Don’t do it.  There I said it.  But for fun, I sometimes look around the internet for what goes as financial advice.

See this thread at Bogleheads.

Here a poster asks about an investing formula she found in a book [great book by the way].  The reactions are of course predictable because the forum she posted it on has an ideology of indexed mutual funds and asset allocation formulas.  Anything else is “nonsense” in their world.  But note, the people responding have no clue as to what the strategy is.  They assume much, but know little.  Fact is, the formula in the book [and supported by a web-site] is a value investing formula they could have been lifted off the pages of Ben Graham’s investing books that spawned the greatest investors of the 20th century.  Not that I am saying everyone should follow “The Magic Formula,”  but at least understand the stuff you are criticizing .  The worse part is this web site is suppose to be one of the best places for financial investing advice!

Better to educate yourself over time, read widely in the subject, give greater emphasis to people who have in public [Like Greenblatt the author the book and Warren Buffett another well known value investor] made superior returns, and come to a well earned understanding of investing than go to a web site [any website including this one] for your advice.

Postscript:  I see someone has actually posted some truth on the post at Boglehead.  Pretty much shut down the snarky comments except for a couple of folks who can’t see the truth because they are “true believers” in the bogglehead strategies that says no one can beat the market!

The third equity I own is MMP, a master limited partnership.  Their primary business is the transportation and storage of petroleum products.  A simplification plan which is eliminating the general partner goes into place this year, which caused some costs to be accounted for this quarter.  Going forward the costs should be lowered.

The storage part of the business is doing quite well, while the transportation is doing well in gasoline, but not so well in diesel and aviation fuel.  It acquired a new terminal in Oklahoma and added the “Longhorn Line” which is around an  additional 700 miles of pipeline.  These capital acquisitions amounted to $272M of the $510M planned for 2009.

Of concern is the increase in debt of 50% over the last year mainly due to acquisitions that have not started producing [which should reach full potential in late 2010].  Decrease in dividend coverage from 1.2 to 1.1.  This means at current operating profits the dividends could not be increased.  However, the current environment is improving and as it improves profits should improve.  The additional storage and transportation lines will also increase profits going forward as they are brought on line and maximized.  There is also a large ethanol pipeline planned if congress approves backing of the debt.

Overall, I am happy with this investment, especially since at my cost the dividend yield is 9.4%.  I will consider additional shares in the future, but watch future revenues closely.

As my regular readers know, I own three different equities.  I commented on the largest ownership, BRKb a couple of days ago.  Today I will comment on third quarter results for HCN.

First HCN.  This REIT has performed admirably through the real estate issues of the last year and a half.  It has maintained its dividend payout of .68/quarter.  This gives me a dividend yield of over 11% on my cost.  Gross additional investments for the quarter were $156 M making it over $500M for the year.  It also raised $434 M in an equity offering in September which it used mostly to pay down debt.  The debt to equity ratio has been driven down to a very conservative 40%.  Outstanding debt with rates of around 7.2-8% were retired and some replaced with debt at rates of 5.9%.  The maturity of debt was also moved out several years, so there should be no problem with near side risk for debt.  Their is a $1B line of credit available.

Some properties were sold as per company strategy.  The company continues to lower the ratio of nursing homes and off campus MOBs in favor of CCRCs and on campus facilities.  The CCRCs did not perform as well during the last year mainly due to general real estate malaise.

Of concern is the lowering of Funds Available for Distribution which dropped from $.82 to $.72 compared to the third quarter of last year.  For the year it has dropped from $2.39 to $2.24 year on year.  This has driven the payout ratio to 91% for the year as compared to 85% for same period last year.  However, this result is due to the lowering of the leverage and the  using of funds for capital investments.  As I have stated before this is a conservatively run REIT, that aims for long term results instead of short term gains.  I feel comfortable with lowering of the leverage for the time being with the credit markets still impaired.  I also note that rents continue to increase and the quality of projects also continue to be improved.  The CCRCs I believe are the wave of the future and will improve dramatically as seniors are able to sell their homes into an improving real estate market.

I note that between 2008 and 2009 there will be an additional $2Billion in real estate owned for HCN, continuing its remarkable pace of 25% average yearly increases since 2003.

I will add to this position going forward as long as it stays below $47/share.  It is goes above, I will have to rethink any further purchases as it will be IMHO overly priced at that point.

Berkshire Hathaway reported late Friday its 3rd quarter results.  As expected its book value went above $80K to $81,247 per A share.  It is now trading at 1.26 times book value.  Its book value is now at an all time high.  Pretty impressive performance in the middle of a recession!

However, there is still much more upside potential with its operating profits not fully recovered from the recession.  Many of its businesses are still suffering from the effects of the recession with reduced revenue and profits.

Total earnings did triple from the third quarter of 2008.

Proving its critics wrong, is one thing, but driving its book value to an all time high in a recession is simply an amazing performance.  The future is really bright as we see slow improvement in operating businesses this quarter over the first two of the year.  Tremendous value is being created by the deals Buffett made in the last 2 years and the purchase of BNI announced last week should continually improve both cash flows and profits for many years to come.

I will continue to own and add to my shares of Berkshire going forward.

By the way, there is tremendous upward potential over the short-term for Berkshire, IMHO, and folks who have been sitting on the sideline should now strongly consider purchasing BRK.

Next post will go over the other two stocks I own, HCN and MMP.

Check this out.  Pretty Funny.

You all should know where I stand on this buy-and-hold idea!

Warren Buffett bought the balance of Burlington Northern Railroad [78%] this week.  As usual there is much chatter, most of it negative about the latest Berkshire move.  But the truth is this is classic Buffett.  He bought a well managed business, for a fair price.  Now much is made of his 30% above market price, but this is from people who have never bought a local business, let alone a $34 Billion business.

Does anyone out there think that railroads are suddenly going to stop being the transportation of choice for coal?  Or stop moving product around the country?  Does anyone think that trucking will be able to compete with the price of diesel where it is at or where it is going? Consider the railroad is profitable in a recession, how much cash flow will it produce as the economy heats up?

Just another reason to believe that Berkshire Hathaway will continue to double the returns of the S & P 500 Index.

Now, the other move was that it is splitting the B shares 50 to 1.  I am agnostic about this, but this move probably results in Berkshire being included in the S & P 500 index in the future.  So all those index mutual fund investors can get  some of those superior returns!

Commentary on Berkshire Hathaway

So you want to be an investor.  You better make some decisions up front.  One of those is choosing a style of investing.  Of course most people just start throwing money around and never think about this, but you should.  The two main styles are value and momentum.  Value investing, popularized by Benjamin Graham and his disciple Warren Buffett, looks for investments that have a history of consistent performance that can be bought for a fair price.  The thinking is that as long as the performance remains  consistent you can come to a fair price to be paid and wait until the investment can be bought for that fair price or even lower.  Negative emotions are your friend as negative market emotions drive down the prices of even good performers.

Momentum investors could care less about price or performance.  They rely on correctly noting the direction the price of an investment is going early into its trajectory.  Both positive and negative emotions are relied upon as momentum investors like the ability to sell short if the trajectory is down.  The key is hopping on the trajectory early and getting off soon after the trajectory changes.

Note, both these strategies require market timing, one by changes in momentum, the other by good pricing.   Now momentum strategies are very high-tech these days with folks  writing their own computer code to give the buy and sell signals to take their emotions out of the equation.  And proponents of both strategies have publicly disclosed returns and wealth that are impressive.

Now hear this, there are many folks that say that “market timing” doesn’t work, but the fact remains that is the only thing that works to create wealth.

For me, I decided over a decade ago that I was going to be a value investor.  2008 was a very good teacher for me.  I did not have a huge amount of $$$$ saved up to take advantage of the values that appeared like I should have.  That won’t happen again.  Fortunately for me, Warren Buffett did.  Early on I decided I would put much of my money into his hands to invest for me while I learned.  I often suggest other folks do the same.

Many times I find folks are reticent to put their money in Buffett’s hands, instead trusting in some indexing/mutual fund/asset allocating strategy dreamed up by some engineer/accounting/financial adviser/numbers guy who purports to have found the best risk adjusted way to invest.   To each their own, but until I find one of those guys publicly noted rate of return that rivals Buffett,  I will continue to do what I do.

Folks regularly question Berkshire Hathaway as an investment going forward [on this blog as well as all over the internet].

Watch this interview with Sokol, one of Berkshire’s CEOs and tell me what you think this tells us about BRK?  At 7min and 30 seconds it gets really interesting!

Here are a couple of financial truths:

You will never reach your goals by following the herd;

Already, the Wall Street crowd has put into place and started implementing their plan for your money going forward.  Have you seen the adds where they are working on your fear, your fading retirement hopes, etc.?;

It does you no good to become a do-it-yourself investor if you don’t also become a knowledgeable investor;

You can’t become knowledgeable by reading/following the same advice that failed you before;

Any strategy that doesn’t look at purchase price is bound to fail ie dollar cost averaging, no money down real estate purchases,  routine mutual fund purchases, etc.;

If you don’t have the inclination or the time to make investing a hobby, then don’t expose yourself to the stock market;

Investing is a game that is best played to win, not to become average;

Beware of a strategy that says that investing is easy;

Never put all your assets into one investment;

Always have reserves;

Diversify yes, but not by owning 50 or 100 different stocks or bonds;

Think income investing once you are 50 years old;