Andrew Hallam

The U.S. and International markets have dropped, on average, roughly 5.5% over the past 5 days. …more info!

The five day chart shows the emerging markets (EEM) accounting for countries like China, Brazil, India, Thailand, have dropped 6.5% in just 5 days.
 
It also shows the U.S. market, having dropped nearly 5% and the first world International markets having dropped roughly 6.5% in the same 5 day period.
 
I hope that they continue falling, because if fear settles in, then selling could precipitate more selling–which will knock prices down further.
 
Market declines are long term opportunities for patient people.
 
New Investors:
 
You have each seen your personal holdings with the club rise.  For those of you who were able to get your money in by June, you have seen your profits increase by 25%.
 
But your confidence needs to come when the markets drop. That’s when the seeds of wealth are sown.

It’s like buying canned goods at a supermarket.  We know that over time, like the stock market over the past 200 years, they will rise or increase in price.

When there’s a massive sale, we want to load up our carts with canned supermarket goods.  The canned goods may temporarily get cheaper in price, after we buy, but that shouldn’t matter to us.  More than 200 years of history shows us that the prices of these canned goods will rise over time.  If we know that we’ve paid a cheap price, we should be satisfied, and not get caught up in the intoxication of the markets (which nearly everyone does).  And if the price of those canned products decline further after we’ve bought them, we….surprise—buy more of them.

If the markets fall heavily, it will be like a moment of truth for our club.  We’ll need to have the nerve to deposit money so we can buy at wonderfully discounted prices.  Ignore what you see on television.  Ignore what you read in the papers.  Ignore what you read on the internet.  These industries make money based on “viewership”—so they capitalize on people’s emotions.   If you take investment advice from CNBC Squawkbox, you’ll be thoroughly confused, and you’ll go broke in a hurry. Keep track of what they say for a while and you’ll see what I mean.

 Let’s tackle the man who’s probably the most famous television stock prognosticator of all:  Jim Cramer.  Host of CNBC’s Mad Money, the general CNBC viewing public are fooled into seeing Cramer as an investment guru who can help you get rich.  But if you had listened to his top picks and predictions of 2008, the indexes would have hammered you.  I can’t imagine a professional money manager keeping his job after results like this: …more info

David Swenson, who may be history’s greatest long term endowment fund manager refers to Cramer as an investment “Anti-hero” who would melted away investors’ portfolios, if they had listened to him rant about the wealth producing phenomenon of tech stocks at the start of the millennium.  In February, 2000, he recommended buys in Cisco and Yahoo!, among an indiscriminate slew of other tech companies.  And with a vulgar pelvic thrust, he was suggesting that Berkshire Hathaway shares, at $45,000 a share, were “ripe for the banging”—recommending that investors short the stock.  That would have been ugly for anyone listening, as those same shares trade above $100,000 today.   In fact, he regularly hammered old economy stocks as yesterday’s news. 

But he was wrong.

As for Cisco, it dropped from more than $80 in 2000 to about $25 today.  Yahoo! dropped from more than $100 a share to roughly $15 today.  Cramer isn’t good for investors’ educations.  But he still commands top ratings and likely a huge salary from CNBC.

Barron’s concludes that, “the credible evidence suggests that the telestockmeister’s picks aren’t beating the market.  Did you really expect more from a call-in host who makes 7000 stock picks a year?”

Cramer also has a “real-time personal portfolio”, the services of which can be bought for $400 a year.  The average annual return from January 1, 2002 until January 1, 2007 was 4.9%, for a total return of 27.68% (See The Dick Davis Dividend, Dick Davis, pg.202, 2008)

During the exact same time period, our investment club made 10.3% per year, for a total return of 63.26% compared to 27.68% for Cramer’s elite, fee-based information.  And because our stock turnover is lower than his (a lot lower!) we would have pulled much further ahead, in after tax profits.

Anyone getting his rapid fire advice from television would be disappointed to know that Cramer’s TV calls haven’t done as well as his fee-based newsletter has.  And they’d be even more disappointed to know that a little Vancouver Island based investment club has put Cramer’s returns to shame.

Are we great, or is Cramer just a product of the media?  It’s the latter, of course.

Back to the recent market activity:

The markets might not drop further than they already have over the past five days.  But we can allocate fresh money today, at reasonable prices, if you have money to deposit.  What I’m trying to say is that we shouldn’t try “timing” our deposits.  If the canned fruit is selling at a fair price, we buy some.  If it starts selling at a ridiculously low price, we back up the truck, and load up.  If it gets cheaper still, we bring in the mother ship.  We ignore magazines, the internet, television prognosticators and newspapers.  And when we look historically at the best recent times to buy during the past decade (after 9/11; at the beginning of the Iraq war in March 2003; during the economic crisis of 2008/2009) the financial media were nearly all, in unison, scared to death and advocating further declines ahead.

You pay a high price in the stock market for a rosy consensus.  Money isn’t made in the markets when everyone feels good about the markets.  The seeds of wealth are planted when the outlook looks the bleakest.

The U.S. stock market has just had its biggest two day drop since June, falling more than 3% in three days.  Berkshire Hathaway shares, on the other hand, have risen roughly 7% during the same time frame.

Here’s why:

Berkshire Hathaway bought Burlington Northern Santa Fe railroad in November. …more info

Choosing to pay for the railroad (they bought the entire railroad) in cash and Berkshire stock, they were left with a potential dilemma.  Let’s assume that you owned $3000 worth of Santa Fe stock.  Well, you wouldn’t have the option of being bought out in Berkshire shares because Berkshire Hathaway’s cheapest B shares were trading at roughly $3,200 each.  As a result, you would have to take cash instead Berkshire shares.

Buffett felt that this favored wealthier Santa Fe shareholders, which he didn’t think was fair.

For this reason, he decided to “split” Berkshire B shares 50 to 1.  This means that if you owned 1 Berkshire share at $3,200, you’d now own 50 of them at $64 per share.

The end result is the same: you’d still own $3,200 in Berkshire Hathaway shares.

Long term, this is a non issue.  A company like Berkshire will trade at or close to its intrinsic business value over time.  If the business’ profits increase by 300% over the next 15 years, the stock price will likely do something similar.

Short term, as mentioned at the start of this post, Berkshire shares have jumped 7% in two days.

Why?  There are a couple of reasons:

1. Most investors don’t understand how stocks work.  They think that Berkshire shares are now cheaper.  It’s hard to believe, but the average person believes that a $10 stock is cheaper than a $100 stock.  But you know that a stock’s expensiveness is related to how many shares are on the market and what the business’ earnings are.  Berkshire IS NOT cheaper than it was two days ago.  Yes, today it might trade at $72.72 per share. … more info 

But it’s more expensive than it was yesterday, when it traded at around $3,300 per share.

Imagine someone selling you something at a grocery store, and they say, you can pay me with twelve one dollar bills or one ten dollar bill.  Most stock investors think that twelve one dollar bills is a better deal.

 2. Because of Berkshire’s class B stock split, it will now have a higher amount of trading volume, and as a result, will likely meet requirements for acceptance into the S&P 500 index.  It’s not like this is a coveted club Berkshire has wanted membership in, but it’s likely to be entered.  As a result, S&P 500 index funds will have to buy Berkshire shares to add to its index.  This will temporarily push the price up.  The 7% increase in Berkshire’s price is a result of those likely “anticipating” these future purchases.  The speculators will likely sell as the indexes buy Berkshire, thus stabilizing the price.  Playing games like this isn’t recommended, because stock prices, short term, are nearly impossible to figure out.

Your accounts—and how this might affect you:

Long term, this won’t have an effect on Berkshire shareholders.  But if you look at your brokerage account statement, you might notice that your brokerage has not kept up with the stock split.  My brokerage just hasn’t kept up with the split.  Likewise, yours might not have either.  So if your online account suggests that its value has dropped significantly, take solace in knowing that it hasn’t.

Two months ago I had surgery for bone cancer, where 8 cm pieces of three ribs were removed, as well as a piece of my spine.  Here’s a post-surgery update.

First of all, a big thank you to everyone for your superb support, generosity, well-wishes and great humour.  It has helped me a lot over the past two months.

Yep.  Today is two months to the day that I went under the knife.

People have asked me if I see the world in a different light after getting cancer.  The answer to that is, “yes” and “no”

I’d like to say that I’ve been flooded with profound visions of wisdom, but I’m still no smarter than I was before.  Maybe I’m just more aware of the source of my inadequacies and idiosyncracies.  During a cancer CT scan, I was recently shown that I have a harmless hole in my brain—left, front temporal lobe.  That explains a few things, don’t you think?

Anyway, what are the profound thoughts of a guy dealing with torso swelling, missing ribs, cancer fears and an abridged spine?  Here’s one:

I went to a place, here in Singapore, looking for organic spinach and ludicrously expensive organic blueberries.  Passing “John’s Bar” I saw a group of guys that I couldn’t help but stare at.  They were expatriate guys smoking, drinking Guinness, and eating greasy fish and chips. 

 And the bastards were old.  I’ve never wanted to smoke, drink Guinness, and eat greasy crap before, but I wanted to join those guys.  I wanted to be one of them.  “You lucky sons of bitches,” was all I was thinking.  You’re old.  You look like crap.  You’re not dead.  And you don’t care what kind of garbage you put in your bodies.  And it made me laugh.  Loudly. 

 And they looked at me.  One scrawny Keith Richards wannabe  gave me the “You want a piece of me?” look.  Damn, that bugger was still defiantly snarly enough to visually threaten an ectomorphic  “cancer survivor” in a spinal support vest.  That kind of guy doesn’t give a crap about anything, and for a few minutes I wanted to be that guy.

Is that profound or totally wacked?  It must be the hole in the brain. 

Anyway, I am feeling much better.  Today I had an x-ray and the fluid in my lungs has finally dissipated.  My scar is long, but it’s very clean.  A lot of flesh in my back was slightly re-located, but I have a great range of motion and under the circumstances, decent strength.

 I go to a physiotherapist regularly, and I’ve been diligent about doing the exercises at home as well, with an emphasis on strengthening my core muscles and some specific structurally important muscles in my back.

I found that I can walk on a treadmill on a high incline, so I’ve been doing that four times a week—and I’ve been pushing myself.  I think the uphill “marching” really helped to clear my stubborn lungs of the fluids that were threatening to infect them.  My lungs were supposed to have cleared after a handful of post-surgery days, but 4 weeks later, there was still pooled fluid in them, and if things weren’t clear on today’s x-ray, they were going to put a catheter in me. 

On a few social occasions, when I don’t want the not-so-subtle Asian community staring at me and asking questions, I venture outside without the spinal brace on.  I’ve been asked, “Why you wear that?” more times than I can count.  And I’ve started to lie–mostly about a car accident I was never in, and one time, I convinced a local guy that I got attacked by a shark.

I’ve found that when I tell the truth about cancer surgery,  most people’s expressions tell me that they’re talking to a dead man.  It’s a strange feeling.  And I think beyond myself when this happens.  I think of all the other people who have or have had cancer, and the hope and encouragement that I’m sure they’d much rather see in the eyes of other people.

The fact that I can venture out without a spinal brace is encouraging on so many levels, of course.  It means I’m getting better.   Yesterday, with the spinal brace on, I jogged 200 meters, and it didn’t hurt.

As for the cancer—it isn’t coming back. 

 I’ve also made an ambitious goal to enter the JP Morgan Corporate Challenge at the end of April, and finish in the top 20.  You can blame the delusion (if you think it is one) on the hole in my brain.

Even if I do crack the top 20, I’ll be the slowest defending champion in the history of the Singapore event.  But, no matter how I’m placed, I’ll probably be crying as I run the final kilometre.  Just thinking about it makes me misty-eyed.

Here is the article I wrote about the 2009 Singapore JP Morgan

 I love applying one of Shakepeare’s quote whenever it suits me:

“Nothing is either good nor bad, but thinking makes it so”

And I think everything is great.

Thank you,

Andrew

A five year old girl named Star is brought up on a Bohemian island where the locals make their own clothes, where neither men nor women use razors to shave and where nobody wants to mask the aphrodisiac quality of good old fashioned sweat.

Unfortunately, despite how appealing this might sound (especially at tightly congested town hall meetings) it isn’t paradise.  Butterfly doesn’t want Star (her young daughter) growing up in a dump.  Wanting Star to respect the environment, she convinces her to spend 20 minutes each day, collecting cans and trash from the side of the country roads.

Butterfly takes Star to the local recycling depot and collects $1.30 in refunded cans and bottles.  Although a Bohemian at heart, Butterfly’s no provincial bumpkin.  She recognizes that if she convinces Star to earn $1.30 a day from soda pop bottle returns, she can invest the daily $1.30 to make Star a millionaire.

Butterfly doesn’t take any special risks with that money.  Putting it into the U.S. stock market, Star earns an average of 9% per year (which is slightly less than what the stock market has averaged over the past 80 years).

Fast forward twenty years.  Star is now 25 years old, and although she no longer collects cans from the ditch, her mother insists that Star sends her a $41 monthly cheque (roughly $1.30 per day).  Butterfly continues to invest Star’s money.

Living in New York City, Star lives “the good life.”  Working as a lawyer, she drives a BMW, dines at gourmet restaurants and blows the rest of her significant income on clothing, theatre shows, expensive shoes and flashy jewellery.  But other than the stash her mother invests, Star is completely broke.

For another 15 years, Star and her best friend Lucy—who she shares a condominium with– live their flashy lives on the edge.  They’re a long way from Star’s granola upbringing.

But Lucy figures something out: “Star, we haven’t saved any money for our retirement.  If we keep going like this, we’re going to be working full-time until the day we die.”

Not wanting to think about retirement, the 40 year old Star still wants a lifestyle like Paris Hilton’s slightly poorer cousins.

Lucy, on the other hand, starts investing $800 a month for her retirement.  Over time, she ends up making the same return that Star makes on her “pop can” money:  9% per year.  But she’s investing far more than Star, who’s still mesmerized by the good life.

Fast forward 25 more years.  Star hasn’t invested any more than $1.30 a day.  Now 65 years old, she has no idea how much her mother has squirreled away from this modest contribution.  But Star takes out a calculator and finds that she has invested, over the many years, a total of $28,800.

Star didn’t know anything about compounding interest, so she figured that if her mother had invested $28,800 of her money, then Star would have more than that in her account—maybe double or triple that—but she really didn’t know.

Lucy, however, invested far more than $28,800—despite starting years later than Star.  Lucy was responsible enough to invest $240,000.

But there are a couple of things we can’t forget.  Warren Buffett is fond of saying that Noah didn’t start building the Ark when it was raining.  Compounding interest works miraculously when people get on with their investing, instead of procrastinating.  Call it the Noah principle.

1.  Star didn’t invest as much, but she started earlier, following Warren Buffett’s “Noah Principle” (Star invested $41 a month for 60 years for a total of $28,800 invested).

2.  Lucy invested far more ($800 a month for 25 years for a total of $240,000) but she started later, ignoring the “Noah Principle”.  Lucy and Star both made 9% per year from the stock market.

 So what were the eventual sizes of their accounts?

Mastering the Noah principle, Star’s mother, Butterfly, proved that her daughter could retire a millionaire, despite her irresponsibility with money.  The Noah principle plays favourites only with those who understand and apply its magic. 
  
 You might have missed the opportunity to start investing as a 5 year old but the earlier you start, the better.   Starting early can give you the luxury of investing far less money over time.  And the less you put towards investments, the more money you can spend, throughout your life on luxury items – if that’s what floats your boat.