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Another day, another earnings warning. Im starting to see a trend here, how about you guys? You have to start wondering though, why are the masses so quick to sell a company when they miss analyst expectations by 2 cents? With interest rates as high as they are/were, doesnt it seem obvious that a company would suffer some adverse effects that wouldnt allow them to meet forecasts that were made before the interest rate increases? This recent market behavior just reinforces what all of us on this board believe in and stand behind. It should help us appreciate that what we have learned really makes alot more sense then what the market as a whole. Tell me how a company can go from $200 to $5 a share without any significant core business changes. The drops weve seen in these companies are just a result of valuation changes and nothing more. None of us have suffered these kinds of losses because we dont invest in the flavor of the month. I congratulate everyone on this board for their contrarian style of investing. Keep the faith!!!
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Off topic and long.

Please help.

disclosure: only been an investor for one year. ZERO tech in my portfolio. y2k beat S&P by 17.76%. (pat myself on the back for my first year)

I have volunteered to help file tax returns at my base. I met my boss he's a "been around the block sarge" He has a business degree and is completing his accounting degree. He has a lot of ego and is quite confused about what to do with his money. heres the scene:

Him; I lost 1/3 of my money in the market last month but I am not selling, I will hold my money there and look into further investing in Gas.

Me; why gas? its overvalued. if youre holding your techs why not DCA on more shares? if you feel your fundamental research was right and youre not going to sell out why move elsewhere?

him; I have yada degrees...EGO...(I'm flaring up inside) well they are good companies but I feel there is something in Gas.

me; gas is overvalued just like the techs are, you shouldnt be in either and you shouldnt be investing in the "market".

him; well the companies have earnings...

me; valuation says otherwise.....

I ended the conversation telling him I will not be investing in any companies until I finished reading Intelligent Investor by BG and he should do the same...

I'm am trying to smile thinking about the fact that he is 'Mr. Market' that BG discusses but the Id in me wants to smack him with II and say shut up and get out... so I have to go in and deal with him for the next few weeks. next time he brings it up I am thinking of telling him to give me his money as at least I can put it to some good use instead of him flushing it down the tubes.

How do I contain my composure with this issue? I keep running into similar scenarios around base with friends and co-workers.

Thanks in advance, Howard

btw- I noticed a lot of folks I meet who are in tech read 'individual investor' is there a correlation there???
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It seems like your stuck between a rock and a hard place Howard. If you encourage him that he will do ok and make his money back soon, you might be lending him money pretty soon. On the other hand, if you try to bring it to his attention that his portfolio is overvalued and speculative, i doubt he would graciously thank you:) Lets admit it, your "superiors"(who seldomly turn out to be actually "superior") generally dont like being corrected or instructed by their "inferiors"
I would think you should just stay away from the subject of investing with him. If theres one thing that your sergant will like less then being wrong is being PROVEN wrong. I think that some people are too hard headed to be told therye wrong no matter what the case is. I know many people like that. Meanwhile I would just let your record speak for itself, it will over time. And by the way, damn good return for last year. Beating the S&P would make even Buffett a happy man. Keep it up, and good luck!!!
eric
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Don't bother trying too hard here. You'll only make an enemy you don't need. Smile and let him go on his merry way and thank your stars you don't have to do more than foot your part of his Social Security and military retirement benefits.

Market psychology is a powerful force, one far more persuasive to most folks that boring stuff like probability and statistical analysis (which is largely where my own "faith" in Graham mainly comes from). I'll share ideas with anyone who asks me, but I don't try to tell anyone what to do with their money, especially if they've decided already that they "outrank" me. It just doesn't do to buck the tides of cognitive dissonance.

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Market psychology is a powerful force,

That it is. Some good reading:
http://www.amazon.com/exec/obidos/ASIN/1890151408/sr=2-1/ref=sc_b_1/103-5532025-5768664

Ya' know, even Isaac Newton lost money investing in the South Seas debacle. It seems that group think can strike the educated as well as idiots.

-Ortman
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Hi Everybody,

This thread brings up possibly one of the most interesting aspects of Graham like value investing. Namely the importance of temperment and attitude.

Mr. Buffett has often said that the technical knowledge needed to successfully invest is minimal but the discipline needed is enormous. Graham often talks about the temperment needed when going against the crowd. And Peter Lynch (whose books I'm reading again for probably the first time in about 10 years and feel they are an excellent companion to II) says that successful investing is more a matter of the stomach than head, or having the gumption to buy what others overlook.

One of the major psychological cons of being a value investor was described perfectly on this thread, the frustration in trying to talk a common language with market participants who aren't Graham like value oriented investors. Mr. Buffett has indicated that he thinks a person either naturally takes to Graham's views or they don't. I might tend to agree.

Personally most of the time when I deal with people and the talk evolves to the market, I generally have a couple of standard picks, even in the most overbought areas, that are at least somewhat reasonably priced and I feel comfortable suggesting they might look at.

For instance, in the oil & gas area, I think MRO looks reasonable. Not cheap enough for me to buy now but reasonable enough for me to feel comfortable advising a relative or so that is gung-ho on getting in the energy sector. Suggestions like these also offer the opportunity to back them up with an earnings based or asset based rational that not only defends the suggestion but also may impress the suggestee that you have an above average amount of financial acumen. (However, I found that at social events typically an overly long financial rational of a pick merely results in receiving a vacant stare and a quick end to the conversation.)

On the plus side of this equation, the knowledge about the reasonably priced companies in the hot area's might offer a head start in finding the bargains when that hot area eventually cools off. And related to the general concept of either being a value investor or not, there is a certain psychological benefit to believing that with an appropriate value methodology and a minor factor of good fortune, one has the potential of creating significant wealth via a business appraoch versus a gambling activity.

ZB
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For those uninterested in reading my more blathery posts, please hit the next button now. This is a long'un.

Ortman wrote:

Ya' know, even Isaac Newton lost money investing in the South Seas debacle. It seems that group think can strike the educated as well as idiots.

And perhaps this is all for the best, since without some degree of purely speculative investing, some (perhaps all) of the key technological advances we enjoy today would never have made it to commercial viability.

MacKay's book (pointed to in the URL posted by Ortman) is one of my all-time favorites.

Education may in fact be a risk factor for speculative excess. After all, an educated person can readily perceive that the Web and 'net have enormous potential for economic change and increased business efficiencies, even after the present debacle and the flood of 'net related bankruptcies that are practically certain to wash by over the next few months (or years). It seems to me that it takes a combination of fairly long experience as an observer (and cautious participant) in financial markets to spot and be able to withstand the siren song of speculative temptation.

In fact, I personally failed in this over the past year myself, though not to the degree that many people I know have done. Looking strictly at the equity portion (about 65-70% of total) I am presently floating around the breakeven point overall, which still puts me ahead of the S&P for the year and considerably ahead of the Naz. Cold comfort that, considering that I felt very strongly, as I was making decisions through the year, the risk of being in tech at all.

I "justified" my taking those limited positions that presently show paper losses in excess of 50 percent as a form of "irrational exuberance" insurance. My gut told me that I was crazy to put anything there, and it was chiefly the notion of "diversified risk" that caused me to place capital with three companies (1 fiber optic, 2 biotech, of which one is way down, one has been roughly even and the last has been anywhere from 50% to 200% ahead since I bought it). I continue to like all three companies on a fundamental basis, but was well aware that they were and probably remain significantly overvalued at present levels.

The other two positions in my spec port (USG and ZANY) meet most criteria for value, but are (in USG's case) too debt-laden and at potential risk for insolvency or in ZANY's case, too small and with too little public operating history, and in a fairly unpredictable and historically unrewarding niche: retailing toys and educational products for kids. What I know of the company suggests to me that they have found a model that works fairly reliably, but I am prepared to be proven a lower-case fool in the matter.

My value port is presently showing roughly a 20% annualized gain, while the spec port is pretty close to the NASDAQ in its average loss, though lately it's been improving, thanks largely to USG and recent bounces or seeming price stabilization in the other positions.

Time will tell how severe and how permanent those losses will prove... in any case, their absolute magnitude is (thankfully) quite limited, and their potential magnitude at this point is also limited. By potential magnitude, I mean assuming each and every one of the 5 companies in my spec port were to declare bankruptcy before I sold them, which is entirely possible, since I don't consider myself a very good judge of imminent bankruptcies, despite efforts to improve on that score, and I am resistant to selling in a very uncertain and highly pessimistic broad market, even while I tend to share much of the pessimism now rampant and tend towards "permabear" status in my general reading of financial markets and the qualities of corporate managements.

At this point I would tend to rate my purchases of non-callable long-term munis as my best investments of the year, though much of my value port seems to be holding onto its gains despite the rough weather... still, I'm not really convinced we're anywhere close to the bottom for the broad market. (And, given my general bearish outlook, most likely I won't be convinced we've made a bottom until 2 or 3 years after we've scraped it.)

Meanwhile, there are some quiet little (and big) companies out there offering some fairly attractive dividends, and seemingly meeting all the criteria of value that Graham outlines in II and in Security Analysis.

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And perhaps this is all for the best, since without some degree of purely speculative investing, some (perhaps all) of the key technological advances we enjoy today would never have made it to commercial viability.

That's true - you certainly need to have some amount of capital out there that is willing to take a risk. Otherwise, we would miss out on many valuable technologies.

Education may in fact be a risk factor for speculative excess. After all, an educated person can readily perceive that the Web and 'net have enormous potential for economic change and increased business efficiencies, even after the present debacle and the flood of 'net related bankruptcies that are practically certain to wash by over the next few months (or years).

It's most likely easier for somebody with a little knowledge to get sucked in than it is for somebody who is completely in the dark.

My girlfriend, for example, most likely would not be able to explain the characterisitics of a stock and a bond. Given her level of comfort with the material, I see no realistic scenario in which she could get sucked in - regardless of how many bullish zealots she associated herself with.

Knowledge offers a degree of comfort, which enables you to take unnecessary risks.

Meanwhile, there are some quiet little (and big) companies out there offering some fairly attractive dividends, and seemingly meeting all the criteria of value that Graham outlines in II and in Security Analysis.

Like tobacco stocks towards the beginning for the year? I think marrying a doctor cost you some profits there. :)

I've also been eyeballing some REIT's - though I don't think I know enough identify a good REIT from a bad REIT. Have you checked any out yourself?

-Ortman
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I've also been eyeballing some REIT's - though I don't think I know enough identify a good REIT from a bad REIT. Have you checked any out yourself?

I've tried a few times to get a handle on the capital structure and risk profile of REITs and failed.

Part of this lack of research is that my doctor spouse was in effect required, as a partner in group practice, to put substantial funds into several real estate partnerships in the first years of partnership, so that, in addition to whatever risks attend our practically unavoidable investment in our residence, we have a fairly significant share of our accumulated assets at risk in real estate... since we've also talked prospectively about possibly buying a vacation property in a few years, I've been tending to think we're about as real estate heavy as I care to be for the present.

At this point, by rough figure (and not counting the effectively margin-like risks of holding a mortgage) I'd say we're holding about 4 times as much in real estate as we are in common stock (and, of course, there's some sort of RE risk contained in those common shares too).

I'm expecting real estate (at least in our area) to tank in a fairly big way within the next 6 months or so, so this may very well be the time to get a better education on REITs.

My sense is, at least in the short term, REITs did well this last year or so, that they had discounted a good part of this risk in their slide over recent years... I'm just not sure we're not looking at some more, possibly serious givebacks before any capital gains are effectively "secure"... and I may be entirely wrong about the short term real estate outlook... though the recent bankruptcies of Montgomery Ward and Bradlee's do sort of confirm my suspicions that a retail shakeout is may be looming ahead over the next year or two, and that does suggest that one needs to be very cautious about the nature of and how secure lease income is going to be, at least in many of the commercial property REITs. Just looking at the retail expansion of recent years, I find it hard to imagine that all that retail space is going to remain consistently booked up over the next 5 years or so.

Like my take on other capital intensive sectors like autos right now, the value is probably there... I just don't want to be too premature or agressive in committing to a position, especially given existing RE risks in our total portfolio of assets. I'd rather be a bit late, I guess, than far too early.

Having more or less totally undercut my qualifications to assess REIT value, if I were getting serious about looking at them, I would tend mainly to pore over the REIT's portfolio of assets very carefully and cautiously to determine whether I saw any exceptionally huge concentration of risk there, apart from the generalized risks surrounding the types of properties they hold and manage. This might be a topic to suggest over in the Boring Stocks Study Group, to see if there are any takers in performing and comparing analytical approaches, assuming everyone there has not totally lost interest.

You'd think with an uncle (by marriage) who's heavily involved in NYC real estate (as a lawyer) that I'd understand real estate trusts and investments a little better, but we don't tend to talk about his work more than tangentially when we visit.
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I'm expecting real estate (at least in our area) to tank in a fairly big way within the next 6 months or so, so this may very well be the time to get a better education on REITs.

Here too. I don't know what the story is there - but here in Northern CA, property values (at least where I live) have been increasing some 15% year over year for the past few years. I still don't own a home - as I don't think it's a good place to leverage myself given current prices.

Needless to say, I catch a lot of hassle from my girlfriend's mother - who's a real estate agent. Given her profession, and the fact that inflation has carried property values through the roof for most of her life, she is of the opinion that property values always go up.

... though the recent bankruptcies of Montgomery Ward and Bradlee's do sort of confirm my suspicions that a retail shakeout is may be looming ahead over the next year or two, and that does suggest that one needs to be very cautious about the nature of and how secure lease income is going to be, at least in many of the commercial property REITs. Just looking at the retail expansion of recent years, I find it hard to imagine that all that retail space is going to remain consistently booked up over the next 5 years or so.

Oh, I have no faith in the future of retail. I'm quite confident they'll have a hard time moving forward.

But there's a few sectors in the REIT that I've kept an eye on. There are a couple of (seemingly) solid health care REIT's. Perhaps some apartment REIT's? After all, people will always require health care and a place to live. Property value aside, these sectors may be a little more protected from a decline in income.

Or perhaps REIT's with strong clients? JDN (which I don't know much about) develops a good number of WalMart locations. WalMart is the type of retailer (marginal to inferior goods) which I would expect to withstand any economic turbulence.

I actually have the financials for quite a few REIT's sitting on my desk - but I fear I don't know enough to really extract an meaningful information from them. It's really quite a shame - 'cuz the dividend yield on some of them are quite attractive.

-Ortman
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Hi Everybody,

I noticed that there was some discussion about REITs going on and I thought I'd throw my two bits in on some things I think are useful.

The main thing I look at with REITs is asset value. Basically my take is that if you can find a REIT whose true asset value is more than the market price for the equivalent assets, you'll probably be OK.

To get a decent estimate of asset values I typically need to know a few things:

1. What kind of properties are owned? (Maybe commercial office, healthcare, industrial warehouse, etc.)

2. How much do they own? (They usually mention that they own x number of sq feet of office space or warehouse space, or units for apartments or sites for healthcare.)

3. What's the going market for that kind of property? (A really convenient way is the Wall Street Journal's Real Estate section has a lot of ads offering property and many show an asking price and volume and type of real estate.)

4. How much is the market pricing the equivalent per the REIT? (I add the market cap and the debt of the traded REIT)

5. What's the asset value vs the market value and are there any extenuating circumstances for any large differences?

A recent example of what I was looking at was MT (Meditrust). They are trying to liquidate their healthcare portfolio and I was looking to see if their preferred was safe. If they could get close to book value for their properties it probably would have been OK. After looking into it, I estimated the properties as actually being worth somewhere between 30% - 70% of book.

This way of looking at REITs is only one of many ways but I've found it helpful in at least getting a foundation on what the companies based on.

ZB
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