he could earn 50% a year in the stock market if he had just $1,000,000 to invest.

Where would he look to do that? Pabrai claims that early, or low-asset, Buffett would look to buy $0.50 dollars and sell them when they reached 90% to 100% of their true value. He wouldn't be a buy-and-hold investor; rather, he'd look to buy quick-hit (read: 1-3 year) investments.

And with that, let's take an early Buffett look at Sharper Image (SHRP).

Continue Reading A Glance At Sharper Image ››

It is no secret that Buffett tends to shy away from technology companies. One one side, people say he simply doesn't understand them and can't predict the future with any degree of certainty or comfort; on the other side of the fence, people say the industry changes too fast and today's leader could be tomorrow's old news.

Continue Reading Let's Look At Apple ››

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.

Continue Reading Pabrai's Law of Large Numbers ››

Thanks all for your kind words and e-mails. On October 17, 2007, Paul Ponzio was born. He's doing great. Mom's doing great. His sister's diong great. Me—I'm great.

Just wanted to drop you all a line that everything went swimmingly and that I'll be back on Monday.

By the way—check out Sharper Image (SHRP). Its break-up value may be around $5.60 a share. If you think the company is going to close up shop, it may be providing a nice margin of safety. If you think it will pull out of the mess it is in, it may be providing a nice margin of safety. If you think it is screwed and it will spend all of its assets before declaring bankruptcy, run. And if you aren't sure, skip it! There's another boat coming.

And now, I'm off for some long overdue sleep.

The value of a company lies entirely in the future, and it is our job to predict that future with a degree of accuracy and confidence. To choose a growth rate, we must delve into the inner workings of a company and see how quickly it will grow internally.

Enter CROIC.

Continue Reading Choosing A Growth Rate: CROIC vs. FCF ››

Is the Nutrisystem drop old news? In the stock market, you'd have to say yes because things happen so quickly. Still, we can learn lessons from virtually every event in the market. Once we get through the noise and look at the business, things begin to make a lot of sense.

Let's look at Nutrisystem from a business perspective:

Continue Reading Is Nutrisystem Healthy? ››

One of Mohnish Pabrai's favorite quotes goes something like this: Heads I win; tails, I break even or don't lose much. When it comes to investing in the stock market, that seems like an ideal to strive for.

Let's examine some worst case scenarios in owning pieces of businesses.

Continue Reading Heads I Win Big; Tails, I Don't Lose Much ››

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.

Continue Reading Have You Read Buffett? ››

I'm a business owner so I know what it means to be cheap. Okay, that sounded bad; still, I like the philosophy of "why pay for what you can get for free." In business, just as in your personal finances, cash is king—so you don't want to blow it unnecessarily.

There are three rational ways to value a business: break-up value, ongoing enterprise (F Wall Street) value, and buy-and-resell (Pabrai or Williams) value. If you can buy at a discount to any of those three valuations, you'll be on your way. Let's find some opportunities.

Continue Reading How Do I Screen For Investment Opportunities? ››

If you aren't familiar with beta, it is the measure of a stock's volatility in relation to the rest of the market. If a stock has a beta of 1, it tends to move up and down at the same pace as the markets. Stocks with a beta greater than 1 move more quickly (up and down) than the markets as a whole.

Though conventional wisdom and Wall Street say high beta means high risk, well, "F" that. High beta is your friend. Let me explain.

Continue Reading Market Multiples: Looking At Beta ››

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.

Continue Reading Pabrai Week: The Kelly Formula ››

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).

Continue Reading Mohnish: On Noise, Emotion, Gold And Change ››

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.

Continue Reading Why Ask Me? Ask Mohnish. ››