He may be making some attractive offers today given the huge fall in the indices. I’ll take a look over the next days/weeks and tell you what I find.
I love it when he goes manic on us.

I’ve just completed a fine read, called Finding the Next Starbucks: How to Identify and Invest in the Hot Stocks of Tomorrow. The title explains the crux of it, and author Michael Moe does a great job demonstrating the important principles and practices that can lead investors to long-term, outsized gains.

The most important message from the book is to look for and study the “Four P’s” — people, product, potential, and predictability. Moe points out how nearly every company whose stock has risen 30%/yr for ten years shares remarkably similar characteristics in regard to these four qualities. He teaches the reader how to evaluate these elements, and takes his audience in depth on how to spot them in the first place.

My only criticism is that the book can be at times repetitive, but, after all, most of the crucial points in the book bear repeating.

I won’t spoil too much of the book, as it should suffice to say that it’s a quality read for just about any investor. Check it out and buy it: here.

Thanks to Dave who submits the following:

One industry that has taken a plunge is Puerto Rican banks. The highlight would be the stock of Doral Financial (DRL) whose chart resembles the flight of Icarus. I don’t know the full story (I think few do) of what happened to Doral. A few years ago, this was regarded as one of the fastest growing banks in the US. But they got into trouble by overestimating their income from interest only strips, which are the coupons from mortgages dealing only with interest and not principle. They sold them to other PR banks but had an off balance sheet agreement in which they guaranteed payment. Hence these were not true sales and so the accounting was improper.

So Doral went down and had to restate massively and take massive losses. This enveloped most other banks in PR including R&G Financial (RGF), W Holding (WHI) and others who had to restate but generally by much smaller amounts. Most of their stock charts look similar to Doral’s. Morningstar analyst, Ryan Batchelor, refers to Doral as “toxic waste,” not exactly a glowing endorsement. Yet overall, these banks are all undercovered and shunned by Wall Street.

I am not sure if any of these banks offer great investments, but I suspect that there is gold among the garbage for the enterprising investor who can do his own work. For example, I personally think the best bet may be W Holding. This is a particularly impresssive operation. It has among the lowest expense ratios in banking anywhere. The CEO Frank Stipes seems to be a fantastic motivator and quite a visionary. This bank, perhaps surprisingly, is at the forefront of banking technology. It has been in business since 1958 and has never had a loss. Few banks anywhere can say this. It is well capitalized and pays a nice 3.5% dividend. It is on the lookout for aquisitions both in PR and the US and is not struggling like its weak competitors.

Their main problem seems to be that the yield curve is flat, supressing their net interest margins. That will someday change and it isn’t really their fault anyway. When this changes this bank will grow very rapidly. I have picked up some shares recently, well below book value (or 1.2 x tangible book including preferreds.)

Another more specualtive play is RGF which will soon be delisted. Still, it is probably selling below tangible book value. It hasn’t filed in a while so this requires the investor to make a probability calculation of the book value. I believe it is selling for less than book now. Still, you may be getting excellent odds to make this bet. You can be assured that no one on Wall Street is buying this for their clients at any price. If it sells for 30% lower in the pinksheets, I will be picking up shares.

Note: The author, Dave, owns shares in W Holding.

Two words on minimalism.

First, I’ve changed the design of the header of the page to simplify it a bit. I’ve added an extra search feature to the top of the site for convenience.

Second, this simplicity got me thinking: if you haven’t noticed, I tend to be minimalist when it comes to my portfolio. I own around 3-4 stocks at any given time, and most are highly simple ideas that don’t take rocket science to figure out. For my purposes (and I argue for most individual investors purposes), this is the way to go. It enables you to keep track of fewer variables (that is, “things”) and, while it may increase short term volatility, for the long term investor, it enhances profit potential by not “diluting” your best ideas and allowing you to focus on important, knowable “things.”

Just some late-night investing ramblings to ponder.

There’s a branch of psychology dedicated to the study of emotions and how we perceive, understand, and use them in our daily lives. The concept, which originated almost jokingly by Yale professor and current dean, Peter Salovey, along with two colleagues, has garnered international media attention since the 1990s. For us as investors, “EI” as it’s known, holds important lessons.

The standard view of emotions, both as the ancients felt and as many investors feel today, is that they are maladaptive and serve little purpose. The standard advice in investing is that one should never get too “emotional” about a stock — that doing so will lead to irrational decisions, like holding when you should sell, for instance.

In many cases this may be sound advice. But I would argue that investors, rather than attempting to rid themselves of emotion entirely as some have contended, should focus on learning from the theory of emotional intelligence, which maintains that emotions serve a purpose and can be understood and used to facilitate decision making. Rather than trying to ignore emotions, investors should try to understand them in order to gain greater insight into not only their own investing psyche, but also the company’s and the market’s.

It is better for an investor to know why he or she feels some way about a stock than simply to know that he or she feels this way and that this is patently “bad”. In some cases, the emotion may be maladaptive, but in others it may be telling you something important about a company in which you’ve invested. Yet, the only way to know is not to ignore the emotions.

For instance, an investor may feel his stomach drop at a sudden price plummet or his spirits rise when an unexpected surprise leads to a spike in price. These emotions may well serve little purpose — for in most cases it will be better for the investor to remain detached from random price changes.

Yet, now imagine an investor has followed a company for some time, and the company releases a highly disappointing 10-K. It seems the business has begun faltering in earnest, and the investor is quite upset with this difficult fact. While it sounds like great advice to remain detached, the simple fact of the matter is that it may be highly difficult if not impossible to do so. On the one hand, the company is one the investor has admired for some time and feel a certain liking toward. On the other hand, the 10-K and loss of value are things that upsets the investor. Instead of ignoring the emotions, the investor would be best served by taking time to understand these conflicting emotions to help in the decision making process.

Furthermore, understanding EI can help investors in understanding customers, management, and brand image. Knowing what motivates people — what drives emotion –  can assist investors in getting a better hold on how a company is building its brand image, how management is rallying and incentivizing its human capital, and even how other investors feel about a company and why. There is no doubt that many great companies create long-lasting success by evoking strong emotions and loyalty in their customers and employees.

Anyway, this was just some food for thought as I take a break in studying for my exam in a class called — you guessed it — Emotional Intelligence. Wish me luck.

As I mentioned in my last post, I still believe LENS is a buy (or at least a hold) in the face of its lackluster quarterly results.

I’ll keep the reasons brief and in list form.

1. LENS still trades around half of readily salable assets. Its inventory position has improved as has its cash equivalents. There remains little to worry about on the liability side.

2. Despite widening since last quarter, losses have still narrowed year over year. This is clearly not the optimal scenario, but I find it little to worry about. Exitting the digital camera business was a necessary, smart move, and while it has hurt sales, it will continue to add to the bottom line and improve cash flow. SG&A continued to fall year over year (by 41%) and compared to last quarter (by 13.8%), a positive sign.

3. I now believe there are several possible catalysts to bring the price more in line with book value. To me they are a) a buyout by an outside investor or management, b) the potential exit of competitors from the unattractive SUC camera market, a boon for LENS, which might benefit from greater sales, lower costs from more volume, or, in the best case, a combination of both, c) improved margins leading to big upside given such a low price/sales ratio, and/or d) heavy institutional buying or general improvement in sentiment.

Naturally, for every favorable factor there is an opposing risk. I find those to be:

1. Management can waste money on risky or unprofitable ventures, thereby eroding the still strong balance sheet.

2. Sales are still highly dependent on a very small number of customers, exposing the company to the possibility that one or more stop purchasing SUCs. The company needs to pursue relationships with new customers if it is ever to meaningfully increase sales, and such a task is always easier said than done. Also, there is a limit to how much a company can cut costs before it simply can’t go any more, and there is always the risk that cost cutting measures simply won’t be enough to eek out profits.

3. The probability of any one catalyst driving up the price remains small, though in combination I still feel the chance is meaningful.

Basically, my stance on the company has changed little from the quarterly, and the basic thesis remains in tact.