uncommonprofits

The Canadian dollar was in free fall up until March. The lag involved with this would also have something to do with the slight inflationary pressure. Also, Canada weathered this storm better than many countries ..... the crisis not so deep (in some cases some significant wage increases amongst the havoc). But the Cndn dollar situation has of course reversed itself with significant strength. Again, read Carney's last statement ..... with the Cndn dollar's strength, the BOC is not worried at this point about too much inflation. Quite to the contrary --- they are worried about getting UP to their inflation target range (1-3%). Unless we see the Cndn dollar back off significantly -- we would seem to have a lot less to worry about when it comes to inflation. But, on the otherhand ... if this dollar strength persists we might worry about a more severe recession in Canada down the road. UCP / DD

The real yield on bonds in the 40's was horrible. Spikes of inflation took place -- but interest yields remained low. Real Rates of yield as taken from Valueline for the LT AAA Corporate Bond (Moody's) were as follows (first figure Gross, second figure Real): 1940 = 2.8%, 2.1% 1941 = 2.8, -2.3 1942 = 2.8, -8.1 1943 = 2.7, -3.3 1944 = 2.7, 1.1 1945 = 2.6, 0.3 1946 = 2.5, -6.0 1947 = 2.6, -11.8 1948 = 2.8, -4.9 1949 = 2.7, 3.7 Simple average for the decade = 2.7% (gross), -2.9% (Real) [inflation of course making up the difference - ie. 5.6% SIMPLE average] Over the last 8 decades in the valueline record -- the 40's was by far the most dismal decade in terms of real yields for bonds. Will be interesting to see if the 2010's is shaping up to be something simililar to the 1940's, OR late 70's/early 80's, something in between, OR something entirely else. Who knows, but the point is bond markets can suffer difficult stretches just as the stock market can - the 40's was really, really bad for bonds. It's interesting to note also that the 40's was preceded by a similar era as we have now: a previous long term stretch of very good times for bonds (in real yield terms). Of course the other common theme with the 40's was the real Pearl Harbour back then and as Buffett puts it the 'economic' Pearl Harbour we face today that spread fear across the country in a similar fashion .... along with corresponding Government Spending. UCP/DD Ref: http://www.valueline.com/pdf/valueline_2006.pdf

With the significant run-up in the Cndn dollar, the Bank of Canada is NOT worried at all about excess inflation ... in fact quite to the contrary. Carney is actually concerned about getting back up to the inflation target of 1-3%. A rapid series of significant interest rate increases is NOT in the cards unless we see some serious backing off of Cndn dollar strength. http://www.vancouversun.com/sports/Bank+Canada+Mark+Carney+worried+about+Canadian+dollar+strength/2043783/story.html As for the situation in the States -- you may see some gradual rate increases but with rates remaining in a historically low range up until there is visible evidence of wage pressure. Fact of the matter is the average citizen cannot afford any significant interest rate increases at the moment (and this becomes magnified by any rise in commodity prices and a new reality of putting away a little toward savings). With the unemployment situation as it is -- any potential wage pressure would seem quite a long way off. In the mid-late 40's there was a couple big spikes of inflation .... interest rates rose, yet at the very low end of the historical range (something like LT bond rates rising from 2 up to 3%). While many are relating this situation to the one in the 70's --- it could just as well work-out more like the 40's scenario. UCP / DD

Call me the supreme optimist but that sounds so ultra conservative. Are you assuming little in the way of inflation going forward Sanjeev? Just with everything going on, I figure there is a strong chance of returning to at least the historical inflation rate of 3% over the next 5 years. In fact there is a very good argument that the inflation rate could exceed this significantly. But suppose one goes with 3% inflation along with say 1.5% of sluggish growth. Now that is below the historical norm of about 6% nominal GDP growth (3% real + 3% inflation) --- but even based on this kind of sluggish achievement that equates to almost a 25% improvement in 5 years time. Even off of today's levels this type of improvement would seem to put at least revenues well beyond what they were in 2007. Under a stagflation scenario margins might lag somewhat --- but the inflation part of the formula would increase things much further than than the 25% sluggish calc. Now if you are figuring 2 or 3% nominal growth (1-1.5% real + 1-1.5 inflation) then under that scenario for sure it could take 5 years to reach where the economy was in 2007. I am just not sure that inflationary pressures can be held off for that long though -- but who knows. I doubt that very many here would be happy with 7-9% returns; however, 7-9% would be higher than the historical achievment which has long term pretty much followed along the lines of nominal GDP (historically about 6%). A rate of 7-9% going forward would either assume higher nominal GDP growth OR that stocks are presently undervalued (albeit much less than they were in March). But I am assuming here that you are referring to the averages (perhaps the S&P 500). As intelligent investors don't we all seek out the company's that will perform above average .... and preferably be more undervalued than the average. If one is to buy (especially as you put it 'on the dips') there could be some excellent opportuniities. Personally, I am finding the best bargains at present in the small cap, little known situations. But I am not selling much of what I bought in the March panic either as I still view them to significantly exceed what the average return might be over the long haul. The only instances where I might sell would be to get in to something where there is substantial improvement in risk/reward. UCP / DD

The investment portfolio is managed by outside investment managers. Although, I think they have hired some competent investment people -- I don't expect the portfolio to be the main theme here (but it is run quite conservatively). This isn't an FFH --- more like a Progressive in the first inning having yet to use it's leverage. One might argue though that they are more intelligently run than Progressive --- at a time when they shouldn't be -- Progressive is very highly leveraged. Management of EGI consider themselves insurance people and that is where their focus is. They are intelligent people and operate this space in a very disciplined manner. ROE's have run anywhere from 5% (last year) up to 30%. One goal is to over time achieve more consistent results .... which they think the Niche segment will help out with. With some hardening of the market, maturing of their niche segment and some increased leverage ability -- I find it conservative to view about 15% ROE as about normal. So based on such normalized earnings the company would be presently trading at about a 5.5x PE multiple(+/-?). UCP / DD

Have seen a tremendous run in the two main American securities I own (IR & CBS). I continue to hold all of the IR and only sold off a small piece of CBS – not nearly as deeply discounted as they were in March but both still seem reasonably undervalued. I will likely hold all my Ingersoll Rand for a very long time. Still finding deeply discounted bargain status in a few Canadian issues – below are a couple examples: RNK: Over the last year or so they have struggled with external production problems on their first theatrical production + the general financing mood has created some difficulties. The market as it will gave it a good beating (at one point a market cap of <$10 mil). The price has improved somewhat – but still I think it is worth significantly more than the current $15 mil market cap appraisal. Things would appear to be heading back to normal and the major transformation of this company back on track. A very underfollowed story. EFH: The non-standard insurance segment is appearing to be in an initial hardening phase. They continue to grow their niche segment which has yet to hit critical mass. Meanwhile, a (very timely?) expansion into the States. The company is very underleveraged and in excellent shape to take on the growth initiatives as well as the non-standard business that they previously passed on but is starting to come back at improved pricing. The company and management have a history of attaining well above average returns – meanwhile it trades at about .82x BV. UCP / DD

When you look at an index quote for today it will have factored in today's ex-dividends. So actually dividends are factored into the indexes. You can do an experiment and take an index quote from one year end to the next and it will match the year's return for the index with dividends included. UCP / DD

Something to keep in mind is that pre-great depression the sum of inflation + deflation was roughly zero. Spikes of inflation were offset by spikes of deflation. If you look at the historical chart below, the post-great depression era represents the longest predominantly inflated period in the last 200+ years (hit the link to view whole chart). This present inflated era is going on 75+ years and it's likely to continue. True enough that over the course of Gold's history it has served as a proxy for inflation -- and when allowed to trade freely it reacts similarly to common stocks as short term voting machine, long term weighing machine. However, the proxy for common stocks has an added kicker in that (over the long term) they are a proxy for not only inflation but also economic growth. Of course one should also be looking at valuation. I have no clue whether Gold is in a bubble or not -- bottom line is there still remains some very undervalued select common stock opportunities. I would even venture to say that the S&P index itself will outperform gold over the long haul. UCP/DD http://www.visualizingeconomics.com/wp-content/uploads/inflation-history.jpg http://www.visualizingeconomics.com/wp-content/uploads/inflation-history.jpg

I agree with Uccmal -- KFS's business has been predominantly non-standard. Very little benefit here for Northbridge. You might instead take a look at EGI Financial -- they are highly involved in non-standard & specialty lines. They could pick up some of KFS's business -- particularily in Ontario. EGI is very underlevered and are now indicating that the time is right to finally lever up. They resisted any significant expansion when multiples were too high and have patiently waited for the present opportunity. M&A opportunities are significantly more attractive, standard insurers are exiting non-standard lines and the likes of KFS are now hemoraging. It trades at about a 0.8x multiple to book (albeit very thinly). UCP / DD

Since the Great depression --- we have purposely chose the path of inflation. Prior to the 30's, there were spikes of inflation that were typically offset by deflation --- but the end sum was pretty much zero -- Gross GDP more or less equalled Real GDP. While we have had varying degrees (including spikes) of inflation over the last 7 or 8 decades --- the dominant theme has definitely been inflationary with little (if any) deflation. The gold bugs point out all the diminishing dollar effect that inflation causes ..... and there is no question of this. But as a system that encourages people/business to come out of their caves and spend in a quicker manner than they might have otherwise --- it does seem like the better evil than the system that existed in the pre-30's era. So are we getting better at reducing the length/impact of recessions? OR --- are we getting better at managing inflation? Check back in 5 or 10 years when consumer prices have increased by 50% or more. Today's short-time solution may well become a longer-time problem -- but that's the system. UCP / DD

Since Herbert Henkel took over the helm (about 9-10 years ago) --- he has been transitioning IR into a less cyclical and more focussed organization. Take a look at what IR was 10 years ago --- and what it is today. It's a very different company. * The main segments are Trane and the climate control business. Combined they make up 2/3 of revenue. Within the climate control segment they have developed a moat within grocery retail (think Wal-mart especially). Lots of synergy potential with Trane. Trane's main competitor is the slightly larger Carrier (owned by UTX). Between the two they kind of dominate the heating/cooling market --- Carrier seems heavier weighted to heating whereas Trane to cooling. Cooling would seem much more favourable to a growing emerging world than heating (same goes if you believe in global warming). Energy efficiency comes into play -- some of the newer technology has quick pay offs in replacing old equipment. High energy prices, higher inflation down the road along with potential goverment incentives could be a boost for the business. In the mean time there is pent up demand. If someone's air conditioner breaks down -- they might live without it for a year or two -- but eventually it will get fixed or replaced. * The security business makes up about 15% of revenues. This segment was growing up until Q3/08 --- despite the housing problems dating back well before that. Again, new technology is unfolding -- digital technology is changing the way people unlock a door, get into an apartment, start their car, etc. * What they call the Industrial segment makes up the rest (about 18%). They make some very good tools -- and perhaps the best compressor technology. New compressor technology is unfolding -- smaller .... more compact .... capable of more apps (particularly energy efficiency, air quality, etc) -- also synergies with Trane/climate control. Club Car falls into this category also --- while it is only 3% of the company's total revenues --- a hidden fact is Club Car is the largest 'plug in' vehicle manufacturer in the world. Club Car has started to branch out beyond the golf business but golf still is the predominant market -- they build/sell the best and have a 60%+ market share. Where Club Car goes from here who knows -- but despite being only 3% of the company I still view it as a very valuable asset (sale, spin-off, merger, internal growth potential). If you take a look across their broad base of businesses --- with the exception of maybe security there is a common theme: Energy Efficiency (and to a lesser extent air quality). But security still fits in well with the package -- when it comes to sales, parts and service -- there is a common focus with numerous synergies to exploit. While the stock market has been beaten down -- I see IR being given an extra pounding --- thanks to: 1. When they sold the road/equipment division --- they had a pile of cash --- the hope was that this would be returned to shareholders. Didn't happen. 2. Instead they bought Trane. So there is a belief that they over-paid (While they may have got a better deal in today's market -- that's all in hindsight -- I think this will still be a good acquisition especially at today's discounted IR stock price. Trane added 6% to recurring parts and service revenue -- they are now at 25%, goal is to get to 50%.). 3. The Bermuda (now Ireland) business registration (fact of the matter is that their main competitor UTX has even more of these registrations. If President Obama succeeds -- both competitors will be in a similar position. It's quite possible that some of the added tax base would be passed on to the customer over time I don't see it as a big issue --- and at the present price I see a big enough safety margin even if next week the company had to turn to 100% American corporate taxation. 4. Herb Henkel will be retiring in 2010 -- Mike Lamach will be taking over. Lamach has been with the company since 2004. Some analysts are of course nervous about this. I have a preference for companies in some sort of transition -- with very favourable odds of success. 10 years ago I don't know that one could have said that about IR -- but I really like the progress that has been made. I view IR as an above average business striving to become an outstanding one. In the mean time it trades at a healthy discount to what an average business trades for in the market. UCP / DD

First of all --- how do you know this was a Buffett decision and not someone else? When I get some time I will post my thoughts for what they are worth. UCP / DD

With all the 'know thy client' rules out there now --- how does someone like this become a client without being aware of the risks. What is a 75-year old investor doing with his life savings exposed to the market -- particularly if he has a short term purpose for these funds. I own a small bit of Tims fund --- when I signed up there was something in the documents that said 'I could lose ALL my money' ---- it was not in small print either --- very bold. There was also some bolded out language that stated to 'read the document'. If after the fact this 75 year old still signs on what can you say --- he was prepared to take the risk just like anyone else. Informing the client of the risks before hand is very controllable. When I play hockey on Monday nights there are still a lot of guys that don't wear face shields - I don't know how informed they are but if they were --- they certainly are doing so at their own risk. And so am I by simply playing the game. You can't control all the hazards but you sure can control the information. Funny that you bring this up -- because my dad just turned 75 today!! I manage most of my parents funds and have always kept aside a very safe segment (staggered AAA Canada and AA Provincial bonds) for their anticipated needs for at least the next 5 years. Yes, their equity side has been impacted on paper but they will not need these funds for at least 5 years. We of course hope they live much longer --- what they don't realize is what inflation could do to their buying power. Lets keep in mind that in the Ruane example I mentioned is that the original purchase was back in the black within 3 years from the onset of the '73 bear market. By the time the complaining (and some client withdrawls) would have started --- things were probably very much on the mend (at least for Sequoia). Whether or not that will be the case for the smart value types in todays instance who knows ---- but what I do know is that with Tim's fund in particular there will be no incentive fee paid until the fund is back to break even. I don't disagree --- you will never completely eliminate risk. Whether it is wearing a seat belt or a helmut --- or making intelligent business decisions you will never completely eliminate risk. Never. But there sure are some wonderful businesses that do a terrific job --- unfortunately only a select few in Canada that are publicly traded. So to participate in the breeding ground for such company's in the states we as Canadians have another risk called 'currency' --- and unfortunately another problematic one when doing a lot of trading. The point I was making was with your theoretcial ten-year 20% note bought in the 1982 period and the 3x pe's available at the time that Buffett was also buying. I just pointed out that during this time he also bought or added to KO -- and I would guess that the return over 10 years probably beat the 20% total return on the theoretical note. 10 years later would have been around 1992 --- so the KO investment could have cumulated tax free for another 6 years before Buffett in hindsight would have sold it. UCP / DD

I am sure it happened --- but for those that were loyal they would have been quite pleased by the end of '76 (and beyond) -- quite the oppositie of your worries at present. Ruane as leader and captain knew what was best for the clients. Would he retain them all? Of course not -- you never do. Could GM have retained all their clients over the years? No -- but they sure could have done a better job by developing products that were in the client's long term interest rather than the client's short sighted ones. Doing what is best for the client (even if they don't know it at the time) works -- even for money managers!! Buffett did not sell Coca Cola in that early 1980 era --- in fact he added significantly. I would bet that his investment in KO outperformed the theoretical ten-year 20% return note. And the beauty was he avoided a lot of taxes compared to the gains that would have had to be claimed on the note. Look, I am not saying there is not a time to sell -- but investor's ought to have a long term core strategy. I am not saying to buy KO -- and in fact I have never owned it -- but I will say that over the 17 years of doing this, KO is certainly the best bargain I have seen it at. Are there better bargains for the small investor -- in the 3x PE variety? Sure there are especially in some small cap names -- there's lots of usual junk too but there are some high quality ones in the fold especially if one takes into account an assumption or two. Certainly far from a small cap -- but a question was asked about Ingersoll-Rand (I will try to answer this in a little more detail when I get a chance -- perhaps on another thread). When it was at around $12 -- I had it figured at a 'normalized' PE of 3x. By 2012 there is a strong chance of IR earning $5-$7/share and doing it in a more consistent manner -- there is a lot of pent up demand from the down-turn and synergies to be flushed out from a recent acquisition. Value line has it rated with the same Safety factor as KO. Personally, I would downgrade it a notch or two from KO until they have their ducks in a row --- but with it's current and near term cash generation (compared to the price) it comes with an added layer of safety. Over 10 years --- IR will hopefully outperform that 20% total return note. They lost great wealth because they focussed on wealth accumulation rather than what was important. They invested in risky ventures --- we know the result. UCP / DD

One other point about wealth accumulation -- wealth accumulation is a result, NOT a process. If you are Ingvar Kamprad -- are you worried that the value of IKEA might be less if you tried to sell it today? Of course not -- you are focussed on the business execution. The success or lack thereof will dictate the resulting direction of wealth accumulation. The business execution is the process and inspiration -- wealth accumulation is the result. Unfortunately, for many -- short term emotions and/or greed interfere and they think of it the other way around. Now I enjoy value just as much as the next guy (heck I even buy most of my clothes from a second hand shop for cents on the dollar!!). From a value investor's point of view this is a tremendous opportunity. Since all asset classes are on sale one can have the pick of the litter. When I was accumulating Ingersoll Rand -- others here were buying BNI, KO, WFC or whatever. In the end you take this rare opportunity to pick up something great that you think you understand. I started out doing this in 1992 and I can tell you that this is by far the most fantastic opportunity thus far. Perhaps it's not on par with 1982 but it's still very good. I am hopeful there will be a couple more of these in my lifetime --- but I view it as a rare opportunity that one does not want to miss. It would be very hard for me to sell at a bit of a pop for the hope that this kind of opportunity will happen again soon. UCP/DD

Sanjeev, this is rear view mirror thinking. I have mentioned this before -- one of the best/honest long term investor's was Bill Ruane. If we were having this discussion at the beginning of 1975 --- you would have been saying the same thing: that Ruane and other long term value types had 'gotten completely hammered'. After all a $10,000 investment in Sequoia on Dec 31/72 would have been worth $6,355 on Dec 31/74. The S&P 500 would have been worth about $6,270. Looking in the mirror, there was little evidence that Ruane's strategy was working at that point in time. However, two years later (Dec 31, 1976) that $6,270 turned into $17,730 ---- the S&P 500 had barely returned to it's value 4 years previous (it would have been worth about $10,675). A couple hidden things with Sequoia. Firstly, compare the typical 20% (or more) incentive charge to Sequoia's straight 1% management fee structure. And the thing that does not show up in the record is the very friendly tax treatment due to a longer term 'investor vs trader' type of thinking. When one buys Wells Fargo at $9.50 and sells it at $17.00 it doesn't reflect the tax consequence. Many partners are in high tax brackets -- the reality is they might only see $14 (or less). [Actually strip out a 20-25% incentive fee and they might only see $12.00-$12.50 -- but this is beside the point]. Now, granted, if this could be done every two weeks --- it's still going to net some tremendous results. But you and me know this will not be the norm. The bottom line is that all great wealth accumulators in this world did so by holding longer term. Some held longer than others --- but no one has proved to make a lot of money by doing quick flips. Yes, there are special situation plays that can be shorter term and have proved very profitable .... but the core strategy for the very successful has been thinking long term -- it's a common theme. UCP / DD

Buying KO back in 1982 and selling in 1998 (16 years later) would have been more 'buy and hold' than it would have been a 'trading' strategy. This is quite unlike 'flipping' it quickly for something else. We have entered a point in the market where 'buy and hold' starts to make more sense. Yes, if one can buy KO at 12x PE and sell it next year for 24x PE then one might want to go for it. My guess though is that it might take 20 years for KO to again attain a 24x PE status (it may never in our life time attain the kind of PE it had in 1998). But I think it is reasonable to think the PE can double in 20 or so years -- in which case in itself represents a 4% return. On top of it you get a 4% yield with earnings + dividends growing at perhaps 4-5% more than inflation. Personally, I don't own any KO -- but for many investors they would do well today by taking this 12-13% (+inflation) return and just owning it rather than hoping to trade it for something better. The reason Buffett says he should have sold in 1998 was because it was trading at a very generous price. Correct me here if I am wrong but I think in 1998 the PE for KO was around 40x? If in 1998 KO had only been trading at 24x PE, I don't think you would hear Buffett say (in as strong of terms) that he should have sold it. KO at 40x was quite opportune. Old School Graham taught to think like an intelligent private business person in buying and selling publicly traded equities. The only downfall to the theory was that private business people put their businesses up for sale much less seldom than does a common stock operator. Buffett obviously converted himself to the business ownership aspect -- but with a major cavaet: that he would only buy outstanding franchises. Don't get me wrong, I have the utmost respect for Graham -- however, if people are buying sub-par businesses do so with eyes open (and perhaps 'trade often' would be good advice). Time is not necessarily a friend of the sub-par business as it is with the outstanding one -- tremendous margins of safety are of the essense. UCP/DD

Dividends are not over and above -- they are factored into the index.

Where this Grantham analysis would seem to fall short is that it makes no distinction between junk and higher quality low PE stocks. When Peter Cundill mentioned this -- I am quite sure he was not speaking of the low PE issues that were swimming naked (hence the reason they were cheap). I think he was referring to stocks that at minimum had accurate financial reporting, honest management, etc. There is also the issue of hidden assets and/or earnings that are flushed out over due course. For example -- CBS right now trades at about 2x it's free cash flow in 2007. Because of some writedown in goodwill it would show a negative PE if Grantham were to run his analysis today -- so it would really not be considered. And some of the hidden free cash flow would not appear as earnings -- yet I would consider it a very low PE at this juncture. At some point Sumner Redstone either gets past his personal debt problems or he is forced to put his controlling stake up for sale. If CBS were sold next month --- it would again probably not even register in the analysis that Grantham has done. Real earnings (as they relate to PE's) do not always show up without delving into the details --- same for real losses. The PE convergence is more about what is real and what is not real ... what is sustainable and what is not ... a broad analysis of reported earnings is a bit misguided. I have no question that a company like Coca Cola will often weather a storm better than many --- but the key ingredient here is the quality. Find a very good quality company trading at 3-6x PE --- one could do better than the KO scenario (especially if the company is smaller size and more nimble, very underleveraged, etc). The problem is that at the height of things in 1929 ... an extreme low PE company would have been as rare as what could be found in 2007. But keep in mind that the overall valuation of 1929 compared more like where we were at in say 1998-2000. The situation in 1998-2000 was that there were still some excellent values as lots of stuff was being trashed for tech stocks. Had Grantham's study been of the bear market after 2000 -- I think the results would differ. High valued tech stocks crashed --- with moeny going to the lower PE stuff where the smart money was already parked. But for our current day situation a snap shot of 1929 - 1932 gets more and more meaningless. We are well into this now --- and probably at valuations comparable to sometime in 1931. So perhaps a take of how low PE stocks (prefably decent quality) performed from a starting point in 1931 ... would be more comparable to our situation today. Where were they 5 or 10 years later -- don't forget out the ones taken over through M&A activity as the financial system thawed, etc. UCP / DD

I should just point out that these are just charts I have found and have not had the time to check them out for complete accuracy. With a short view and comparison of the figures used they do seem to be reasonably accurate and hence I presented them here. If anyone finds any inaccuracies -- please do point them out. I have saw some very odd charts that are posted around the web so one does have to be careful. In fact the first chart on this thread seemed kind of odd --- as it was showing a price for the S&P in the 30's at a point where the Dow would have been at that time -- I could not make sense of that one. UCP / DD

Here is another interesting chart: http://www.equinox.co.za/Media/images/ned_0804.gif Instead of showing the year to year or month by month PE variables, it takes a 10 year average. Buffett continually pounds into investor's heads to view the long term The 10 year average would seem helpful with this. Taking a guess at 2008 earnings -- I am figuring that the 10 year average (99-08) earnings for the S&P 500 would be about $62.70. So when considering where we were in November (S&P 500 at 741) --- we were probably hitting about 11.8x PE (versus the typical 10x or so from the graph above). While this might be slightly higher than where it has bottomed out before --- does one wait for it to actually bottom out? Yes, a bottoming out of the PE multiples could happen in a second Capitulation event in the next few days or weeks .... but then again it could take 5 or 10 years for such bottoming. If today (or in any market!) -- a person can find good quality companies with nice competitive advantages trading at 3-6x PE's (or less?) why not buy them? Sure the overall market index PE may come down more --- but provided the lower priced bargain isn't some sort of big mistake --- it will converge up. And further down the road will likely also benefit from the market rising back to normal levels. I remember Peter Cundill once mentioning that this was the way with bear markets --- they bring about a convergence of PE's. The overpriced comes down --- the underpriced goes up. Overall the bear market brings with it a down draft --- but value is still value. UCP / DD

A common theme for some on this thread is that peak unemployment is a prerequisite for the recession bottoming out. Yet historically that is not the case -- unemployment consistently peaks shortly after the recession is over: http://bigpicture.typepad.com/photos/uncategorized/2008/04/12/jobless_vs_unemployed.png And another common theme for many is that the recession must be over before the market can bottom. Again, this is not true -- here is an excellent chart that sums up that point: http://static.seekingalpha.com/uploads/2008/12/3/saupload_stockmarketperformance_recessions_1926_2008_ibbotson.png In each and every case the market bottomed out prior to the recession ending -- including the mother of all recessions we call the Great Depression. In the two most recent (ie. 73-75 & 81-82) deep recessions of the past -- they both lasted 16 months. The market bottomed 4-6 months before these deep recessions actually ended. And, the return from the bottom to the end of the recession alone was +32 to +34%. The current US recession officially started Dec/07. So we would seem to be in the 15th month of the current recession. The longest it took to finally put in the low would have been during the Great Depression where it took 34 months. The second longest on record was the 81-82 recession where it took 12 months. If the current low was put in at November then this would tie the 81-82 recession (also at 12 months). If not then this is perhaps putting some new numbers on the chart -- question is: is it today, tomorrow, next week, next month, 20 months from now -- taking over the number 1 spot? All I can tell is that the preference right now is for inflation spending and that will continue until confidence returns. I see us being way closer to the end than just the beginning. And there is a lot of tremendously cheap stuff out there --- especially for the smaller investor who doesn't have to go after the Burlington's and stuff that WEB does. Don't get me wrong -- I would love to own Burlington -- I think it stands to chug out ROE's of 18-20% over the next decade or more. The thing is, one can find much more unknown small quality situations that stand to attain at least this kind of ROE over the same period --- but they are trading at 3-6x PE instead of 10-11. They may even have unused leverage and perhaps trading at a good discount to Book Value instead of 2x BV. UCP / DD

So did the VHS machine .... but it made the Betamax obsolete in quick order. Why? Because VHS was the format adopted by the content suppliers. Amazon would like to think they are a rulemaker -- but their pushy tactics look like a big mistake. Again, for protected content the Kindle has issues. What do you do when the square pegs won't fit through the round hole anymore?? They already are ..... even with the limited content that exists. It's not so much about reading an entire novel on it ..... and besides only the Kindle die-hards are likely to do that. It would seem the appeal would be that it can be bundled with a hard copy or individual chapters can be bought. For example you are stuck in a long wait at the Barbershop ... you have been reading a book but it's at home. Your iPhone is in your pocket. When you bought the book you might have bundled it with a digital copy for a nominal cost (perhaps it was thrown in free!). And if not .... for 99 cents you could buy a chapter of the book you have at home -- reading it while you wait. The appeal would also be for professionals, students or maybe people travelling ..... they can buy individual chapters for 99 cents or have the whole thing always handy for review. If I ever get a smart phone the first thing I will do is buy Chapters 8 & 20 of the Intelligent Investor. If one is subscribed to a Newspaper or Magazine --- the digital version would also be handy to have if it is bundled with it for a nominal charge. You read bits and pieces on your iPhone through out the day.... but if you want to read something from cover to cover it's still hard to beat the real thing. Again, it's not about quality ... it's about convenience. If it's quality you want buy the actual book. You want something in between fork out $359 bucks and buy the Kindle --- but with your head up that it could become obsolete over time. People will continue trading in their phones every 2 or 3 years --- thereby keeping the technology current and that technology will get better over time. Carrying a cell phone has become habit forming -- eventually it will replace your wallet and probably your keys. If/when a half million or more current kindle owners find out the product is obsolete for the new current stuff -- and the new one not much better -- I would question if in a few years Amazon can even give it away. UCP / DD

Amazon is not very popular amongst many of the publishers. Like I said they take as much as 65% of the retail price of an ebook sale (the bare minimum for some big name authors and publishers is around 35%). Some think they are tryiing to make much of the publsihing industry obsolete. Amazon would like everyone to think that their moat is so strong that they can bully their way through this -- but can they? This is more about new titles/content than it is about old stuff. Something that the music and publishing industries have in common is people's appetite for new content. Because of the way Amazon treats the people who supply their product -- many authors/publishers may be holding back releases for this Shortcovers launch. The Shortcovers launch is much more aligned with publishers/authors interests ..... and it's headed to where the e-download traffic is. Indigo Books and Music has a monopoly here in Canada when it comes to the bricks and mortar side. They still do a very robust business --- and are smartly run. The excitement being generated around the Shortcovers launch is that there is about to be tons of new titles available and in addition it will be available for a massive amount of customers who carry around a compatable version of ereader in their pocket called a smart phone. Last Friday Amazon announced that they are back tracking and will also be providing their service on smart phones --- but when or how is unknown at present. Meanwhile the Shortcovers venture is moving ahead. Some surprises are promised at launch -- we will have to see what they are. The only holdup right now is the approval process to get on to the iTunes app store. UCP / DD

Kindle's competition is beginning to heat up..... a lot of positive things being said by a venture being headed by Indigo Books and Music (IDG -- yes I own it) here in Canada --- called Shortcovers. This is their blog (but there is also a lot of positive feedback and excitement if one googles around on it): http://blog.shortcovers.com/ Amazon has been fighting the publishing industry's adopted format (epub) ... and I believe this includes the newspaper industry's adopted format. In fact there have been some who have held back from buying a Kindle as they have concerns that it could become limited in it's use in a short period of time. Meanwhile Indigo has been co-operating with the publishing industry and the Shortcovers app will fully support their adopted formats and concerns. It's estimated that 500,000+ Kindles were sold last year but they ran out or it could have been more. A new generation Kindle has just been released so perhaps Amazon could beat that amount by a fair bit in 2009. The number of Kindle sales sound like quite a lot until you consider that iPhone unit sales should be about 10 million in 2008 --- with expectations that the price for an iPhone will drop this summer to $99 (versus $359 for the kindle). If so there are projections out there that the iPhone could go mainstream with around 20-30 million of unit sales in 2009. Shortcovers will be the first app based major provider that has access to significant amounts of new content through the good relationship they have with publishers via IDG's established retail business. It will first be launching on the iPhone through the iTunes app store. iTunes dominates the music download business (75%) and Amazon has failed to catch them. Apparently the new app store did 500 million downloads in it's recent first 6 months of operation (Note -- these are NOT music downloads --- those are over and above). A lot of it is free -- but it is generating a lot of traffic and there seems to be high demand for more apps in the way of better content. A very timely entry for Shortcovers? But the iPhone is just the first step .... the Shortcovers app will shortly after be available on the Blackberry and possibly on to some other wireless compatable smart phones, readers and other gadgets. Yes, Kindle definitely has it beat as far as size, quality and battery life goes at the moment ...... but the smart phone technology is catching up with the introduction of each new generation of the product. And, for the many who either own a smart phone or will in the next short while there is no additional outlay during these difficult times ---- the projected number of smart phones far outweigh what Kindle will ever be. The advantage of the Shortcovers app based solution is that it's convenient and always in your pocket. Amazon would seem to be making many of the mistakes that Sony made with the Betamax tape player in forcing the industry to accept their solution rather than co-operating with the format the industry has been adopting (and meanwhile AMZN has been pocketing as much as 65% of the transaction!). Sony has obviously learned from their lessons of the past though and while their product at the moment might not be as good -- it does support epub. In any event, things are starting to evolve very quickly in the wireless world despite the recession. Will be interesting to watch where all this goes. Will also be interesting to see what Barnes and Nobles strategy will be or if Indigo will be partnering with them. Shortcovers is set to launch toward the end of this month. Let the battle begin. UCP / DD