No. of Recommendations: 4
I've been looking for businesses that it will
be safe to own a fraction of for long term even if stock prices are
terrible. Financial stocks do not meet either objective for me.
The ones I'm holding are BRK and FFH. Everything else is tangible,
making or doing something that has an existance in the physical world.

There are times to trust one's gut, I think.


I've actually just bought HDI (Harley Davidson) today for 46.60.

My logic for buying it is that I believe it has consistently returned a 
good return on equity for the past ten years (Warren Buffet logic) and 
I believe the current market opinion of the company is too pessimistic.

I have analysed this on a per share basis calculating the book value 
per share by adding earnings and subtracting dividends.  I calculate 
the return on equity as EPS/(my calculated book value per share for the 
previous year).

Since non current asset values are often meaningless leading to very 
questionable values for Book value per share, I totally ignore the 
official book value per share and pick my own starting value that
results in the most consistent return on equity over the 10 year 
period.  To demonstrate, the numbers for HDI are below.

12/04	3.00	0.41	12.91	29%
12/03	2.50	0.20	10.31	31%
12/02	1.90	0.14	8.01	30%
12/01	1.43	0.09	6.24	29%
12/00	1.13	0.10	4.90	29%
12/99	0.87	0.09	3.87	28%
12/98	0.69	0.08	3.08	28%
12/97	0.57	0.07	2.47	29%
12/96	0.47	0.06	1.97	30%
12/95	0.37	0.05	1.55	30%

The BV/S values are my "psuedo" book values and the ROE is my 
calculated value based on these numbers.

This would suggest that HDI has consistently generated an ROE in the 
region of 30% for the last ten years.  WB likes > 15%.  The current 
price though even after the recent fall is still 3.6 times my 2004 year 
end calculation for BV/S.

My interpretation of this is:

1.  If HDI continues to perform in the future as it have done in the 
last ten years, one should be able to expect a long term total return 
before taxes on somewhere close to 30% per annum.

2.  HDI's own forecasts for future growth are lower than they have been 
in the past (10 - 15% per annum going forward over the medium term as 
opposed to 26% per annum over the last 10 years).  Depending on how 
much earnings they need to retain to fund this lower growth, it is 
likely that future ROE will not be maintained at 30%.  If they 
significantly increased the payout ratio and still maintained 10 - 15% 
growth, it is possible that they could still achieve an ROE of 30%.  On 
balance though, I expect their future to be less rosy than the past ten 

3.  Since the current price is 3.6 times my calculated BV/S, there is 
plenty of scope for significantly reduced returns in the short term.


After a lot of searching, I have found this to be one of the more 
attractive stocks right now after:

1.  Ignoring financial stocks

2.  Looking for a solid, conservative balance sheet


3.  Looking for companies that have real intrinsic value.

I'll probably wait a while before my next purchase to:

1.  See if the market gets any more attractive


2.  To take time searching for my next stock.

I am generating a list of stocks that generally meet my requirements, 
but are too expensive at the moment.  I can keep an eye on these hoping 
for some short term bad news (like I hope is the case with HDI) to give 
me a buying opportunity.

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When Life Gives You Lemons
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