Warren Buffett and the Motley Fool

Investment advice is kind of like fried chicken recipes. Everyone’s got a tip they’re willing to share – results may vary. Just when you think you might have the corner on a good piece of advice, something happens to shake that belief. My most recent awakening to the snake-oil side of stock research came when I tried to fool the Motley Fool by tracking down their “Only Stock You’ll Ever Need!” through clues in a free teaser for a research report. I couldn’t find the insurance stock they called the “next Berkshire Hathaway,” (BRK-A), but I did learn that this stock is similarly touted in other investment reports with nearly identical descriptive sales language. Here are a few lines from an e-mail I got from Kate Ward, publisher of Motley Fool Inside Value: Berkshire CEO Warren Buffett “used his business valuation savvy to recognize hidden assets. And help shareholders get rich. That was the simple Buffett strategy that built Berkshire – it’s also the secret of the company we’re talking about today. … And it could make you rich.” Yeah, like to the tune of $110,500 a share!

Sounds great, doesn’t it? The e-mail was sprinkled with charts illustrating how this wonder stock killed the S&P 500 over the past several years and showing how magic value stocks recommended by Motley Fool sage Philip “Admiral” Durell will make you rich beyond your wildest retirement dreams. It also featured drool-inducing vignettes about the monumental gains realized by early Berkshire investors. At this point, already hot to the wonders of the Fool after buying a car with its advice, browsing its daily newspaper columns for years and digesting several similar e-mails – even going so far as to follow an Admiral recommendation and buy the high-yielding bank Lloyds TBS Group (LYG), which had done well enough – I was just about convinced that I had to buy their $149 investment letter subscription to get my hands on this next Berkshire. But before I called a buddy to urge him to go halves for this fount of knowledge, I did a little Googling to see if I could figure this one out. Then I did more. At first I couldn’t find for myself anything as exciting as what Kate was talking about. What I did find, though, with all my searching for the “next Berkshire,” was an investment newsletter offer written by Addison Wiggin, publisher of Capital & Crisis, who for some time has been pedaling “The Only Stock You’ll Ever need!,” which he says was pointed out by top-flight analyst Chris Mayer.

Here’s how Mr. Wiggin describes this must-have stock: “Then (Buffett) used his own business savvy to dig out hidden assets … and help the original owners of the business get very rich, while reinventing their companies as even bigger cash cows and wealth producers than they’d ever been before. That was the real Buffett strategy that built Berkshire. It’s also the secret strategy of the company we’re talking about today. And it could make you very rich.” His letter was also sprinkled with graphics showing how this market-drubbing stock will weather you through good times and bad for generations to come as well as drool-inducing vignettes about early Berkshire investors.

And that’s when I stopped taking the Fool so seriously.

Sears Holding Co.

Luckily, Googling for the next Berkshire led me to more than just greater skepticism for subscription investment advice. I also stumbled on a few 2004 articles about billionaire financier Eddie Lampert and his plans for Kmart. Articles from Business Week to New York Magazine questioned whether the savvy Lampert was going to use the struggling retailer as a base for a Buffett-style investment empire. Lampert went on to buy Sears and merge the two giants under Sears Holding Company, (SHLD). The stock looks like a value buy by all the metrics I’ve reviewed and is now trading at a reasonable $155 after a hit, low in its 52-week range. In his letter to shareholders on the first anniversary of the merger, Lampert compared his goals to Buffett’s: “Our goal is to increase the per-share value of Sears Holdings.” Lampert initially plans to do so by improving operations in the core retail business and buying back shares at a reasonable valuation.

“It could make you very rich”

On a side note, while researching this column I did find new clues that made me certain I’d tracked down the stock touted in these two mirror-image investment reports. In case you’re interested (and want to save a little dough), this gem that launched a thousand investment letters is White Mountains Insurance Group Limited (WTM), an insurance holding company put together by John J. Byrne. Byrne’s the executive who turned Geico Insurance into one of Berkshire’s most profitable holdings and who Buffett once called the Babe Ruth of the industry. White Mountains has indeed soared and recently was topping the S&P 500 handily with gains of over 100 percent since 2003. It is trading near the top of a sour 52-week range at $575, less than 50 percent higher than book value. I’m bearish on WTM.

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Screening, Indexing, and Plain Having Fun with Money

Market science is a lot like denominational religion – there’s always someone out there to tell you what your inching ears want to hear.
Unfortunately, probably the best advice on the markets is simply that in the long term, active stock picking loses to indexing. But inside that bit of wisdom are other truths that should have younger investors loading up their retirement portfolios with small-cap funds. Small, and small value in particular, always wins.
The rub in retirement investing is that it’s real money, and you’ll really need it someday. You really shouldn’t splash your cash around in whatever flim-flam funds and cutesy companies that spring your fancy. Despite, that, though, I like to have fun with investing (what can I say – I’m not into sports).
So how do I pick my religion? If I had just a little more to invest – and don’t we all think about that – I’d probably go to a broker and split up my cash into a number of the fine indexes offered by Dimensional. (Indexing is broader than the world of Vanguard and the Bogleheads.)
In the absence of quite the stash, and perhaps the confidence in others, to put my future in the hands of a full-time broker, I enjoy the cheap online trading services that have been cropping up ever since I entered college. Unfortunately, there are still plenty of limitations to these sorts of sites. You might have access to the world of funds and most markets, but there are plenty of fees to ding you: small-account fees, transaction fees for no-load funds, account transfer fees, and per-trade fees, to list some of the most common. Add in the limitations imposed by most 401k plans and you may end up like me – a wee little piggy bank carved up into several accounts with names like ING Retirement, E-Trade, T. Rowe Price (which has an inexpensive automatic account builder and a diverse basket of funds), TD Ameritrade and Scottrade.
But from there, a little research at fun sites like MoneyChimp.com – where indexing is praised and dollar-cost averaging is called a myth – and the Motley Fool (if you stop reading columns before the last couple of paragraphs you can avoid the sales pitch) should give you some great investing ideas and strategies. (Chimp also has great calculators, including one based on Warren Buffett’s value-investing style.)
Yahoo Finance has, for my money, the top stock and fund screeners on the Web (while Google’s chart technology is my favorite). Self-directed retirement fund cash in hand, I recently ran a number of funds through just about every one of the above sites to narrow down a buy.
As much “buy low, sell high” advice I read, I just can’t bring myself to ignore past performance. If an asset class has performed poorly for the past five years, and hasn’t outperformed in the long-term either, why should I put money into it (large-cap funds, are you listening?)
Small-cap, international, natural resources and real estate funds all have done well for the past several years and, I believe, still represent some of the best opportunities for long-term capital appreciation. Who doesn’t want to bet on innovation, globalization and scarcity? (If I want to bank on the growing demand for consumer staples, I’ll buy a single stock, like Johnson & Johnson, JNJ.)
Capturing these classes means picking just the right indexes, or scouring for the small percentage of actively managed funds that have a strong track record of beating sector averages (and hoping that you can find a brokerage where you can buy them without cutting into your initial investment).
Scouring through a list of no-transaction-fee funds and a few hot tips, I put the screener to work to search for returns and proven management. That worked up a handful of funds the looked nice at first blush:

Julius Baer International Equity A (BJBIX)

With a year-to-date return of 13 percent and a five-year at 15, well above its relative index, there’s not a lot to dislike about this fund. It’s very volatile, though, up seven years, down five. I compared this fund to Dodge & Cox International Stock (DODFX) and American Funds EuroPacific Gr R4 (REREX), both of which look great but have been out the gate less than five years – too short for my tastes.

Excelsior Value & Restructuring (UMBIX)

I also came across this fine large value fund, with only two down years out of 13. It has a fantastic three-year return of 20 percent, but it’s five year haul is just under 8.

Bridgeway Ultra-Small Company Market (BRSIX)

Bridgeway Funds has a history of closing off funds to new investors to protect existing shareholders, and the managers are encouraged to splash their money in the pool as well. Aside from a recent settlement with the SEC over how its performance fees were calculated, Bridgeway has a solid track record of low fees and stunning performance with its active index and quantitative funds. The company also donates half its profits to charity. The Ultra-small fund, an index of some of America’s tiniest publicly traded companies, has trashed the Russell 2000 over its eight years of existence. It’s up 17 percent annually since inception.

Amana Trust Growth (AMAGX)

This large-cap fund looked fantastic for more than a minute. It’s interesting in the field of socially responsibly funds for adherence to Islamic principles – no porn, no gambling, no alcohol, and no interest. But its blazing three-year return of 23 percent is tempered by much weaker long-term history, buoyed most by a 100 percent return in 1999.

Despite having to pay a small transaction fee for a fund that wasn’t on the discount list for my account, my money went to Bridgeway’s Ultra-small.