GLOBAL STOCK AND BOND INVESTING NEWS & TRENDS

Key Value Investor Shares His Research Strategies

We recently attended the much publicized Value Investing Congress in New York.
We heard a good number of interesting value investing ideas, eagerly consumed by the numerous investors and advisors in the audience. (www.valueinvestingcongress.com)

Among the most interesting speakers was Murray Stahl, Cofounder and CEO of Horizon Asset Management which manages almost $18 billion. Stahl's talk revolved around his investment mistakes, too detailed to explore here. However, equally of note is Stahl's approach to targeting companies for investment.

"What are the characteristics of companies that typically interest you?" asked Value Investor Insight newsletter in a recent interview. Stahl's response: "We want to see a set of circumstances that we consider likely to develop over several years that are completely dismissed or heavily discounted by the market." The reasons might be because the market doesn't think the events will likely occur or they might occur not soon enough to become relevant.

Another example: Stahl says he is interested in firms that are redeploying their assets to make better use of them. This uncertainty causes them "to be held in low esteem by the market and therefore trade at a higher discount."

Typically Stahl, like other value investors, likes companies with relatively long product lifecycles, so that the product or service will be about the same in five years from the present. His rationale: "if that's not the case, we don't believe we can with adequate confidence make reliable long-term earnings forecasts."

Stahl's Research Process

Prior to examining a targeted firm's financial statement, Stahl looks into the firm's history. He wants to know how it got into its current "predicament." If we're looking at it," he says, "it's usually a predicament." Stahl uses the Internet a lot in his investigations trying to find other examples of whether the firm's problems can be controlled or corrected.

Stahl believes that once a firm loses its dominant market share, it rarely recovers it. However, if it keeps its dominant share but can not control its costs, that is a different situation - one that can be rectified. He would also be concerned with management's plan to solve the problem. He is looking at the firm's expense structure, investments, R&D, employee training, etc.

Finally Stahl is often interested in companies, in what the market considers predicaments because they are farsighted and spending on future opportunities. He tells Value Investor Insight: "The good thing about that type of spending from a shareholder's standpoint is that if the company is right, you benefit and if it turns out to be wrong, it stops spending the money and you also benefit." (www.valueinvestorinsight.com)

SEC Turns Down Investors on Board Nominations

In the post-Enron backlash to sleepy and incompetent board directors, SEC and Congress vowed to give investors more say on who sits on corporate boards. Given the fact that in the current environment, with financial firms losing megabucks in the subprime mess, the thinking was that SEC would react positively to more investor and shareholder rights.

But to the chagrin of many institutional investors and followed closely by others, the SEC recently rejected a proposal that would have allowed investors to nominate directors to sit on corporate boards. SEC Chairman Christopher Cox, took plenty of heat in the media for turning thumbs down to the investor plan and instead supporting a business-friendly proposal which gives companies the authority to reject any investor proposal that recommends candidates for corporate boards. Firms would not be required to consider investor board nominations or even include them on proxy statements that would be sent to shareholders.

SEC apparently received better than 34,000 letters from investors asking for more authority to change boards of directors.

"This is a sad day for shareowners," said Ann Yerger, executive director of the Council of Institutional Investors. That group represents over 100 of the largest pension plans and retirement funds. Their clout in the investment community often helps secure the rights of private investors, as well.

Spokespersons for a number of corporations and business groups generally applauded the SEC action, saying that they have highly competent directors on their boards.

A spokesperson for Merrill Lynch observed that board directors can't prevent every crisis. "No board can be expected to act on the basis of information not known to it, and even the most responsible and diligent board cannot prevent every serious problem a company faces."

Former SEC Chairman Arthur Levitt criticized the SEC for its decision but observed,
"I believe that it is only a matter of time before investors are given the shareholder access they deserve."