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Warren Buffett Buying the Sizemore Investment Letter’s Picks

Lest I be accused of hero worship, I’ll spare readers another Warren Buffett lovefest article.  Yes, Buffett is a living legend, and yes, he is arguably the best investor of all time.  But these facts are nothing new, and there have already been more articles than I can count written about the man and his methods over the years.  Buffett has been elevated to something akin to a demigod in the minds of many value investors, and the art of investing like Buffett is a subject that has been thoroughly beaten to death by the financial press.

With all of this as a caveat, I’ll let readers in on a little secret:  I do like to keep tabs on what Buffett is buying or selling.

It is never a good idea to blindly ape the trades of another investor—even one with a track record like Buffett’s.  Due to the time lag in reporting with the SEC, an investor you follow may very well have sold the position you are copying by the time you buy it.  And what makes sense in that investor’s portfolio might make no sense at all in yours.

Still, given Buffett’s penchant for long investment time horizons, he’s a little easier to follow than most.  And, again, his track record over the years make him a man worth watching.

Imagine my pleasure this afternoon when I saw Berkshire Hathaway’s updated portfolio holdings for the third quarter of 2011 (see Warren Buffett’s portfolio).  Three out of Buffett’s five new additions were Sizemore Investment Letter recommendations.

Buffett initiated positions in SIL recommendations DirecTV ($DTV), Intel ($INTC), and Visa ($V).  His other two additions were pharmacy chain CVS ($CVS) and defense contractor General Dynamics ($GD).

While I was not invited to Buffett and partner Charlie Munger’s strategy sessions before these purchases were made (I’m sure my invitation was lost in the mail), I have a pretty good idea of what Buffett sees in DirecTV, Intel, and Visa.  Each is a leader in its respective industry, and all three benefit from durable, long-term macro trends.

Let’s start with DirecTV, the world’s largest provider of paid satellite television.  Given that TV-over-internet options like Netflix ($NFLX) and Hulu are increasingly crowding the turf of traditional paid TV—and given that the paid TV market in the United States is already saturated—Buffett’s choice here might raise a few eyebrows.

I can assume that Mr. Buffett’s rationale was the same as my own:  DirecTV is a direct play on rising living standards in the fast-growing markets of Latin America, where it already has 11.1 million subscribers (vs. 19.8 million in the United States).  Latin American revenues were up 46 percent in the 3rd quarter, due primarily to subscriber growth.  But even in the United States—where everyone already has paid TV service in one form or another—revenues were up 8 percent.  Not bad, given the precarious financial situation of the average American.  DirecTV is also very reasonably priced at just 10 times expected earnings.

Moving on to Intel, my only question to Buffett is “What took you so long?”

Intel absolutely dominates the market for computer processor chips.  But this very strength is what has caused investors to shun Intel.  You see, the PC is dead.  Smart phones and the iPad killed it.  And given that Intel is still quite weak in the mobile market, the company is resigned to be a slow-growth behemoth.  Who wants to own a dinosaur like Intel?

That story would seem to make sense at first.  The problem is that it’s simply not true.

The PC is far from dead.  Smart phones and tablet computers are growing at a much faster rate, of course.  And the PC market does depend more heavily on the corporate and enterprise market, which is not in the best of shape in this economy.  But tablets and smart phones do not replace a computer for most users.  And in most emerging markets, PCs are still very much a growth industry.

Intel’s revenues and earnings are growing at 28 percent and 17 percent year over year, respectively.  And that is in near recessionary conditions.  Meanwhile, the stock trades at just 9 times expected earnings and yields 3.4 percent.  At current prices, I consider Intel a safer investment than most AAA-rated bonds.

Finally, we come to Visa.  Visa and rival MasterCard ($MA)—also a Berkshire holding—have become somewhat trendy of late, but it wasn’t like that for most of the year.  Regulatory uncertainty cast a pall over credit card stocks, as did fears of a consumer slowdown.  Yet investors who were, in Buffett’s words, greedy when others were fearful did quite well in Visa and MasterCard.  Both are among the best-performing stocks of 2011.

Visa and MasterCard benefit from two powerful macro trends—the transition to a global cashless society and the rise of the emerging-market middle class.  As electronic payments become a larger share of commerce, credit and debit cards—as well as newer payment methods such as PayPal—will increasingly replace cash and checks.  And while this process is well on its way in the United States and other developed markets, it is only just beginning in most emerging markets.  This is a trend that will be with us for a while.

Visa trades for 14 times expected earnings, which is a bargain for a company with Visa’s brand, financial strength and growth prospects.

DirecTV, Intel, and Visa are all long-term holdings of the Sizemore Investment Letter.  And while Buffett’s reasons for purchasing may have been very different from our own, we’re glad to see the Sage of Omaha sharing our enthusiasm.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What’s Working in 2011?

2011 has been a rough year for investors.  Stocks, as measured by the S&P 500, are down nearly 8% for the year and down 14% from the April highs.  And while 14% may not sound like all that much in the grand scheme of things, investors felt every point in a surge of volatility that brought back discomforting memories of the 2008 meltdown in which the major stock indices lost half their value.

Still, some market sectors fared better than others.  Let’s take a look at Figure 1.

Figure 1

Three sectors are in the black year to date—utilities ($XLU), consumer staples ($XLP), and health care ($XLV).  (Note: these figures do not include dividends.)  Consumer discretionaries ($XLY), technology ($XLK), and telecom ($IYZ) are down for the year, though less than the broader market.  After that, it gets ugly.  Energy ($XLE) industrials ($XLI) are down 10% and 14%, respectively, but the real losers for the year have been materials ($XLM) and financials ($XLF)—down 18% and 23%, respectively.

Investors who underweighted the highly-cyclical sectors and focused instead on the less-sexy, dividend-paying value plays haven’t had a bad year.

So WHAT if I bet the farm on banks and gold?

But what is remarkable about this year’s correction is that so few investors seemed to see it coming, and this included high-profile professionals.  John Paulson, the hero of 2008 who used the subprime meltdown to make the most successful trade in history, has had an abysmal year.  Due primarily to his overweighting to financials and materials—the two worst-performing sectors by a wide margin—Paulson’s flagship fund was down by as much as 40% this year. (See John Paulson’s portfolio holdings here.)  And over the past two weeks, his largest single holding—gold—has taken a tumble and may have much further to fall. (see “Is It Time to Call a Top in Gold?”)

No investor should be judged by a single nine-month period, and perhaps Paulson will ultimately prove to be “right” about financials.  Many banks appear cheap on paper, and sentiment is almost universally bearish towards them.  It’s entirely possible that he will eventually recoup the losses he took this year.

Still, Paulson’s heavy losses on his leveraged, concentrated portfolio should stand as a warning to investors.  Paulson ignored low-hanging fruit that was ripe for the picking—such as telecom and pharmaceutical shares trading at multi-decade lows based on earnings and dividends—and instead swung for the fences with a massive leveraged bet on an inflationary expansion.  Paulson risked his career and the wealth and livelihood of his clients without ever asking that all-important question: “What if I’m Wrong?”

Sir John Templeton

There is nothing wrong with betting big on a concentrated position.  Great value investors like Warren Buffett have made careers of doing so, and over-diversification is a recipe for mediocrity.   As the great Sir John Templeton said, “By definition, you can’t outperform the market if you buy the market.”

But the second half of Sir John’s quote is also quite illuminating: And chances are if you buy what everyone is buying you will do so only after it is already overpriced.”

If you’re going to take a large, concentrated position, two conditions should be met:

  1. You stand to make a bundle if you’re right.
  2. You won’t lose your shirt if you’re wrong.

Value investor and financial guru Mohnish Pabrai  compares the investment decision to a coin toss in which “Heads I win; tails I don’t lose too much.”  I tip my hat to Mr. Pabrai, and I only wish I had thought of that quote first.

Unfortunately for his investors, Mr. Paulson did not apply the same logic.  He loaded up on gold after it had already been in a bull market for the better part of a decade and had become trendy.  And he bet big on financials even after watching what happened to them in 2008.  He swung for the fences…and struck out.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Myth of Commodities Investment

One of the oft-cited reasons for investing in commodities is that they have historical returns comparable to stocks while having a low correlation to the stock market. The problem is that this statement is patently false.

Yes, commodities used to have low correlations to stocks. But that was before the era of “financialization” and securitization.

In their 2011 paper “Index Investment and Financialization of Commodities,” Princeton University Professor Wei Xiong and Renmin University of China Professor Ke Tang prove empirically what many of us in the profession have long suspected: Commodities and commodity stocks are becoming more highly correlated to each other and to other asset classes.

Furthermore, while the prices of individual commodities have always been volatile, commodity prices as a whole have also become far more volatile in recent years.

The question begs to be asked: Why? Continue Reading →

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Running of the Bulls

The following is an excerpt from the July issue of The Sizemore Investment Letter.

You will have to pardon me if I am a little sentimental this month. You see, dear reader, it is that time of year again. July 6 marks the beginning of the Feria de San Fermin. For one full week, thousands of otherwise sensible young men—and plenty of not-so young men too—will throw reason and commonsense to the wind to run with the bulls through the streets of Pamplona.

There is a widespread—and false—belief that the boys who participate in the encierro are drunk. Surely, no sober person would do something as phenomenally stupid as run in front of a 2,000-pound charging bull. Yet sober they are. The running of the bulls kicks off at 8:00 am, and at that hour the drunks are still passed out in the park from the excesses of the night before.

Why do they do it?
Continue Reading →

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Luxury Toilet and the Rise of the Affluent Chinese Consumer

In the interconnected web of the global economy, the rise of China has been one of the biggest drivers of the decade-long bull market in energy and commodities. But China is also making its presence felt in other less obvious areas of the economy. Yes, it would appear that affluent Chinese are driving a global boom in luxury bathrooms.

Kohler, the American plumbing fixtures manufacturer, now sells the $6,400 Numi luxury toilet (see photo). Driven by the demanding tastes of China’s newly wealthy, the Numi features a heated footrest and a “sleek iTouch style remote,” according to the Financial Times, that controls an internal music system, the adjustable bidet, and the temperature of the seat. It also allows the user to play video games, read e-books, and call friends on Skype. The press release didn’t elaborate on whether or not Skype’s video conferencing features are enabled; I sincerely hope that they are not.
Continue Reading →

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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