Enterprising Investor Forum

It’s been a while since we posted anything on Jim! Here is a short but interesting interview where he talks about the kind of companies to look for…. he insists that investors should focus on stocks that have been driven down by forced selling and that have become valuable take-over targets:

Enjoy!

As already discussed various times, don’t worry about the volatility - try to profit from it!

The Enterprising Investor is focused on holding for the long-term and these swings should simply represent interesting buying opportunities… we actually recommend that you start placing daily Limit Buy orders say 10-15% below the current price of the stocks you have been following and are current targeting to take advantage of the deleveraging which is still taking place:

• Stocks with the highest institutional ownership continued to underperform the ones with the lowest
• Hedge-fund managers are under increased pressure to liquidate their positions as banks are asking for more collateral to back borrowing
• Most funds are bracing and preparing for investor redemptions (experts say around 25%)
• Investment bank winding down is forcing hedge funds to adjust their strategies

This is a classic catch-22 situation BUT mostly for those who are invested through leverage and not for the long-term buy and hold investor that does not have short-term liquidity needs.

Please read our disclaimer.

We had a few emails asking about more details on prime brokers and what they do.. here is a great explanation:

Prime brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a leveraged basis and achieve an absolute return. The business advantage to a hedge fund of using a Prime Broker is that the Prime Broker provides a centralized securities clearing facility for the hedge fund, and the hedge fund’s collateral requirements are netted across all deals handled by the Prime Broker. The Prime Broker benefits by earning fees (”spreads”) on financing the client’s long and short cash and security positions, and by charging, in some cases, fees for clearing and/or other services. It also earns money by hypothecating the portfolios of the hedge funds it services and charging a fee to those borrowing securities and other investments.

The following services are typically bundled into the Prime Brokerage package:

• global custody (including clearing, custody, and asset servicing)
• Securities lending
• Financing (to facilitate leverage of client assets)
• Customized Technology (provide hedge fund managers with portfolio reporting needed to effectively manage money)
• Operational Support (prime brokers act as a hedge fund’s primary operations contact with all other broker dealers)

In addition, certain prime brokers provide additional “value-added” services, which may include some or all of the following:

• Capital Introduction - A process whereby the prime broker attempts to introduce its hedge fund clients to qualified hedge fund investors who have an interest in exploring new opportunities to make hedge fund investments.
• Office Space Leasing and Servicing - Certain prime brokers lease commercial real estate, and then sublease blocks of space to hedge fund tenants. These prime brokers typically provide a suite of on-site services for clients who utilize their space.
• Risk Management Advisory Services - The provision of risk analytic technology, sometimes supplemented by consulting by senior risk professionals.
• Consulting Services - A range of consulting / advisory services, typically provided to “start-up” hedge funds, and focused on issues associated with regulatory establishment requirements in the jurisdiction where the hedge fund manager will be resident, as well as in the jurisdiction(s) where the fund itself will be domiciled.

Read the full article on Wikipedia: here.

We have talked about Mr. Taleb in the past and have even reviewed his book ‘Fooled by Randomness’ (read post - here).

Nicholas Taleb has a reputation for having little patience when dealing with people who do not really know what they are talking about and being extremely passionate too! This is a segment of a show he was recently on when he tries to get his message across… trying to explain why we find ourselves in the current situation, the effect of leverage, complicated models, risk exposure, etc…

at his best!

We have been so focused on troubles in the US and more recently, in Europe that most people have completely forgotten about the rest of the world. Naturally, the US is impacting everyone else and other markets are principally responding to the moves on wall street but we thought that our readers might like to have the following overview.

In the following graph, we compare the latest 3 month performance for the US total Market (using the Vanguard VTI) against the Russian market ETF (RSX), the Greater China Fund (XGCHX) and the Japan Equity Fund (JEQ).

Needless to say, not a pretty site…. and it looks like the end of then week will only drag this graph lower.

With most of the commentary focused on the financial industry and the economy at large, we thought it could be useful to highlight the kind of market cap destruction that has hit the famous ‘Tech Trio’.

Hereafter, readers can see the latest 6 month chart for these companies where we compare YHOO vs. AAPL and GOOG - quite shocking to say the least!

Who would have thought to see Yahoo trading around 13 USD, Apple under 100 USD and Google under350? Here are some more detailed figures:

Conditions are likely to remain difficult but even the most ‘anti-tech’ Enterprising Investor will be forced to start to have a look at these three incredible franchises if they continue this slide…

As our readers know, we favor small cap value when looking for interesting investment opportunities. An excellent starting point when looking for ideas or starting to compile a short-list of stocks to properly screen and research is the Forbes: America’s 200 Best Small Companies.

Click on this link - here - to go to the Forbes article where you will find a few of the companies we have talked about in the past like Quality Systems, Middleby, Under Armour, Portfolio Recovery and more.

Our click - here - to be taken to the full list directly.

Unfortunately, it looks like we have pretty much erased a decade … needless to say , the ride has been quite intense and very interesting but the sad truth is that we are back to 1999 levels - look at this chart of the DOW.

Furthermore, with the economic climate continuing to deteriorate and increased fears of the European situation, investors find themselves without a real outlook of where we are going. The truth is that, most probably, we have been in unchartered terriory for the best part of the past year and that the ‘prudent and persistent’ investors will be the ones with the best chance of protecting their investments.

Recent times have reminded a lot of people of the words of Mr. Keynes that warned investors that: “Markets can remain irrational longer than you can remain solvent.”

Actually not sure if this should have been posted under humor, investing or ….