It’s the most wonderful time of the year!

Usually this phrase is attributed to Christmas. Not for me.

Today, Berkshire Hathaway’s annual report, written by Warren Buffett, will be published! (Full disclosure: I own Berkshire Hathaway both for clients and myself)

I know what you must be thinking, “here’s five dollars, go out and buy yourself a life!”

But really, I look forward to this time of year like no other. Every year at this time, I get to sit at the feet of the master and find out what he’s thinking. Every year, he explains things in a way that greatly improves my understanding of business, economics, people and investing.

I am quite literally giddy with anticipation, like I am every year. In fact, I’m writing this blog much like a child tries to focus on something other than Christmas morning and all the presents that brings–I’m trying to distract myself.

At 2:30 Mountain Standard time it will be available…what will I do until then…

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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What investments are looking interesting?

I am not a top-down investor. What does that mean? It means I don’t think about the macro-economy and investment sectors first, trying to determine what will happen from a big picture perspective, and then picking individual investments that fit my big picture themes.

I am a bottom-up investor. What does that mean? It means I look at individual companies, one at a time. I try to understand the economics of each business: what are its competitive advantages, does the company generate good returns on capital employed. I try to understand management: how are they compensated, how competent are they, how honest are they, how much of the company have they bought with their own money. Finally, I try to understand what the business is worth: I assess what the business would fetch to an outside investor thinking about buying the whole thing. Only when I can find satisfactory economics, management and valuation do I buy.

Although I am not a top-down investor, I’ve realized over the years that my bottom-up approach tends to uncover interesting investments areas. All the sudden, I start finding a bunch of cheap ideas in one sector.

In 1998, I found a ton of technology companies selling at dirt-cheap prices because of the Asian contagion and Long Term Capital Management fallout. I didn’t go looking for technology companies, I just realized after looking at several cheap technology companies that there was a theme.

In 2000, I found a ton of small cap value companies selling at dirt-cheap prices because everyone was selling small cap value to buy large cap growth and technology. Once again, I didn’t decide to look at small cap value companies, it was just where I was finding value.

Where am I finding value now? Not surprisingly, I’m finding value in financial, real estate, retail and building materials companies.

It’s probably too early to bite on financial companies. More write-downs are coming and it must be crystal-clear that the business you’re buying will survive and thrive in this credit crisis environment.

Some real estate investment trusts are selling very cheaply. I think some babies are being thrown out with the bath water, but you must be very selective to avoid buying dirty water.

Some outstanding retail companies are selling at dirt-cheap prices. Why? Everyone is worried about the consumer and whether they will be able to spend. In the short term, the consumer will be crimped. But, in the long run, the strongest retailers will gobble up market share and emerge stronger during the next up cycle. It may take patience, but it’ll work. Once again, avoid anyone with too much debt or poor competitive positioning.

Some building materials companies are looking dirt-cheap. The housing market is getting pummeled, so such companies are scrambling to scale back capacity to avoid losing too much money. Like with retail, the strong companies will emerge stronger and with more market share and greater pricing power. More patience on this, too, but what did you expect, a free lunch?

History has shown that great times to invest are tough times to put money to work. But, that’s when the bargains can be found. I’m finding more bargains than I have in years, so I’m happily buying some great companies and waiting for others to come to me as this volatile market unfolds.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Is a double dip recession possible?

Two reports today seemed to confirm that we are probably entering a recession.

The first was the University of Michigan’s Consumer Sentiment Index that plunged to lows not seen since the early 1980’s and early 1990’s recessions.

The second showed that capacity utilization dropped below 80% at US factories. This, too, is usually an early indicator of recession.

Added to this, import prices are showing a continuous upward trend at the same time. Can you say “stagflation” boys and girls?

This got me to thinking about our last recession in 2001, and how I dramatically under-estimated the impact of government stimuli.

Back then, the Federal government provided huge fiscal stimulus in the form of government spending and tax cuts.

At the same time, the Federal Reserve provided huge monetary stimulus by cutting short term interest rates down to 1% (thus spawning the housing and credit boom, and now, bust).

Will the US government be able to repeat these stimuli? I believe they may succeed in goosing the economy in the short term, probably in the second half of 2008 and first half of 2009, but I don’t think sending out checks and cutting interest rates will fully fix our current economic problems.

This led me to wonder: could a double dip recession like the one that occurred in the early 1980’s happen again now? It’s certainly possible.

Our economy, unfortunately, follows the four year election cycle pretty reliably. It’s very unusual for the stock market to tank in an election year because politicians are promising and delivering all kinds of goodies to get re-elected.

But, such politicians tend to buckle down after the election is over and this slows things down fairly consistently.

My guess, and it is only a guess, is that fiscal and monetary stimuli will work this year to get the economy going again. But, in 2009 and 2010, things will get ugly.

So, in the mean time, it’s probably reasonable to expect a recovering economy toward the end of this year, which will probably mean a stock market rally in the spring to summer time frame.

But, look out for 2009 and 2010, when we just may enter a second leg down of a double dip recession. And, this time, the US government will be out of the ammunition they used to bail things out this time.

I’m not personally betting on this scenario, or any other macro-economic scenario for that matter. I invest for the long term and try to look through boom and bust cycles.

The best protection against market and economic cycles like this is to buy great companies at good prices, and that’s what I’m doing for my clients now.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

January was quite a month

Every once in a while, the stars align and you get outstanding performance relative to the market in a brief period of time. January was one of those months for my clients and me.

I didn’t do it my day trading. I didn’t do it by forecasting the economy or market direction.

I bought businesses over the last 3 years that looked cheap relative to my assessment of their value. That’s it.

It takes a while for the market to recognize long term value. The average holding period on the exchanges is 9 months. 9 MONTHS!!!

In other words, most institutional and individual investors, as a whole, are trying to forecast what will happen over the next 9 months. I, on the other hand, have a time horizon of 5 years or more.

This investing style takes a lot of patience. But, it pays off.

In January alone, my growth clients beat the S&P 500 by 4.6% and the Wilshire 5000 by 4.7%.

Over the last year, my growth clients have beaten the S&P 500 by 13.3% and the Wilshire 5000 by 13.7%.

Over the last two years, my growth clients have beaten the S&P 500 by 12.4% and the Wilshire 5000 by 13.2%.

Since inception (4/30/05), my growth clients have beaten the S&P 500 by 7.1% and the Wilshire 5000 by 4.4%. (for full disclosure of my performance, please go to my website)

It pays to be patient, and it pays to assess the value of the businesses you buy.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Is the Fed easing interest rates because it thinks we AREN’T entering a recession???

Surprisingly, the market did well this week.

This is surprising, to me at least, because the Fed cut interest rates another 0.5% and the jobs report came in looking pretty bad.

The Fed did not cut interest rates this week because it thinks the economy is doing well. It especially wouldn’t have done so after dropping rates between meetings by 0.75% just last week.

The Fed is clearly signaling the economy is in serious trouble. So why is the market rallying on news the Fed thinks the economy is in serious trouble?

In addition, the job report today was simply awful. It showed the first monthly decline in jobs since the economy was slowly coming out of the last recession. Cause for celebration? Apparently so.

In my opinion, market participants are still digesting the market’s significant drop during January. They are also digesting recent economic news, government actions and election results.

The reality is that much more deck-clearing is required in the financial sector, credit markets and housing sector before the next bull market can really take off.

In the meantime, some excellent bargains can be found in select places in the market. Troubling times like this are a big opportunity to prepare for the next upswing, regardless of when or how it comes.

I’m seeing some of the best opportunities I’ve seen since 2003, and I think those opportunities will grow in number and size in the not-too-distant future.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.