Agora Financial’s Rude Awakening

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Laguna Beach, California

• God, Cramer and the perils of being ahead of the curve,
• Buybacks vs. dividends: a curious showdown,
• Market secrets from sages and strippers and much more…

Eric Fry, reporting from the Sundance Film Festival in Park City, Utah…

“I’m a stripper,” a beautiful woman we’ll call “Mary” explained to your
editor yesterday. “And I’m good at it. So I make a lot of money.”

“Oh, that’s cool,” your editor replied, trying to seem neither judgmental nor
aroused.

“So I invest my own money,” Mary continued. “I don’t let anyone else do it.”

“Interesting…So you really make that much money stripping?”

“No,” she laughed. “I’m just kidding. I’m not a stripper. But I’m not kidding
about managing my own money, or about trading put options. I don’t trust any
run-of-the-mill financial advisor. They always lose my money.”

…Your editor met Mary at a pizza joint here in Park City, Utah. Mary and her
two companions were eating their pizza at one end of a table, while your
editor his colleague were eating their pizza at the other end. Eventually,
someone said something to someone, and then Mary asked, “Are you guys here
for the festival?”

“Yes,” we answered. “We’re here to see our friend’s film, ‘I.O.U.S.A.’”

[Note: To learn more about this groundbreaking documentary and its appearance
at the Sundance Film Festival this week, click on the following link:
http://www.agorafinancial.com/iousa.html]

“What’s it about?” she asked.

“Well, it’s about America’s runaway national debt,” your editor replied,
anticipating a look of boredom or indifference. Instead, Mary said, “Oh yeah,
that’s a big problem. I keep track of all that stuff. My main investment
source is the Daily Reckoning.”

“The Daily Reckoning?” your editor laughed. “That’s our letter!”
“You write it?”

“No, but I used to write part of it. Now I write the Rude Awakening.”

“Oh yeah,” she smiled. “I get that in my inbox every day.”

“My apologies.”

“No, it’s okay,” Mary assured. “I like what you guys do. But you’re almost
always early. So you made me lose a bunch of money buying put options too
early.”

“My apologies again.”

“That’s okay,” she said. “You’ve been right. Early, but right. Almost
everything you guys have been writing about is actually happening now, bit by
bit. It’s amazing…I like a non-mainstream viewpoint like yours. An ordinary
financial advisor would never say what you guys say.”

“Well, I’m glad you like our stuff,” your editor replied. “And being early is
probably better than being late, don’t you think?”

“I guess,” she said. “But it was frustrating for a while.”

Mary is right, of course. Being early to an investment trend can be very
frustrating…and expensive. And oftentimes, being early feels a lot like being
just plain wrong. But even so, being early – and a little wrong – is usually
much better than being late.

The sellers of dot.com stocks in 1999 may have regretted their sales in early
2000, as these stocks continued flying higher. But the early sellers did not
regret their sales for very long. By the end of 2000, most of the highflying
dot-com stocks had collapsed.

Being early to a new bull market can also inflict a bit of pain and anxiety.
For example, almost anyone who purchased oil stocks in 1998 would have
regretted their investment two years later. But if they had held on until the
present, they would be harboring no regrets whatsoever. And the early buyers
would have made a lot more money than the late buyers.

Unfortunately, an investor can never know in advance if he is early or late
to a trend. And he can never know if “much cheaper than six months ago” might
also be “much pricier than six months from now.”

During the first two trading sessions of this new week, bourses around the
world tumbled an alarming 8% to 10%. (Mercifully, the New York Stock Exchange
was closed). So the global financial markets are starting to look very
unstable and very dangerous. Is this the moment to buy? Or the moment to sell
even more? Only God and Jim Cramer know for certain…and Cramer won’t tell us
until long after the fact.

Mere mortals like ourselves have no idea if the markets will be up or down
tomorrow. We know only that the world’s finest investors tend to buy ‘em low
and sell ‘em high. One of the finest practitioners of this investment craft
was a man named Harry E. Singleton, as Chris Mayer explains below…

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Singleton’s Secret
By Chris Mayer

“Buy low. Sell high,” is not just an ancient Wall Street saying, it is also
the formula that made Henry E. Singleton a fabulously wealthy individual.

Henry Singleton was the co-founder of Teledyne. It was, like Buffett’s
Berkshire Hathaway, a conglomerate of many kinds of businesses. Singleton ran
the company for many years, from its founding in 1960 through 1986. His story
is rich in wisdom on markets and how to beat them.

Warren Buffett says Harry E. Singleton had the best track record of any
industrialist in the history of American business. That’s very high praise
from a guy who may be the greatest investor of all time.

In his book The Money Masters, John Train writes: “The failure of business
schools to study men like Singleton is a crime, [Buffett] says. Instead, they
hold up as models executives cut from a McKinsey & Co. cookie cutter.”

First, let’s take a quick look at that track record, and then we’ll look at
one of the keys to his success – what I call “Singleton’s secret” – and how
we can use that insight in our own investing. Teledyne went from $100,000 in
profits in 1960 to $238 million in 1986. Shareholders’ equity grew from $2.5
million to over $1.6 billion. Those returns, needless to say, crushed the
market over time – by a multiple of nearly four.

But what became Singleton’s signature mark was his pioneering use of the
stock buyback. A stock buyback is when a company buys back its own shares.

The wisdom of buybacks is pretty simple…assuming the stock is cheap. As
Warren Buffett wrote in his 1980 annual letter, “If a fine business is
selling in the marketplace for far less than its intrinsic value, what more
certain or more profitable utilization of capital can there be than
significant enlargement of the interest of all owners at that bargain price?”
Singleton did this more than anybody. When his stock was high, he used it to
buy other businesses. In fact, he bought hundreds of businesses over the
years. When his stock was low, he bought stock back.

Today’s CEOs don’t always get the playbook, though. They think regularly
buying back stock is a good thing, like paying a regular dividend. They don’t
seem to get that it works only if you buy back the stock at cheap prices.
Otherwise, you’re just throwing money away. Better to just pay your
shareholders a dividend.

During the binge of buybacks we’ve seen in the past few years, companies have
often made that mistake. First, look at the chart below and you’ll see the
surge in buybacks. It’s pretty clear that corporate chiefs preferred buybacks
to dividends in recent years:

As profits have grown, buybacks have too. Meanwhile, dividend payouts haven’t
changed much at all.

Leon Cooperman, an exceptional investor and founder of Omega Advisors,
delivered a presentation on Singleton and buybacks at the Value Investing
Congress in New York. Cooperman is a real enthusiast of Singleton’s career -
a “Singleton junkie,” in his own words. He’s spent a lot of time studying the
man and his methods.

Cooperman cited many examples of companies that routinely spend billions
buying back their own stock. Unfortunately for those shareholders, the stock
prices have subsequently gone down, flushing billions down the proverbial
toilet bowl.

The offenders make up a roll call of blue-chip companies: Microsoft, Intel,
Lexmark, Masco, Pulte Homes, Circuit City, Chico’s and many more. Countrywide
is one of the most egregious recent examples. It spent nearly $2 billion on
stock buybacks in the last two years. Countrywide’s stock price has since
lost 75% of its value.

James Grant, writing in his newsletter Grant’s Interest Rate Observer,
recently wrote about boneheaded buybacks in today’s marketplace. Grant then
paid tribute to Singleton when he wrote: “Henry E. Singleton, visionary
builder of Teledyne Corp., set establishment tongues wagging by issuing stock
at high prices and repurchasing it at low prices. People wondered what he was
thinking about. Our postmillennial captains of industry seem not to
understand, either.”

But just because most everyone seems to act like they don’t know what they’re
doing, it doesn’t mean that there aren’t some companies who get it and wisely
buy back stock.

Indeed, Cooperman mentioned one: Loews Corp. (NYSE: LTR). It’s a company cut
from the same cloth as Teledyne. Over the years, Loews has bought back a lot
of stock. But Loews has been opportunistic about how the company does it. In
this respect, CEO James Tisch has been following in the footsteps of his
legendary investor father, Larry Tisch. The nearby chart shows the average
prices Loews has paid for its own stock over the last 40-plus years.

Today, the stock price $44.00 – or about 9 times the average price Loews has
paid for the shares it has purchased. Shareholders who have held onto Loews
over the years have also done very well. Over the last 25 years, the average
annual return on Loews stock is 17%, versus only 11% for the S&P 500.

Today, James Tisch is at it again. Loews’ stock is cheap, and he’s been
buying back stock. In the third quarter, Loews bought $287 million worth of
its own stock. That brings the total up to 14.8 million shares so far this
year.

Lowes might not deliver investment returns as impressive as Singleton’s, but
it might be the best way for you to take advantage of Singleton’s secret.

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———————————————–

Rude Endnote: On this day, January 22, 2008, Rude closed with “Yikes!”

Cheers,

Joel Bowman
Rude Awakening