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A Huge Hint (Courtesy of Warren Buffett)By
Saturday, February 17, 2007
Warren Buffett's portfolio contains a huge hint about the one industry where you're most likely to find stocks just like the ones that have made him the second-richest man in the world. There are 36 different stocks in Berkshire Hathaway's latest form 13F-HR, released on February 14, 2007. A 13F-HR is the SEC form where Berkshire Hathway reports its stock holdings. Of those 36 holdings, 13 of them are financial services companies of one type or another. More than one-third of the time, Berkshire Hathaway finds what it's looking for in financially oriented businesses. That's a big hint for us as investors...Buffett wants to compound his money at arm's length from the taxman for the longest possible period of time. So he looks for companies that have the best chance of performing well for a long time, of fending off competition for as long as possible.
Then there's Automatic Data Processing, the company that processes America's paychecks. It earns interest by handling nearly $900 billion of other people's money before forwarding it to insurance companies and governments. That's called float, just like insurance companies have. The interest from all that float is pure profit. Berkshire Hathaway – due mostly to its insurance holdings – has around $50 billion of float to invest. Float is wonderful stuff. Neither debt nor equity, it's other people's money that they frequently pay you to take off their hands for an indefinitely long period of time. Float is another great thing you find in the financial industry. Last year, I learned of a money manager, Tom Brown of Second Curve Capital, who only invests in financial services companies. Brown gave a talk in Los Angeles last May about student-loan processor First Marblehead. Since then, the stock has risen from the mid-$20s to as high as $57. It's $49 now. Though the financial services industry contains many businesses with durable competitive advantages, it also gives you ample opportunities to earn big returns by investing at cyclical lows, when sentiment is negative. Money manager stocks got hit hard by Eliot Spitzer a few years ago, creating opportunities to buy stocks, like Janus Capital Group, at discounted prices. The catastrophe reinsurance stocks presented ample opportunities for outsized returns when Katrina took its toll a couple of years ago. Today, the subprime mortgage lenders are getting hammered. I bet there's at least one that's safe and cheap enough today to produce an outsized return over the next couple of years. J.P. Morgan shares fell a couple of years ago, as it digested its acquisition of Bank One. It was a good deal several months ago, trading just above book value. Today, it's at about 1.54 times book, and it still has room to move higher. If you're looking for publicly traded companies to invest in, it can be hard to know where to focus your attention. There are tens of thousands of possibilities to choose from. Where do you start? Well, one great place to start is with banks, money managers and other financial companies. If you spend time getting to know those businesses, it'll probably make you rich a lot faster than trying to find another oil or gold stock.
Market NotesTHE WORLD'S MOST HATED CURRENCY The world loves to borrow cheap money... and the Japanese yen is the world's cheapest. The yen's yield has been stuck at 0.25% since the early 1990s. So over the years, speculators have borrowed hundreds of trillions of yen and sold them for dollars and other currencies where they earn higher interest rates. Said another way, the yen is the world's most hated currency. To show you how extensive this trade is, I spotted this snippet from the Financial Times yesterday: "Households in Latvia and Romania have developed so much enthusiasm for borrowing in yen that the trend has provoked surprise – and unease – from central bankers half a world away in Tokyo." The trade-weighted yen is near its lowest levels in more than 37 years... Big Macs in Tokyo cost the same as they do in Pakistan. The last time the ratio of the yen versus the British pound got stretched this far was in 1998. Its value relative to the pound rose 37% in the following two years. As you can see from this week's chart of the yen vs. the pound, the yen's value is due to spring back. All that's left is to wait for the trend to change... then we'll go long the yen.-Ian Davis |
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