I have been having a wonderful time printing and reading over the past week. Its so wonderful to have free printing in the school though i must admit that there will be some wasteful printing as there is no 'price mechanism' in place.
I think that Canada is doing a great job promoting recycling. Its amazing how individual family sort through their waste, and put them in different bins (waste vs. recyclables) each week for collection.
Loblaws, a supermarket chain, recently started to charge 5 cents for each plastic bag. Previously they gave a discount of 5 cents for each bag you bring, but it didn't work well. With the new system of charging 5 cents, i'm amazed with the number of people who are bringing their own reusable bags, and plastic crates that allow them to load right into the back of the car. I think the success have got to do with people's attitude to asymmetric loss aversion. It 'hurts' more to 'lose 5 cents than 'gain' in 5 cents in rebate.
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Wells Fargo
Following up on the previous post on my Berkshire Hathaway meeting, Buffett said that he gave his first and only stock recommendation to a group of students earlier this year. He said that if there's one stock he'd buy, its Wells Fargo when it was trading around 8 to 10 dollars. The said that it was obvious that the stock was undervalued at that price and it is unlikely that one could lose money over such investment.
Buffett stated that Wells Fargo has a business model that is different from the rest of the big banks. It is a relationship business, a service business and a distributor. Imagine that you run a small business, and that your corporate account and line of credit is managed by Wells. Your personal savings account and credit card is also with Wells. Also, you bought your house (to live in) and guess where do you get your mortage from? Wells. Lastly, you depend on the bank to manage your hard earned savings.
From many such relations, the bank 'makes money' on
(1) The interest it charges you on your line of credit, the interest you pay on your mortgage, the interest you pay on your credit card.
(2) It funds its lending from cheap deposit (cuz customers are sticky and will not move their savings based solely on interest) and external financing.
(3) The bank takes a charge on some credit lossess.
(4) It earns fee revenue from managing your investments and other fee income.
(5) It pays for employee expenses, overheads, infrastructure, etc.
In accounting terms, it is simply
(1) Interest Income
(2) Interest Expense
(3) Provisions for losses
(4) Non-interest revenues
(5) Expenses
(1) - (2) = Net interest Income (aka 'Spread')
Net interest Income - Provisions + Non-interest revenues - Expenses = Net Income.
The role of the analyst is to assess what is the earning power of the bank base on his assessment of the potential spread, fee, and expenses. And to compare the resonableness of his estimate with the assets and liabilities that the bank have.
Buffett stated that analysing such commercial banks is not hard, though harder than analysing industrial companies. But over time he said if the management and accounting is honest, most people would be able to work through the notes and 'understand' the business and estimate its worth.
The way he says sounds easy. I'm working through my second reading of AXP and USB. think it is not that simple and very laborious.Btw, USB is one of the few banks that constantly compares itself to conventional banking metrics and teaching investors how to assess its performance. Haha . Oh , from Buffetts recommendation of BUY at 8-10, WFC recently closes around $25.
Bruce Berkowitz and Fairholme Fund
Bruce Berkowitz is one of the best fund manager out there and has very good returns since the early 90s. I think in an early interview, Joel Greenberg (another prominient value investor) mentioned that in the early 90s, it was Berkowitz who gave the only BUY call on Wells Fargo.
On Fairholme Fund website, his recent interview with Outstanding Investor Digest, he gave us his rationale of selling oil stocks before oil stocks fell, how he invests well despite having a lousy crystal ball, and why is he buying HMOs and defence companies.
One interesting stock that he bought was Pfizer, positioned at over 17% of his portfolio. Everyone knows Lipitor, the worlds best selling drug, is going off Patent in a few years time. At 25% of Pfizer's revenue and with over 70% profit margin, it is apparent that sales and profit is going to decline significantly unless there are replacement. Berkowitz estimated that the earning power per share of Pfizer is about $2.00 to $2.50. At $15 currently, you are buyin one of the world's strongest Pharma at 6-7x PE. BUT, i simply couldn't figure out how he arrived at that. After reading through Pfizer's 10k for 2008. Haha.
It is also interesting that Fairholme is one of the largest shareholder for Sears. He said that liquidation value is at least twice the shareprice (Dec approx $40). He gave us the way he estimated liquidation value, and the author asked his why he was willing to share. Berkowitz said that even with this information out, no one is going to believe him. Whoohoo...open secret. This letter is highly entertaining (ok...my form of entertainment) and potentially profitable. Once again, download it here under the "Article and Interview Reprints" section.
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I should get packing. GOING BACK HOME!!!!
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