Kabirm, I am really digging the learning center! How many times can I thank you? Not
enough times! Take care, Missy

i forgot to mention debt/equity ratio, where we can see MER is leveraged still 15/1, which
is *not* value.

for value investors, id caution against using *just* P/B as a metric. on its own, it just
tells you current value of the company, not what they are able to do with that value.
unseasoned, inexperienced value investors tend to look only at this, and neglect ROE. if
you look at the brokerages for example, you'll see GS selling @ 1.8x tangeble book, and
MER @ 1.2x. if taken to heart only P/B, you'll fail to see real value here as you would
undoubtably pick MER as the "value" play (and you wouldve done it all the way down as P/B
of 2 or lower is seen as value)

however, GS has an ROE on a trialing basis of 25, and most recent quarter of 15, MER is -
41 and -33. so there is some real value in GS (if ROE holds up), but right now, until MER
turns around and has accelerating ROE, is a value trap (as most "value" plays are)

if you look at Buffett's holdings, many have high P/B like KO, but also have high
profitability metrics like margins and ROE

Last edited on: 06-08-2008 03:53 pm

Learning Center

*I take a good amount of time learning investing styles, some basics of investing ...i
take notes or copy notes from the article for summary reasons. i have posted those notes
with articles below..every week i will try to highlight 9-10 articles that i think are
very informative

1.
Make Value Stocks Work for Your Portfolio
-(http://www.thestreet.com/story/10420167/1/make-value-stocks-work-for-your-portfolio.html
?puc=lhhome)

a.

That's where a strategy of value investing can really pay off. Using traditional valuation
metrics like P/E, price-to-book value and enterprise value-to-EBITDA, investors should
focus on names that are less expensive than their peers.

b.Of course, as with any stock one buys, the company has to have potential catalysts for
the investment to work out. Without a meaningful catalyst, a stock that looks inexpensive
may remain underpriced for some time. With that in mind, patience is an important virtue
of value investing, as these stocks or sectors can sometimes take several quarters to
catch up with peers and reach their true full valuation.

2.
Risk Management: Learning to Fly-
(http://www.thestreet.com/story/10419934/1/risk-management-learning-to-fly.html)
a.Investment risk management is a lot like flying an airplane. When cruising at high
altitudes there is not much work that you need to do, except make some minor adjustments,
monitor the instrumentation and take action during turbulence.
b.During this period in March, I received several calls from my clients. One wanted to
move to cash and one wanted me to buy puts on their portfolio. A and B are maximum points
of investor negativity -- pain and panic. A good professional investor would not be
selling everything at points A and B. Instead, they would get ready for a rebound. Here is
what I do at these stress level...
c.Get rid of mistakes. Identify the losers in your portfolio and sell them. Don't think
that everything will come back when the market rebounds. Cleanse out the portfolio. Get
rid of what is not working and will not work in the rebound.
d.Add to strength. Energy, material and handheld device stocks were sold off, but were
still fundamentally strong growth stories -- all of which, were relatively unaffected by
the financial crisis.
e.Maintain a little cash. Use that cash to trade around your positions by using
exchange-traded funds until a new trend can be established
f.A good professional investor would not be buying recklessly at C and D (highest levels).
Instead, they would harvest gains and getting read for a pullback. Here is what I do at
these elevated levels.
g.At elevated levels do the following:
Focus on targets. Stocks that met or exceeded my price targets were immediately sold in
part or in whole.
h. Ease the stress. Stocks that contributed more risk and volatility to the portfolio were
sliced down.
i.Again, get rid of mistakes. Even though the market rallied around points C and D, I
still may have some disappointing holdings still on the books. Those get sold because if
they can't rally in a strong market, then why should I hold them for a pullback?
j.Raise cash. I raised nearly 15% in cash. With that cash, I bought some shares of the
Ultra Short S&P ETF
-------------Cruising Analysis
1. Trade ETFs. I continue to use cash for ETF trading -- both long and short -- until I am
fully invested in individual stocks

3.
Understanding the Stock Market: Tecumseh, Office Depot-
(http://www.thestreet.com/story/10420047/1/understanding-the-stock-market-tecumseh-office-
depot.html)
a. To Play the Game, Understand This: The Purpose of the Stock Market Is to Facilitate
Liquidity
b.Everybody knows that shares can be bought or sold in a matter of seconds in our
all-cash, no-contingencies stock market. The market does an amazing job of providing
liquidity. But that's all it does.
c.The stock market does not provide valuation appraisals. The purpose of the market is to
tell you price. It does not tell you value.
d.The market is indifferent. It doesn't care if you win or lose.
e.Although stocks eventually migrate to value, anything can happen over the short term. In
a panic selloff, TECUA cratered to below $10 per share shortly after I paid $17 for the
stock. Do you believe stock prices approximate value?
f.To Play the Game, Understand This: Price Does Not Equal Value
g. While the average business changes in value by less than 10% per year (less than 1% per
month), the average stock price changes by more than 50% per year.
h.All stocks are mispriced. Some are mispriced by a little, some are mispriced by a lot,
but all are mispriced. A value-centric investor embraces this construct when evaluating
stocks. When value exceeds price by a wide margin, it's time to consider buying.


4.
Ask TheStreet: Great Earnings, No Price
Pop-(http://www.thestreet.com/story/10416760/1/ask-thestreet-great-earnings-no-price-pop.h
tml)
a.It's hard to make short term assumptions about a stock. Stocks move up and down on any
given day for countless reasons. And they usually move the most -- or at least attract the
most volume volume and attention -- when the company announces their quarterly earnings
report because that's when they have the eyes of the investing world upon them.
b. After a company announces earnings, the "Monday morning quarterbacking" begins. It's
easy for analysts analyst, traders, talking heads and the like to come up with reasons for
a stock's short term move "ex post facto."
c.For many individual investors, it's comforting to have a reason -- any reason -- as to
why a stock moved one way or another in the past.
d.Here's what happens. If a company announces great earnings and the stock goes down, the
so-called "market" may be "saying" that it does not like the company's guidance for the
next quarter -- or next year.
e.The market "commentators" may also attribute the drop in the stock -- after what seems
like good news -- to be a result of profit-taking.
f. Some of the things that move stocks on any given day: analyst opinions (yes, they still
matter), short covering, earnings, rumors and other news. And of course, stocks move with
the broader market every day like a toy sailboat caught in the tide.

5.
Value Stock Investing: CarMax, Overstock.com -
(http://www.thestreet.com/story/10419845/1/value-stock-investing-carmax-overstockcom.html)

a.Value-centric investors know it's possible to generate huge returns with low risk.
b. The value-centric investor "insures" against risk by buying shares at a discount -- by
paying a price for stock that is materially lower than value. My risk is low if I buy
shares of a company at 50 cents per dollar of value.
c.How do you find stocks that are selling at 50 cents or even 33 cents per dollar of
value? The answer is easy to state, but difficult to put into practice: You have to be
able to see things that other investors do not see.
d.Identify a specific variable in the valuation equation that the crowd of investors has
overlooked or misinterpreted.
e.The typical investor is perfectly capable of figuring out the competitive edge at
CarMax. You can start by reading the annual report -- something Warren Buffett surely did
before buying shares in recent months.
f.Why base valuation on a multiple of revenue instead of earnings? It's because current
operating metrics understate the earnings power of CarMax. If you can figure out a base
case for how the operating structure will look, you can back into a valuation using a
revenue multiple.
g.For investors interested in identifying the next Dell or Amazon, take the time to study
the evolution of their operating models. You'll see that massive multi-baggers like these
require both sales leverage (usually recognized but underestimated) and margin leverage
(almost always unrecognized).

6.
Profit From the Insiders'
Data-(http://www.thestreet.com/story/10419713/1/profit-from-the-insiders-data.html)
a. The legal insider data reported on the SEC's Form 4, as well as SEC documents recording
transactions by institutions, are a great source of investment ideas no matter what style
you prefer and no matter what type of market we're in. It's also invaluable for following
stocks you already own. After all, who's in a better position to know a company's
prospects than its own management?
b.In a victory for common sense, academic studies show that this SEC data is useful for
garnering "excess returns" in stocks. A more important testimony comes from institutional
investors, many of whom have successfully used the SEC's insider data to help make their
investment decisions for years.
c. But using the data is much more involved than just blindly mimicking the trades of a
company's chairman. Some insider signals and patterns are important, while others are just
time-wasting noise.
d.Into penny stocks? These names are underrepresented in many data flows, like purely
fundamental screening tools. But insiders at exchange-traded companies of any size are
required to file Form 4s. And the investment intelligence they relay is often the only
unbiased information you'll find for small- and micro-caps shunned by the analyst crowd.


7.
Hedge Funds and You: What Individual Investors Need to
Know-(http://www.thestreet.com/story/10407805/1/hedge-funds-and-you-what-individual-invest
ors-need-to-know.html)
a.hedge funds have perverted the original concept of arbitrage and are now just very
highly leveraged leverage private investment vehicles
b.Hedge funds are structured as limited partnerships. A limited partnership has two types
of owners: a general partner (typically, the hedge fund manager) and the limited partners
(the investors). The limited partners/investors have no say in the day-to-day management
of the hedge fund.
c.Hedge funds charge investors not only an asset management fee but an incentive fee.
Sometimes this is referred to as the "1&20" fee structure. The asset fee, say it is 1%, is
a flat charge on the assets of the hedge fund. The incentive (or performance) fee is
earned by the hedge fund manager if the hedge fund makes money.
d.They can operate in a domestic (U.S.) environment or an offshore environment.
e.The hedge fund and its manager are not required to register with the SECor a state
regulatory body.
f.Reporting to investors is sporadic, delayed and limited in nature.
g.They can obtain favorable leverage, financing and brokerage rates
h.In order to invest in a domestic hedge fund you must be an accredited investor
i.If the hedge fund starts its first year with $100,000,000 and ends that year valued at
$125,000,000, the hedge fund manager will be eligible to share in a percentage of the
fund's earnings. So if the incentive fee is 20%, then the hedge fund manager will earn 20%
times the difference between $125 million and $100 million, which is $5 million ($125
million less $100 million multiplied by .20).
j.To earn these potentially huge amounts of money, hedge fund managers will take huge
risks -- many of which are highly leveraged -- in the hope that their big bets pay off. By
taking these huge levered risks, hedge funds will push stocks, bonds, commodities and
other securities security to extreme levels (either up or down). All too often these days,
some (not all) of these hedge funds' "piling on" activity is referred to as bubbles. An
individual investor could be impacted as the "ramp up" occurs, by getting sucked in to the
trade. Or when the hedge funds head for the exits, it's the individual investor who's
often caught holding the bag
k.the U.S. Treasury needs to raise the money it's not getting from those big hedge fund
gains from somewhere.
-----
1.Incentive fees earned by hedge fund managers may be taxed as capital gains(it really
depends on the "character" of the income earned by the limited partners) rather than
ordinary income.
2.Hedge fund mangers can deduct certain expenses as ordinary business losses.
3.Interest and leverage work hand-in-hand and they are at the center of the hedge fund
business model. Hedge funds deploy large levels of leverage and seek to do so at the
lowest rate of interest.
4.When individual investors invest on margin they are subject to Federal Reserve
Regulation T
5.Under Regulation T, an individual investor can obtain a 2-to-1 leverage ratio. However,
hedge funds are able to obtain a lot more leverage. How? By structuring offshore loans or
entering into complex derivative derivative contracts such as swaps, hedge funds can
negotiate leverage ratios which are multiples of 2-to-1.
6.When brokers broker make margin calls margin-call, reduce leverage to hedge funds or the
hedge funds get redemptions from their limited partners, then they go into liquidation
mode. When this occurs hedge funds will sell stocks and other assets with reckless abandon
in panic mode.
7.these leveraged liquidations will exacerbate market declines. This adds to market
volatility and can create panic. The individual investor who tends to be more long-term
oriented can get hurt in the collateral damage of hedge fund liquidations and
deleveraging.
8.Any investor who short sells sell-short a stock will receive cash proceeds from the
stock loan associated with the transaction, which will then be used to collateralize the
"stock borrow." Interest is then earned by the broker-dealer on the short proceeds. This
is referred to as the short interest rebate (see "How Short Selling Works"). Hedge funds
will receive some of that short rebate, while individual investors will not see a dime of
the rebate. This makes short selling advantageous to hedge funds relative to individual
investors.

8.
The Finance Professor-
(http://www.thestreet.com/story/10352105/1/the-finance-professor-understanding-leverage.ht
ml)
a. Buying stock with borrowed funds is achieved through the extension of credit from a
broker-dealer Broker-dealer or other financial institution Financial-institution. Such
credit arrangements are regulated by the Federal Reserve Federal-Reserve-System through a
series of regulations -- Regulation T, Regulation U and Regulation X.
b. Of those rules, Regulation T contains the guidelines that govern the extension of
credit by broker-dealers to customers, particularly individual investors who purchase and
carry securities.
c.Regulation T is simply referred to as the "Margin Rules."
d.Cash Account: An account in which all securities are paid for in cash and no extension
of credit has been made by the broker-dealer to the customer.
e.Margin Account: An account in which securities have or can be pledged to a broker-dealer
for a margin loan. Retirement accounts cannot be margined.
f.Margin Agreement: A document that spells out the terms under which the extension of
credit is made. Furthermore, the client will pledge the securities as collateral under a
hypothecation Hypothecation agreement, which creates a lien Lien against the securities in
the margin account.
g.Margin Securities: These are securities that are eligible for extension of credit under
margin agreements in margin accounts. There are regulatory definitions that outline the
requirements for a security to be considered margin-eligible. In addition, individual
broker-dealers may place even more-stringent requirements upon certain securities above
the regulatory minimum.
h.Minimum Margin: This represents the minimum amount that a broker-dealer will require a
customer to deposit in order to establish a margin account.
i.Margin Loan: Sometimes referred to as a debit balance Debit-balance in a margin account.
This is the amount of money the broker-dealer has lent to the individual to purchase
margin securities. Margin loans are charged interest at a margin rate as determined by the
broker-dealer.
j.Maintenance Margin: Think of this as an equivalent of the loan-to-value concept for home
mortgages. The maintenance margin states the minimum equity that must be maintained in a
margin account relative to the market value of the securities. Regulation T requires a 25%
maintenance margin while many broker-dealers require higher levels of maintenance margin.
k.Margin Call: This is a lender-issued requirement that calls on the borrower to deposit
more cash or marginable securities in the margin account to satisfy the maintenance
margin. If additional assets cannot be deposited, then securities must be sold. To satisfy
the margin call under the margin requiremen, the broker-dealer can liquidate securities
without prior investor approval.
l. With margin rates (for example) currently at 8.75% at Morgan Stanley (MS - Cramer's
Take - Stockpickr), you will have to earn in excess of that rate on an annual basis just
to make your (pretax basis) interest payments. With the S&P 500 historically growing on
average at about the same rate, you have to be very certain that what you are buying on
margin will outperform that index.


9.
Two Option Strategies for Value Investors-
http://www.thestreet.com/story/10415131/1/two-option-strategies-for-value-investors.html?p
uc=relatedarticle

a. Chief among these tools was the use of options to enhance portfolio returns. Although
most value investors eschew options altogether, I have found them extremely useful as a
way to enter and exit positions while collecting premiums. Truth be told, options are
tailor-made for a value style. You can sell overpriced options on underpriced stocks and
add several percentage points to your returns.
b.There are two basic option strategies that, in particular, have a great appeal to me.
One is the selling of cash-secured puts on stocks I want to own at lower prices.
Cash-securing a put put-option simply means that I am putting up enough cash to pay in
full for any shares that I might be forced to buy.
c.So, for example, if I am selling 10 puts on a stock at a $10 strike price strike-price,
I will put up the full $10,000 rather than just the exchange minimum margin. When you do
this, selling puts, far from being the high-risk strategy that many brokerage firms'
compliance and margin clerks would lead you to believe, has the exact same risk profile as
selling a covered call. If the stock goes below the strike price, you have the market risk
of the position. If it goes up, you keep the premium for small gain. It is exactly the
same.
d. I use fairly strict conditions to put these trades on. The market has to be down, and
volatility volatility needs to be high. In a perfect world, I like to see the VIX [CBOE
Volatility Index] about two standard deviations above its 20-day average. At such times I
can be reasonably sure that the options I am selling are somewhat overpriced and that I am
not buying Cubs tickets for an options trader somewhere in Chicago.
e.I have to like the stock and be very comfortable, if not ecstatic, at getting put the
stock at the strike price minus the premium. I only sell out-of-the-money out-of-the-money
options and never overwrite or sell in-the-money in-the-money options, hoping the stock
rises above the strike in the holding period.
f.I also sell short-dated options. If I were putting on a trade today, I would only use
May and June options. Any longer invites too much uncertainty in my mind. I really like
using this strategy with some of the stock screens I have developed over the years that
reveal stocks that deliver most of their outperformance in the later portion of the
holding period.
g.The other trade I really like to use is the combination trade. This means simply buying
the stock and selling a put below the market and a call above the market. Unlike selling
puts here, I want to be selling long-dated options to collect as much premium as possible.
I use this trade when three conditions are met: