if he had one million today he wouldn't be able to get large positions in stocks he's been
getting, so diversifying wouldn't be as profitable as it is with 100 million. but thanks
for your insight into how buffett operates....since i've been watching large capital
companies buying in this market....why "sell" is my question. this market is buy and keep
on buying as it dips...just look for best of breed.

1/16/2008
We have reopened the newsletter due to the bank stock crash for 2008:
Today CITI bank reported their biggest loss in 192 years. That about says it all.

1. FIRST FINANCIAL HOLDINGS: (FFCH $21.99) operates as the holding company for First
Federal Savings and Loan Association of Charleston. With over 55 offices in both South
Carolina and North Carolina, they have one of the best franchises in their markets, more
important very solid asset quality, which is all that ever, really matters. Many of their
top people are over 60 and have been their 20 years +. The only reason to own a bank stock
the next 1-2 years will be for takeovers. This is one that could get sold for more than a
50% premium to today’s prices. You get a 4.5% cash dividend while we wait. They are a $2
billion powerhouse with strong management, great assets quality (did we say this already).
Their book value is $16.00 has to be worth $32.00 in the worst case. In 2 years, once this
crash is over, they could get $39.00+, $32.00 is a low ball price for today’s market.
There is still a large “short” position almost 8% that they will have to cover one
day. Trades plenty, but wild, use limits as always. Their full earnings report will be out
this week. You probably can wait for that report to buy, but we would just average in from
time to time under $22.50 over the next year. They have 11.65 million shares outstanding
and insiders own over 5%. Look for the bank to buy back a lot of stock starting next week.
Downside should be limited to 10% and upside 50%+, make this a top holding today.
Headquartered Charleston, S.C.


We really don’t see much to do yet other than be long, TCB, KEY, WTNY, FITB, and FMER
out of the money call options one year+ out if you can handle the risk. Buy them on big
down days only. If they double in the short -term sell them or let half ride. While so far
this has not worked the past 3 months other than for trades, we are now 20% lower on most
names. If they do go down 10%-20% more, then we would buy the stock, only. Also, if the
fed does something crazy, you could get a double overnight on all these options. They did
it once, will they do it again? I would say yes. The Fed has dropped the ball for sure and
we are in the middle of one of the worst bear markets in over 15 years. This is nothing
like 911, more like 1978-1980 or 1990, hopefully not 1930.
I still feel foreign buyers will come in and take some of the large regional names, if you
want to buy the stocks and average down for the next 2 years then do it, starting sooner
than later.
KFED can be bought in size under $8.00 all day long also. Downside has to be almost zero
from the $8.00 level.
We have sold all PRK today. Their report was very bad and unless they sell, you won’t
make money for 5 years with them. We had thought they were run by no-nonsense straight up
guys, but going into FL really thru them off course. Florida will take years to recover
(5-10), most other real estate markets will take 2-7 years to get an up tick in prices.

Last but not least, COBH. If they don’t change their name this quarter, look for a sale
soon at $33+ and STBK also should be sold. Both will need capital with the growth ahead
since the CBH merger last year, which has given both new life. CBH killed the market for
STBK and now they can shine again, both are very solid with their asset quality and
insiders own a ton on both and are getting old, and many have been with both banks 20
years +. AMRB, a bank that is very solid, but in CA, if you want to gamble buy it under
$16.00 only, and all in under $13.00, worth $24.00+ in their asset quality holds up, we
think it will.
AROW and HARL have held up due to their great asset quality. Both can be sold now and put
to work in FFCH or other ideas as they come up if it is not a takeover candidate we do not
want to hold it any more, tough times are ahead.

Only the best banks will get sold the next few years, at premiums the bad banks get
take-unders, we don’t like them.
Florida “shorts” like IBCA, BPOP and CNB have worked well, but their time is over for
now, we feel.
There were two deals this month in 2008 already, MFBC and SHBK, both got good prices.

Douglas Hughes/ BankNewsletter.com : 1-888-814-7575 1/16/2008

I disagree with one statement, that Warren Buffett looks at a "broader universe of stocks
than the average investor." Actually, the opposite is true. Buffett limits inquiries to
only those companies which he understands. His portfolio of companies are varied, no
doubt, but there are entire sectors (technology, health, cyclicals) which he will not
invest in. Generally speaking, he sticks to financials and services, with some minor
deviation. He certainly would NOT look at small stocks! Why? Small companies do not give
him the ability to project future earnings with confidence. Historically, he has preferred
stocks that are in the $5-$10Billion range, and in his words, "the bigger the better." He
also would not look at foreign stocks, because of transparency issues (and perhaps
management concerns as well).
What to look for?
1. Equity to asset ratios of greater than 15%
2. Debt to equity ratio of well under 1.0
3. Profit margins of greater than 10%
4. When considering 1-3, make sure they have at least a 5 year track record of
consistently strong earnings and the above standards.

Of course, this is a simplistic view of his thinking. Entire books have been written on
the subject. But, most important, is not identifying great companies--that is easy--but of
determining what is a good price to pay for it.

My problems too: how to find and research stocks. So much data to learn and understand. I
appreciate your insight about what you need to know. I am working (slowly) to learn more,
but until I gain more understanding, I will rely on the knowledge of trustworthy sources.
Smartmoney was one of the first I found reliable and CNBC, Louis Rukeyser then Cramer was
a complete God-send. This site is also amazing: I have chosen a couple of the
recommendations suggested for my portfolio and played some of the short squeeze stocks and
the pay-off is great. And it is just great that James A responds to peoples' questions. He
is just a smart, down-to-earth guy.

I would feel better if I was making my own choices beginning to end, but I do have enough
understanding to wade through recommendations to pick ones that are the strongest.

I am currently looking into options with Lenny Dykstra's "deep, in-the-money-calls". A lot
to learn, but I think that is a really good way to make this work for us. I know nothing
of merger arb but I'll keep my ears open about that.

Good luck. Enter the contest: cnbc.com

Last edited on: 01-31-2007 09:38 am

Sophia,

Like most small investors, I am probably investing too much like a large mutual fund. I
own mainly well known, widely followed stocks, and I use primarily a simple long-only
strategy. I know that I can do better.

I'm just trying to think through what Buffet might do if he were in my shoes. What's
always impressed me about Buffett is not just his evaluation of stocks but his search
strategy. He's looking at a much broader universe of stocks than the average investor.
And he's considering a wider range of trading/investing strategies.

These are some of the areas where I suspect Buffett might make changes to my approach:

1) look more at smaller stocks (although small stocks overall have had a run here)
2) look at foreign stocks (I'm still looking for better ways to research foreign stocks)
3) look at local stocks (I think some of Buffett's early successes were in the Omaha area.
There must be a local advantage that I'm wasting.)
4) consider exotic strategies, like merger arb (maybe as a start, I can look at the
cash-only mergers for S&P 500 companies)

So, I need to learn new trading strategies. And I need cost effective ways to broaden my
search universe.

So bambam, what prompts your inquiry? It is interesting. Are you going to try the CNBC
investing challenge? Might as well. There is no doubt that investing style changes with
portfolio size just in simple ways of how long one can tie up money waiting for a stock to
perform, etc. Thanks for the link.

Here's an interesting quote from about.com about the arb that occurs during voluntary
liquidations:

"According to Christopher Ma, William Dukes and R. Daniel Pace in Why Rock the Boat? The
Case of Voluntary Liquidation (The Journal of Investing, Summer 1997, p. 71), %u201CA 1997
study of voluntary liquidations between 1961 and 1985 found that the average annual return
for investment in securities from the date of their liquidation announcement until their
final liquidating distribution was 44.4%. On average, the liquidation securities
substantially outperformed the general market, shareholders recouped their initial
investment within one year and the liquidation process was completed in just over two
years.%u201D"

Buffett actually pulled the "arb between their stock price and their liquidation value"
strategy just recently with CDCO.

But Buffett doesn't agree with pure Graham theory anymore, and arbitraging was a more
profitable enterprise a half century ago, so its highly unlikely he'd be successful at it
with only $1million to invest in such an endeavor. More important, the tools necessary to
consistently succeed as such things are likely beyond the cost of an individual with
$1million to invest. If, however, you could spend millions to make your $1million grow,
perhaps that would be a possibility.

I'm not sure thats completely true. When Buffett was smaller (his hedge fund days in the
late 50s and early 60s) he primarily made his money from merger arbitrage and relative
value arbitrage. Even when he played with slush money in his personal account he would buy
penny stock REITs that were liquidating where there was a definite arb between their stock
price and their liquidation value. At heart he was a Graham-ite. When he made the
statement that Bambam refers to I tihnk he was primarily referring to merger arbitrage
techniques.