Mat’s Investing Blog

Number of times in 2008 that the S&P 500 closed up or down 5% in a single day: 17

Number of times between 1956 and 2007 it did this: 17

source: Harper’s Index

So far this year we’ve added two to the tally including today’s stupendous 6.37% rise and several more above 4%. While these bear market rallies and falls don’t worry me too much I am concerned that too many people are trying to time the market bottom with what could be disastrous consequences for their finances. I especially hope that people have not been buying on margin.

Fairfax (ASX:FXJ) advertises on its Commsec page that it “publishes 240 regional, rural and community publications, has a significant presence in New Zealand, an agricultural publishing business in the US, 9 radio licenses in Queensland and South Australia and metro newspapers in Sydney, Melbourne and Canberra”. This would be quite an astounding achievement if it was the 1960s. Unfortunately in this day and age with targeted advertising from Google, superb auction and job websites like eBay and Seek and a continually discredited and biased media the empires of old are dying beasts, especially the printed variants.

Financially things just aren’t pretty. One look at the balance sheet would cause any investor to do a double take. Cash flow is negative to the tune of $270 million and it’d be worse without the $350 million of new debt. Current liabilities are larger than the net worth of the listed vehicle with 75% of the current assets being of the intangible variety. As I don’t value intangibles in the slightest the current net worth of the company is negative to the tune of $1.5 billion. With $2.5 billion of debt and little cash left in the coffers it’ll be tough for the company to grow the book value for the foreseeable future. Instead expect more capital raises which will dilute shareholders positions and an expanding debt base with the obvious interest payments.

As a value investor the stock is terrible. Basically all you would be buying is the hope that it can turn a mountain of debt and a few key assets, like RSVP, into global vehicles. I feel sorry for employees who are making an investment in the company as at this moment it is worth nothing. The only thing they can be certain of is the money that has been placed in their bank accounts previously.

Now is Fairfax special in this regard? I’d suggest not. Magazines are being shuttered all over the world as advertisers find more effective mediums for their message. Newspapers and news stations are finding it harder to entertain while shaking the dogma of being politically biased. This is of course alienating advertisers and causing people to switch off in droves as the internet provides instant gratification. But what about the portals like bbc.co.uk, smh.com.au or washingtonpost.com? Unfortunately there has yet to be tangible proof that any of them can be profitable unless they truly get advertising right while keeping their overhead to a minimum. The latter will be the hard part though as staff demands are heavy and it will only get worse over time.

Sadly the heydays of the 60s and 70s where the newspaper was the only method of advertising your goods in a city are long gone.

It was a little earlier than I expected but the All Ordinaries has achieved the 50% fall in 1 year and 18 days. Here’s to hoping for another 50% from here!

When the stock market is rising the cautious few, the value investors and their kin, are allowed to be pessimistic without fear of hurting other stock markets players as no one is losing money. However, due to being cautious the value investors are also labelled as out of touch and are generally derided for not reaping the easy profits that are at hand. 

Unfortunately when things switch around, when the stock markets falls and the other players lose big, then the value investors must hide their euphoria as it would too easily offend. Every time the stock market falls we cheer on and all the while thousands of people are losing everything they have. If we speak out we are lampooned for being inconsiderate and cold but it is simply the way we play the game.

As a value investor it always pays to keep our emotions to ourselves.

Midway through last month I wrote about the levels of the Dow and S&P 500 and how they had basically gone nowhere for the last 9 years. 5 weeks later however and how things have changed:

11,433 - Dow Jones, 11th Sept, 2008

8,852 - Dow Jones, 17th Oct, 2008

I have an explicit rule that I can only ever put 5% of my net worth into high risk stocks. I classify these stocks as being in two camps: Graham style value stocks or unprofitable companies with a net asset backing that is higher than the current worth of the shares. Currently I own two of the latter stocks: ADL (ASX:ADL) & BBW (ASX:BBW).

ADL, or Admerex Group, is an unprofitable software company with net assets per share of 250% of its current share price. It ticks off a few of the rules I apply to stocks but notably has poor management, an overly complex product and is pretty badly unprofitable with its cost base growing faster than revenue. I however have discovered that its software is the best in the business and if the management were to be fired for mismanagement the company could very quickly attain profitability simply by focusing on key markets.

BBW, or Babcock & Brown Wind, is a fund containing a vast number of wind farm related assets all over the world. When I purchased the stock it was profitable but the market had valued the company below net assets making it a true value stock in the Grahamian sense. In this case the discounted price didn’t present a decent enough margin of safety for me but the simple fact that I could own a stake in green energy production made me purchase the shares. In fact, if the company can continue to grow as it has shown signs of doing then I may hold it for some time.

I’ve been fairly lucky with these two purchases this year. Combined they have grown 38%, to 7% of my portfolio,  but they could both just as easily vanish completely tomorrow. However, I’ll let you know in 12 months how they are going!

Note: I’m listing these stocks with the knowledge that you shouldn’t touch them with a 50 foot pole. I’ll never list my recommendations to earn money, aka my portfolio, but I will outline sure ways to lose it.