The Plymouth Rock Company

The Plymouth Rock Company is a private insurer located in Massachusetts. The company is run by James M. Stone, and every year he puts out a shareholder letter with commentary on current events in the market. It's usually a good read, and the 2008 letter was just released.

The full letter is here. Look on page 8 and 9 for his commentary. Here is an excerpt that I found interesting:

"The nightmare scenario from here is one in which, at this time in 2010, people look back and say: the Banks and Brokers were bailed out, ditto the auto manufacturers; we had a stimulus package and a middle class tax cut; we ran huge Keynesian deficits; and interest rates were to zero - but we are still in trouble. Confidence in that scenario could plummet well below where it is today."

The annual letters going back to 1984 are at this page.

Since Plymouth Rock is private, the only way to own this company is through buying shares of Central Securities (CET), a closed end fund that has 31% of its net assets in this company.

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Net Current Asset Value Update

In November 2008, I reproduced a list of some stocks that were selling below Net Current Asset Value. I updated that list in January 2009, and do so again now.

I am using the closing price on April 7, 2009. There are a few standout performers on the list, but the majority have gotten cheaper on an absolute basis since October 31, 2008.



Judging by the performance of some of them, many on the list appear to be value traps, snaring investors with false promises.

Here is some more info on the strategy.

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Devil Take The Hindmost

A lot of investors have been complaining about the lack of regulation and failures of our regulatory authorities to police the markets, but in reality the system we have set up in the United States is the result of four hundred years of evolution of the financial system and it provides a lot of protection.

I am currently reading “Devil Take The Hindmost,” by Edward Chancellor. The book is a comprehensive review of the history of speculative activity in the financial markets, starting mostly with England in the 17th through 19th centuries and continuing into the U.S. I am getting to the end of the section on England and came upon a listing of the purposes of some of the companies that accessed the capital markets in the 18th and 19th centuries.

One company tried to raise funds "to drain the Red Sea, in search of the gold and jewels left by the Egyptians, in their passage after the Israelites." Another company called the Fish-Pool company claimed a patent on a boat "to bring live fish to the London market," and yet another to extract silver from lead.

No system is perfect, but is it possible that the one we have now strikes the proper balance between too much and too little regulation.

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Outstanding Investor Digest

There is a relatively unknown publication in the investing world called the Outstanding Investor Digest. If you haven't ever seen it, this is not surprising as it is only published intermittently.

Every issue, the editors publish interviews with selected value managers, or excerpts from their shareholder letters, where they share thoughts on the markets or individual stocks. It's a great read to calm an investors nerves and keep them on track to avoid emotional moves during market routs. The web site is here at:

Outstanding Investor Digest

The cost is only $295 a year , and it is money well spent.

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Bottom Fishing In Alternative Energy

Is Valero Energy (VLO) the ultimate value investor? I read an interesting story today about Valero purchasing seven Ethanol plants from Verasun, which is in bankruptcy.

Valero paid only $477 million for the assets, which according to the article was a "fraction" of what they cost to build. Valero could have rushed in at the peak of the Ethanol bubble, and spent billions, but either through sheer brilliance or blind luck, they have acquired the infrastructure at only 30% of the replacement cost. The plants have annual production capacity of 780 million gallons.

Investors should remember there are some great companies trading at only 30% of what they sold for a year ago, and they are publicly traded, so stop being afraid and do your research carefully and make your picks.
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Is It Time To Look At Retailers?

A value investor must look at out of favor sectors in order to find value, and there are few sectors more unloved right now than retail. The American consumer is dead say the pundits, and we must prepare for life without these out of control spenders.

However, the Commerce department reported today that retail trade sales were down 0.1% in February, and January sales were revised to a stronger increase of 1.8%. Is it time to hunt for bargains in this sector? I found a list of cash rich companies and noticed three retailers on it –

Foot Locker - $2.78 cash per share.
Sears Holding - $6.12 cash per share.
Abercrombie & Fitch - - $6.75 cash per share.

I haven’t independently verified these numbers, but certainly pessimism is too great in this sector and investors should start looking for the companies that will emerge from the recession.

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The Testimony of Benjamin Graham - Part III

I have been posting recently on testimony that Benjamin Graham gave to Congress in the early 1950's. Here are some interesting comments that he made on speculation and how to deal with it:

“Regarding feasible ways of controlling undue speculation in the future, I believe the committee should consider carefully and cautiously whether any plan of control is feasible. Speculation has not gone too far yet, but there may be a grave danger that it will do so. Assuming that measures could be found that are useful and feasible, it would be wise to agree to such measures in advance of the necessity for their use – rather than to begin discussing them while the fire is raging.”

Good advice, plan ahead of time not in the heat of things. Our leaders had years to plan for what was coming and did little. Why didn’t we build the FDIC fund during the boom times instead of in 2009 when banks have less to spare for assessments?

If Mr. Bernanke knew that AIG was running a closet "Hedge Fund" and it posed systemic risk to our financial system, then why didn't he say something before two days ago?

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The Testimony Of Benjamin Graham - Part II

Last Thursday I posted on testimony that Benjamin Graham gave to Congress in the early 1950's. While some would consider this to be ancient history, I found a passage that is applicable to the situation today, as it pertains to the sentiment and psychology that is gripping the market.

"With respect to the causes of the rise in the market since September 1953, my statement indicates I would emphasize very much the change in investment and speculative sentiment, more than any change in basic economic factors. I wanted to point out that that carries an element of danger because a change in of sentiment for the better may be followed by a change in sentiment for the worse."

We are certainly seeing a change in sentiment for the worst, and if you listen to some commentators, we are heading for the end of civilization. This is nonsense, of course, and represents nothing more than the opposite of what Greenspan called "irrational exuberance."

Turn your TV off and start looking for stocks that will get through the next few years unscathed and make you rich.
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The Testimony Of Benjamin Graham

I came across a copy of testimony that Benjamin Graham gave to the Senate Committee on Banking and Currency back in 1955. This was the old name of current Committee on Banking, Housing, and Urban Affairs that is Chaired by Senator Chris Dodd, a Democrat from Connecticut. The subject of the hearing was “Factors Affecting the Buying and Selling of Securities.”

The full transcript is available here:

Under the Buttonwood Tree

Click the second link.

The most interesting part of the testimony is the overall tone. The politicians are actually trying to get information and learn something rather than grandstand and try to get a few headlines on the local news showing them bash some rich Wall Street fellow.

Graham started his partnership in 1923 with $500,000. If you adjust this for inflation using the CPI, that comes to around $6 million.

I am still wading through the 34 pages and will post more next Thursday.
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Charlie Munger Speaks

Charlie Munger has always taken a backseat to Warren Buffett in the pantheon of Value Gods, not because of ability, but perhaps out of a lack of ego or some other reason. He penned an editorial in the Washington Post yesterday morning that made some interesting points.

The full editorial is here.

This editorial has been well covered so I won't go over each point, but the most interesting part to me was the last paragraph:

"...officials might want to consider a precedent that helped establish our republic. The deliberative rules of the Constitutional Convention of 1787 worked wonders in fruitful compromise and eventually produced the U.S. Constitution. With no Marshall figure, trusted by all, amid today's legislators, perhaps the Founding Fathers can once more serve us."

If Munger calling for a constitutional convention to solve our problems? This would, of course, be unprecedented in our history. Our constitution has been amended many times, but only by Congressional action, not through a convention which must be called for by two-thirds of the states. If a convention is called, then everything is on the table, not just the Financial system. This might be a little too radical a solution as the partisanship fighting would explode to new levels at such an event.

Read more on Article V
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Quote Of The Day

The quote of the day comes from Martin Lipton, a partner at Wachtell, Lipton, Rosen & Katz. He was attending a conference about shareholder activism in the new age.

He decided to unload some buckshot against the Hedge Fund strain of this peculiar form of investment management.

"One of the most significant problems caused by activists is their method of attempting to force companies to focus on short-term stock gains rather than long-term value, which could entail pushing for share buybacks or possible special dividends to create a quick profit for shareholders."

I wonder how many companies are on the brink of bankruptcy who wished they had never bought back billions of dollars worth of stock during the good times. I remember many years ago some activists trying to get Ford to pay a special dividend because its cash hoard was too "large." Recent events have shown that no amount of cash is too large.

Read the full article here.
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Net Current Asset Value Update

Last November, I published a list of Net Current Asset Value stocks to use as a starting point in doing research. So how have these stocks done since then? Good question. The theory, of course, is that these stocks will have less downside.



The average stock was down 4.5%, with Synthesis Energy (SYMX) the worst, down 73%. The best performing stock was Force Protection (FRPT), which was up 140.2%. Some other things to consider when looking at this update. The return does not include any dividends, and I did not check to see if any stock splits occurred for any of these names.

The S & P 500 closed at 968.75 on 10/31/2008, and is trading on January 28 at around 867, for a decline of 10.5%. Thank you Benjamin Graham!!!

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Henry Clews - Part II

Last week, I posted on Henry Clews and a book he wrote called "The Wall Street Point of View." He would appear to be one of the earliest Value Investors. Here are some quotes that struck me while reading.

"How is a person to be absolutely certain that a given stock is cheap or dear at a given time ? You say, by comparison ? But if he compares the price with what it was at any past period, he must also be able to state all the facts that existed at that period having any bearing on this stock."

Beware a Value trap. Cheap doesn't mean buy it without thinking.

"After a careful and exhaustive search into all the materials at hand, he buys shares at, say, 60 per cent. of par, as being cheap at the price, and really worth more money, and next day they may be offered at 50. He then has really lost $10 on each share; but if he holds the purchase, and it ultimately advances to par, he has gained $40 per share."

Be a long term investor

"The careless and superficial public, coming in too late as bulls, found themselves at last compelled to become unwilling sellers at greater or less losses, in some cases so severe as to shatter households and drive citizens to ruin."

Beware momentum investing, or the greater fool theory.

"Thus the person who studies real values must not be content with that alone. He must also study the facts that in times of stress and storm make real values fluctuate as wildly in manner, if not in amount, as those of the most fanciful securities.."

Take advantage of other investors who panic.

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Is Henry Clews The Father of Benjamin Graham?

Henry Clews lived in the nineteenth and early twentieth centuries and wrote several books on Wall Street. One that I read recently was called "The Wall Street Point of View" and had a few quotes that would seem to be the early nuggets of Value Investing.

"One invariable rule there is...Buy only what you can pay for; buy when cheap and sell when dear. The veriest financial infants can see the force of this."

The above quote is one of the basic tenants of Value Investing - buy when others are selling, and sell when they are buying. He also warns against excessive leverage.

"People have preconceived notions. They are not willing to clear their minds of existing theories and bring themselves down to close dealing with facts.- They are apt to base their conclusions on the opinions of others."

His attempt at the behavioral psychology of the market.

"People are usually unwilling to act on conclusions that conflict with their desires, and that involve the acceptance of immediate losses."

Here he warns about loss aversion, one of the most common investor mistakes, and one that we all have trouble dealing with.

More next Thursday.

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A Freshly Cooled Financial Volcano

Some more words of wisdom from the dusty annals of Wall Street courtesy of Google books. Those of you who feel a little beat up by the investing results of last year, read the words of William Worthington Fowler, author of "Ten Years in Wall Street; Or, Revelations of Inside Life and Experience on 'change."

"Men come into Wall Street with fortune, credit, reputation, hope, strength unbruised, confidence in their fellow-men unworn, they leave it without money, credit, or reputation; with shattered nerves, a blunted sensibility, a conscience seared, a faith in mankind destroyed, and hopes crushed by a Giant Despair. They lose everywhere, buying stocks, selling stocks; by failures of their brokers, by frauds of their contractors, by panics, by corners, by tricks and stratagems of the market. They use their reason, their reason fails them and they lose. Then they abandon reason, and trusting to luck, plunge blindly into the vortex which swallows them up speedily and beyond rescue. If they emerge at last, it is to wander on with little relish or power for active, honest toil, and haunted still by the phantoms of their old life."

And then here's the part that fit in right with today's market:

"The field of speculation was never more dangerous than now. The market is full of stocks watered to five times the amount represented eight years since. Men in Wall Street are treading upon the hardly cooled lava crust which covers a financial volcano; an eruption may whelm them any day in one common ruin."

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The End of Capitalism

I'm not sure why, but for some reason I always seem to post on major holidays. It was my turn on Thanksgiving, Christmas Day and now New Year's Day. Today I will leave you with a quote that I truly hope is not a prescient view of the next year in investing.

"Another and more fundamental aspect of the crisis involves the decline of American capitalism. It is a crisis of the economic order itself. This is evident in the inability to restore prosperity on any substantial scale. The future is one of incomplete recovery: of economic decline, mass disemployment (including millions in clerical and professional occupations), lower standards of living, and war. Every depression is in a sense a crisis of capitalism."

"Only a deep-going crisis could force government and industry to adopt measures which were formerly condemned as opposed to economic progress. The intervention of government in industry is, of course, nothing new: the development of capitalism has been accompanied by growing government aid to industry. But such aid was limited in scope. It was, economically, an expression of the upswing of capitalism, of the necessity of government action to “regulate” the developing relations of trustified capitalism. But to-day government intervention is on an unprecedented scale. Its economics and politics are an expression of the decline of capitalism, of the necessity of government action to prop up the sagging foundations of the economic order."

This may sound like the rancid sputum of a modern day blogger unfettered and unleashed by the Internet, but it was actually written in 1934 by Lewis Corey.

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A Contrarian Strategy In The Newspaper Industry

Every investor is aware of the slow death of the Newspaper Industry and all the problems that the publicly traded stocks have been having the last few years as advertising migrates to the Internet and circulation dwindles. There is a least one newspaper that has adopted a different strategy.

The paper is the TriCityNews of Monmouth County, N.J. and according to the article in the New York Times, it is flourishing and profitable precisely because it is not putting its content on the web.

“Why would I put anything on the Web?” asked Dan Jacobson, the publisher and owner of the newspaper. “I don’t understand how putting content on the Web would do anything but help destroy our paper. Why should we give our readers any incentive whatsoever to not look at our content along with our advertisements, a large number of which are beautiful and cheap full-page ads?”

The article in the Times is here.

It's interesting to hear a contrarian point of view on how things should be run.

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This Guy Has Balls

I just came across a contrarian opinion on the existence of the supposed "credit crunch" they we are in. The opinion comes from Octavio Marenzi, the CEO of Celent, which is a financial strategy consulting group.

Marenzi was interviewed on CNBC at the link below. I tried to upload it but was unsuccessful so you will have to view it below:

Credit Crunch? What Credit Crunch?

Marenzi maintains that official data from the Federal Reserve and from European Central Banks indicate that credit is expanding, not contracting. The summary of the report is on the Celent web site. It's hard to critique his argument without seeing the entire report, so if anyone knows of a journalist or blogger who has looked at his assumptions and conclusions, pleas post a URL for me to look at.

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Why I Hate Earnings Guidance

I was driving down to New Orleans earlier this week for an Energy conference when it occurred to me that I have a real hatred of earnings guidance and all its permutations.

The desire by management to meet earnings guidance encourages them to do stupid things like managing the company for short term rather than long term goals. One can even make the case that management obsession with hitting earnings guidance was the precursor to many illegal acts at public companies including Enron and Worldcom. I recently read a book about the scandal at Equity Funding back in the 1970's. The architects of that scandal were also obsessed with not disappointing the street, and eventually ended up creating fictitious insurance policies on on its books.

It seems that one of the original purposes of providing earnings guidance was to reduce stock price volatility. Analysts where given ranges were earnings were likely to be so they could put then in their models and reports. Can any one truly say that providing earnings guidance reduces stock price volatility in the market today? How many stocks have you seen in your investment portfolio go down 40% after missing earnings by a penny?

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The Financial Crisis and the Collapse of Ethical Behavior

An interesting white paper just came out from a firm called Greycourt and Company, that dishes out the truth on the ultimate cause of the financial crisis.

The authors write that the financial crisis was precipitated by "the disappearance of any sense of fiduciary responsibility to the ultimate client." One brokerage firm was selling CDO paper to its clients, while simultaneously shorting the same product.

Another major ethical lapse was pushing auction rate securities, and touting them as safe as cash. When the weekly auctions began to fail, some of the firms walked away from clients.

It seems as if this has always been the history of Wall Street - pretending that what you are offering is for the benefit of the customer. Just read the book Reminiscences of a Stock Operator, and you will know what I mean.

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