smart-money-report.com Blog

Shai Dardashti met with Joel Greenblatt for an hour. Read the whole thing, but here are Shai’s notes about Greenblatt’s process of valuation…

1. While studying the footnotes is crucial, the big picture is most important: Earnings yield and ROIC are the two most important factors to consider, with the key being figuring out normalized earnings.
2. High earnings yield, based upon normalized earnings, is important in order to have a margin of safety. High ROIC (again based on normalized earnings) simply tells you how good a business it is.
3. Independent thinking, in-depth research, and the ability to persevere through near-term underperformance, are three keys to being a successful value investor.
4. Worrying about near-term volatility has nothing to do with being a successful value investor.
5. Think of a concentrated portfolio as if you lived in a small town and had $1 million to invest. If you have carefully researched to find the best 5 companies, the risk is minimal (As Charlie Munger says, “The way to minimize risk is to think.”)
6. Special situations are just value investing with a catalyst.
7. International investing may offer the best opportunity, at least in terms of cheapness.
8. Finding complicated situations that no one else wants to do the work to figure out is a way to gain an advantage. (You have discussed and given examples of many such situations in your book, You Can Be a Stock Market Genius.)
9. Looking at the numbers best way to learn about management. What have they done with the cash? What are the incentives? Is the salary too high? Is there heavy insider selling? What is their track record?
10. Focus on understanding and buying good businesses on sale, and don’t worry about the macro economy. Everything is cyclical, so value can always be found somewhere.
11. Focus on situations that are not of interest to big players (usually small- and mid-cap, although currently large caps are cheap; spin-offs may be such opportunities, but the key is to figure out the interests of insiders; bankruptcies, restructurings, and recapitalizations may also be such opportunities).
12. Trust no one over 30, and no one under 30; must do your own work, rather than simply ride coat-tails.
13. Risk is permanent loss of invested capital, and not any measurement of volatility developed by statisticians or academicians.
14. All investing is value investing and to make a distinction between value and growth is meaningless.)

Newmont Mining (NEM) reported earnings this morning.

Net earnings fell to $62 million, or 14 cents per share, from $190 million, or 42 cents per share, in the same quarter of 2004, the Denver-based company said. Revenue rose to $1.31 billion from $1.2 billion.

Excluding a range of items, the company reported a profit of 35 cents per share, according to Reuters Estimates. Analysts, on average, expected earnings of 34 cents a share on revenue of $1.36 billion.

For 2006, the company forecast consolidated gold sales of 7.98 million ounces at a cash cost of $283 an ounce.

The stock is trading at about $57 in pre-market trading — down about a dollar.

Jason Hommel’s “Money Chart” is interesting.

Conclusion:

Therefore, when you hear that billions and billions of dollars are going to be invested in gold and silver stocks, just know that’s an understatement.

I believe in 1980, the total market cap of all gold stocks was $1 trillion, and the total market cap of all NYSE stocks was $1 trillion. Today, the figures are about $110 billion for gold stocks, and $21 trillion for NYSE stocks.

It’s going to be a great decade for gold, and especially silver investors.

Let’s say it’s 1950. You have a choice of buying two stocks — IBM or Standard Oil of New Jersey (now Exxon). IBM is the ultimate new economy growth stock and Standard Oil is an old economy oil giant. Which stock turned out to be the better investment over the next 55 years?

Jeremy Siegel has the answer.

Bill Fleckenstein says that Ben Barnanke is far more afraid of deflation than inflation…

The new Fed boss is most scared about deflation, not inflation. And when the markets figure that out, precious metals prices will scream.

In this Bloomberg article, Joel Greenblatt says that he’s never seen a situation where the best bargains are in really big stocks…

I’ve never seen this before, that the best bargains are in the biggest caps,” said Joel Greenblatt, who manages $1.6 billion and returned 40 percent a year in the past two decades investing money at hedge fund Gotham Capital in New York. They’re usually in the more obscure corners.

Greenblatt, 48, who last year published “The Little Book That Beats The Market,” which is No. 9 on the New York Times’ list of best-selling hardcover advice books, wouldn’t discuss which stocks he’s bought. Redmond, Washington-based Microsoft, the world’s third-biggest company, and Dell are typical of his purchases, he said.

Microsoft is up 5.2 percent in the past year, trailing the S&P 1500’s 9.6 percent advance, while Dell is down 26 percent.

Don’t miss part 1 and part 2 Barry Ritholtz’s interview with Paul Desmond. Desmond is one of the top technicians in the business.

A key quote from part 2…

We are well in the process of forming a top, but we are not to the final stage of this thing yet.

If we were to measure the final top, based on the Dow Jones Industrial Average, — which is not the best way to judge a bull-market top — it is very possible that the Dow has not made its final high yet.

This past week, we took a look at the Dow Jones Industrial Average stocks, the 30 component stocks of the Dow, and what we found was that there were, based on our way of analyzing individual stocks, three of the 30 stocks in strong uptrend patterns — just 10%. And 20 out of the 30 stocks were in well-defined downtrend patterns. So you can see the selectivity that is present there, with 3 of the 30 stocks in uptrends, 20 in well-defined downtrends.

That same type of selectivity is occurring across the broad list [of stocks] as well. Not to the same extent, but it is occurring. And so we think that it is possible that the final highs in the major market averages have not occurred yet, but that a lot of individual stocks have already rolled over into their own bear markets.

Now investors generally don’t buy the market averages, they buy individual stocks. So what we are telling people is that you have got to be watching your own individual stocks at this stage of an old bull market. What you should be doing is holding onto the strongest issues in a portfolio but culling out any stocks that are failing to participate in rallies. So for example, today, an investor ought to be going back through his portfolio and saying, ‘Well, the Dow was up 140 points today, did my stocks participate?’ And if they didn’t, that might be a sign that for that individual stock, the bull market is at or near its end and greater caution should be taken in holding onto to those kinds of stocks.

Hats off to Joseph H. Ellis of Ahead of the Curve for this chart that gives a very clear picture of the effect of interest rates on the stock market.

Click to enlarge

Dudley Baker on the ins and outs of mininng warrants.

The Aden sisters do great work. Here’s their latest report. A key quote…

This bull market has super power behind it because it has growing global demand, unlike anything seen in the past. China and Russia, for example, were closed markets before. This huge influx into the markets will greatly impact the extent of this bull market. Just in the U.S. alone, the ease of buying gold wasn’t there before but GLD, the new ETF, is having a big impact. In just a year, it has a huge gold holding that otherwise wouldn’t have been there.

For now, however, gold is correcting in a downward correction following its steep rise. This is normal and the downward correction will remain in process as long as gold stays below $560. But the major trend is more important and it’s been up since 2001. And it’ll remain up even if gold were to decline to as low as $457.

Nevertheless, some investors feel that gold may now be near a major peak. Time will tell, but if a steep gold correction materializes, it certainly won’t mean the secular bull market is over. On the contrary, weakness for as long as it lasts will provide a fantastic buying opportunity for the years ahead.