Security value analysis and Buffet's philosophy

Browsing Graham and Todd's classical "Security analysis", which is also strongly and repeatedly quoted by Warren Buffet, here are some keys that trace the similarities in the book and Buffet's philosophy, for example, no dividend has been paid in Hathaway for a while but investors have been rewarded by great growth. Arguments are still sound. I added "Corollary" section myself.

common-stock investment cannon (proposed by B. Graham in 1933)
- Investment is conceived as a group operation, in which diversification of risk is depended upon to yield a favorable average result
=> Corollary: acquiring a single stock is not an investment

- The individual issues are selected by means of qualitative and quantitative tests corresponding to those employed in the choice of fixed-value investments
=> Corollary: Analysis without peer comparion is not good

- A greater effort is made, than in the case of bond selection, to determine the future outlook of the issues considered
=> Implication: future outlook can be earning power, revenue trend, return dividend, capital flow etc. It is not defined.

So "future outlook" was categorized in 3 groups in their book
- The dividend rate and record (which was emphasized in Char 29)
- Income account factors (earning power)
- Balance sheet factor (asset value)

So, how to do qualitative and quantitive comparison between common stock and fixed income? One way is to use National economic elements related to investment
- national wealth and earning power will increase;
- such increase will reflect itself in the increased resources and profits of important companies
- such increases will in the main take place through the normal process of investment of new capital and reinvestmnet of undistributed earnings => Corollary: companies should not pay dividend if they can afford to. This could be very tricky. For example, if companies don't pay dividend but also don't provide premium to reinvested capital, investors would better off in other dividend pay companies. See Chapter 29.

Short strategies for these sectors

Commodity stocks have been super stars in the past 3 months. Eventually, as US Dollar strengthens, these stocks will be fading out. Some big names of such stocks are:

Massey Energy, Chesapeake Energy, National Oilwell Varco.

What strategies we can use to benefit from these over-priced stocks? Short sells and purchasing puts. Writing covered calls can be another option if you don't mind holding such stocks for a long time (assuming you bought them very low).

Besides commonly recognized difference between short sells and put writing, short sells is a favorable approach in this stand because it is hard to predict what price it would fall at the put expiration. Considering how much money is involed in these star stocks, it is even riskier. Short sells, on the other hand, doesn't have time constraint.

Besides the above commodity stocks, VMWare and Amazon are two other stocks fall into this group. VMW has lately ousted their co-founder and lowered earning expectation. Amazon may be affected by weak economy.

Banks failed by FDIC

IndyMac is shut by FDIC because it failed to insure 95% of $19 billion under their management. According to FDIC rule, all deposit must be insured under events causing customer loss. IndyMac is in liquidity problem so that its asset can't cover liability. FDIC only insure $100K for deposit and $200K for investment account. The part not insured by FDIC will be loss to their customers. There are about 100,000 IndyMac customers could loss half of the un-insured deposit, that is $500 million. FDIC must pay between $4 billion and $8 billion to this loss.

FDIC shut down IndyMac and tries to find a buyer. This is the third bank FDIC shut down. IndyMac accounts can still be accessible on ATM but not online and phone. These services will be reopen on Monday.

Company news

Wells Fargo chairman bought 40k WFC share in June 2008, for $26.05/sh. This is $1.05M investment. He sold $6.07M in August 2007 at $36.96/sh. The CEO purchase $44k WFC in May 2008.

Exxon will sell 2200 gas stations in the coming few years. Each gas station can be sold between $500k and $2M. This is $1.1B cash return, if using $500k price tag.

In May, a fund tracking Chinese Yuan was incepted, Wisdom Tree Dreyfus Chinese Yuan Fund (CYB). Chinese Yuan is expected to turn higher against US dollar. But since US dollar is getting lower than Euro, further strengthened Yuan brings pressure on Euro vs. Yuan. So the trend is tricky. When US dollar ends higher while RMB higher, it results in higher RMB vs Euro. This is,
Euro/RMB = (Euro/US$)/(RMB/US$)

Bear market is commonly defined as more than 20% from top. From the last 30 years, there were 9 bear markets. In average, it took 14 months to bounce back from the drop and 8 out of 9 reached more than 30% gain from the bottom.