Reading List for the Investing Master

I have been a student of the stock market since my father and great uncle Andy sat me down in 1974 and started teaching me the beauty of investing in Exxon. This was during the oil embargo and my father’s restaurant “The Highland Diner” was situated right next to a gas station. I saw first hand the theory of supply and demand in action as cars where lined up 15-20 deep to fill up. In that year I bought my first shares of Exxon with $100 and eventually opened a dividend reinvestment plan with the company.

Working in that restaurant I also saw that every table had a Heinz ketchup bottle on it and my job at the ripe old age of ten was to manage the bottles and make sure that their were no “empties” on the tables. I saw with my own eyes the power of the trademark and invested in Heinz as well.

For the next ten years I invested most of my pay in those two companies and then went eventually big into Coca-Cola in 1984. I did this after going to college in Europe and seeing how addicted everyone was to their products.

Getting a Real Education by Reading
About every three months I would get quarterly reports from Exxon and Heinz and I would sit for hours trying to understand them. This was way before the age of personal computers and if you wanted to use a computer you needed punch cards and to work in a room the size of a cafeteria . The Internet was at least 15 years away and asking your Dad was as close as you could get to Googling an answer. In those days if you wanted to understand what “Book Value” meant in an annual report you had to go to the library and research it.

Many of you probably feel sorry for me for having to labor so and not having the technology available that everyone takes for granted today. But you should not do so, because I was forced to read in order to find out what price earnings ratio’s and return on equity meant.

While in the library I stumbled across 100’s of books on investing and read everyone I could get my hands on. By the time I was 20 years of age I knew about Benjamin Graham, Warren Buffett and Philip Fisher and was a big fan of Malcolm Forbes Sr.. I would do spreadsheets by hand and can you believe it on paper! It was not until 1990 that I converted to my first PC so I had a good 15 years of reading books in order to learn my trade.

What was I reading? Well the following list is what I consider essential reading for anyone who wants a strong foundation in investing. I will not detail each book, but just list them and provide links to Amazon so you can read the details on each one, (If they are still in print). By reading these books you will learn to not just be an observer of the markets but to become a true participant. You will never again have anyone pull the wool over your eyes and sell you some ponzi scheme or tell you that you can be a successful investor by just doing his system 15 minutes a week. Successful Investing requires hard work and a keen understanding of the terminology that is used. Without it you are flying blindfolded and will make many mistakes. The worst thing one can do in this business is to learn by trial and error. The following books contain the vast experiences of money masters and will save you thousands of dollars in mistakes. The following are the best investments you will ever make.

The Daily Regiment
First I would subscribe to the following:
The Wall Street Journal = To learn in depth stuff on companies in real time.
Investors Business Daily = A quick visual way to examine 100’s of companies a day.
The Economist = The master information source for international investing.
Forbes = A great source for in depth information on management of companies.

The Weekly Regiment
– The Library Periodical Reading Room = Despite what everyone thinks one can find 100’s of articles on companies that are not on Google, which may shed some light on a company that you are ready to invest in. You can spend a few hours at the public library and read past articles of the Wall Street Journal or trade magazines to give you a fuller picture on a company.

Value Line Investment Survey = Most public libraries have this guide available or you can subscribe if you have the money. It is the best data source for information on over 7300 companies that you will find anywhere.


Books by John Train:
The Money Masters
The New Money Masters
Money Masters of our Time
Preserving Capital and Making it Grow
The Craft of Investing
The Midas Touch
Famous Financial Fiascos

Books by Benjamin Graham
The Intelligent Investor
Security Analysis -1934 edition
The Interpretation of Financial Statements
Benjamin Graham : Memoirs of the Dean of Wall Street

Books by or about Warren Buffett
The Essays of Warren Buffett
The Warren Buffett Way by Robert G Hagstrom
Buffett: The Making of an American Capitalist by Roger Lowenstein
Buffettology by Mary Buffett and David Clark
The Warren Buffett Portfolio by Robert G. Hagstrom

Books by Philip Carret
The Art of Speculation
A Money Mind at Ninety
Common Sense from an Uncommon Man

Book by Philip Fisher
Common Stocks and Uncommon Profits

Books by George Soros
The Alchemy of Finance
George Soros on Globalization
Soros on Soros: Staying Ahead of the Curve

Books by Jim Rogers
– Buying Commodities
Hot Commodities
Investment Biker
Adventure Capitalist

Books by Peter Lynch
One Up On Wall Street
Beating the Street
Learn to Earn

Miscellaneous Reading
The Wealth of Nations by Adam Smith
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
Margin of Safety (Out of Print) by Seth Klarman

The above is a great list to build a strong foundation as an investor. In those books you will find theories that have worked and not some “You TOO can be a great investor” books like the majority of the writings you see today.

To master the art of investing requires knowledge which must be gained on ones own. Understanding the terminology of the stock market is just as important; so spend some time and master the art so you don’t follow the crowd. Most of Wall Street acts in unison, those (like the authors above) have made their fortunes by acting independently of the lemming mentality that is found on Wall Street. Do your own homework and concentrate the limited time that you have to devote to investing by concentrating on what has worked in the past. Those above have not reinvented the wheel but have mastered the art of investing and the methods of their predecessors. They have then taken those ideas and have spent their lives trying to improve on them or make them relevant to the time they live in.

Civilization advances by passing the torch to the next generation, so grab that torch and master these writings and then innovate. That’s what makes life worth living in my book.

Identifying a Special Situation

Amidst the turmoil and uncertainty that attends the markets these days, I often find it relaxing to sequester myself for a while and do some analysis. Part of my job as an analyst is to discover things that others may have missed. These may be opportunities to identify “Special Situations.” Some very successful opportunities of mine in the recent past have been companies such as Nucor, Landstar System, C.R. Bard, Laboratory Corp., PACCAR, Asta Funding and Student Loan Corp (STU). I have had some excellent runs with these companies because I was able to isolate their uniqueness early – before Wall Street discovered them.

Student Loan Corp, for instance, is a company that is 80% owned by Citigroup and handles most of their student loan business. During my research, I also discovered that the late super money manager of the Sequoia Fund, Bill Ruane, was a big fan of STU and owned a lot of shares.

Investing need not be complicated if you are able to find just one or two things that others may have missed. If you get there first, there is a high probability of making a handsome profit. Nucor, for example, is the premier steel manufacturer in the world and in 2004 I learned that China was poised to build a city the size of Austin, Texas every year. From this information I concluded that China would need to import large quantities of steel and so I looked to Nucor. With Nucor, I went against the general trend in the stock market – which was to short the entire Steel Industry. By not adopting the herd mentality, I was able to win big with Nucor, being up 111% at one point. In doing so, I chose to follow the advice of Benjamin Graham, author of The Intelligent Investor and Security Analysis,-

“Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it – even though others may hesitate or differ.”

My 2005 analysis of the Steel Industry can be found in the following link:

Asta Funding (ASFI) is a company that I stumbled across because I had read in the Wall Street Journal that Congress was planning to change the laws in regards to how people can file for bankruptcy protection. Based on this article, I initiated a search for companies that would stand to benefit from this change and I subsequently identified ASFI. Asta Funding is a company that buys distressed debt from credit card companies for pennies on the dollar and then tries to collect on this debt in court. So if they buy $1 worth of debt for $.05 and then settle the case for $.10, it becomes a 100% profit on the transaction. The new bankruptcy laws enacted by Congress held the consumer more responsible for their debt. Unlike previous legislation, the new law did not permit the consumer to become absolved of debt by simply filing for bankruptcy. This meant that Asta Funding would be poised to make significant profits, and indeed this was the case.

Special Situations are always out there, but at times you need to search hard to find them and think through the idea of what makes them different and special. In 1984 Coca-Cola (KO), for example, decided to spin off their bottling plants and create separate companies from them. This allowed Coca-Cola to dramatically change the way it reported its financials and as a result of spinning off their bottling plants, their shareholder’s equity was reduced dramatically and their return on shareholders equity increased substantially. The beautiful thing about all this was that though their shareholder’s equity was reduced (buildings, trucks, factories were transferred to the new bottling companies), their profits now came exclusively from selling syrup to the bottlers and their only expense was advertising. Thus their profit margins exploded and after many years of malaise, suddenly Coca-Cola became a growth stock. Every year the company would split off another bottler and continually reduce their equity while increasing their margins. For some 14 years this successful pattern was followed until they finally ran out of bottlers to spin off. If you look at the historical records for the symbol KO, you will find that the stock was selling for a split adjusted price of about $1.75 in 1984 and when they ran out of bottlers in 1998, it traded for about $75 a share. For those keeping score, that amounts to a return of 4,186% or an average compounded return of 30.79% per year. (Now you know why Warren Buffett, who bought 8% of KO during the market crash of 1987, is a multi-billionaire). Once Coca-Cola completed their bottler spin offs, their growth rates slowed and that is probably why the company has done nothing for the past 8 years. About five years ago, Pepsi arrived late to the game but finally discovered that they could follow a similar pattern. It’s no surprise that their growth rates exploded as did their stock price as soon as they started splitting off their bottlers.

I myself sold Coca-Cola in 1998 to move into Nokia Corp. I had thought that Nokia, which had significant market share, would conquer the world, owing to the fact that everybody either had a cell phone, or wanted one. I got in big at $18 a share in 1998 and saw the stock hit $62 by 2000. Being a confirmed “Philip Fisher” analyst, I adhered to his methods, as detailed in his book Common Stocks and Uncommon Profits, where he outlined his belief that one should never sell a great company and should ride out the bear markets. However, 2000-2001 showed us that this was absolutely the incorrect strategy for Nokia, as the stock of Nokia fell from a high of $62 in 2000 to about $10+ before rebounding slightly. My investment in Nokia taught me that no one system is perfect for all market conditions and one should never follow any one system exclusively, but should compliment an investment strategy with good old-fashioned common sense.

Consistency in earnings is a key landmark for identifying Special Situations. Low debt, strong return on equity, nice net profit margins and finally, little in the way of competition. All the companies that I have mentioned in the first paragraph are “islands” and have little in the way of competition. In addition, the best time to buy Special Situations is in a bear market.

In my recent research at Right Time Investing Research I am finding out that investing in Technology is really a game for gamblers and traders. I have learned the hard way that the Technology Industry is basically just one big commodity market these days. Stocks like Lucent Technologies, Dell Computer and Intel are proving this everyday as their profit margins are consistently getting squeezed by foreign competition. It took me 20 years to finally understand why Warren Buffett never invests in Technology stocks. The reason quite simply is that they are unpredictable. Buffett states that he does not understand them but I am sure that he does.

It’s all well and good to talk about the past, “but what have you done for me lately?” One stock that has caught my eye recently, Home Depot (HD), is just getting massacred by Wall Street at the moment. Justifiably the worry over housing and how higher interest rates may affect Real Estate in general, creates great uncertainty for Wall Street. Wall Street abhors uncertainty (ironically) and rather than waiting to see what happens, they prefer as a group to cut and run. This “lemming effect” creates opportunity for those who have a longer time horizon and are willing to wait for large gains in the future. Home Depot is the best-run retail operation out of one hundred big-name retail companies that I analyzed for this article. I have generally found that the best way to analyze the Retail Industry is to determine each company’s profit per store. The following is a list of the top ten retailers by profits per store.

Number of Stores
Profit per Store ($Million)
Home Depot
Nordstrom, Inc.
Lowe’s Cos.
Costco Wholesale
Federated Dept. Stores
Wal-Mart Stores
Target Corp.
Coach Inc.
Best Buy Co.
Tiffany & Co.

As you can see, Home Depot management is doing a wonderful job and though housing may be slowing down, the do-it-yourself/remodeling market is still going strong. Another thing that Home Depot has going for it that its sales per share are expected to be around $45 a share in 2006 and its stock price is at $33.85. This is important in that on Main Street, when one sells a retail operation, the buyer usually looks to buy at around one time sales. Thus when we divide 33.85/45 we get 0.75, which would amount to a bargain on Main Street. In addition, Home Depot exemplifies an “Economies of Scale” retail model. Economies of Scale refers to a company that grows large enough where it expands to the point that everything it sells gets purchased in bulk and the more it buys, the greater the discount it receives from suppliers and wholesalers. The table below demonstrates the Home Depot (HD) model of “Economies of Scale” in action in terms of how it relates to their profits per store.

Number of HD Stores
Profit per Store ($Million)

In conclusion, I hope that I was able to impart the importance of finding just one or two unique things about a company that can make you a lot of money. Who knows what will happen with the stock market in view of the current uncertainty in the Middle East, and whether the Federal Reserve will raise interest rates again. What I do know is that Home Depot is a well run “Special Situation” and when the markets do turn around, it should do quite well. Other Special Situations that I find compelling these days are Amgen and Medtronic, but that’s a story for another day.

Note: Peter George Psaras is not an Investment Advisor and nothing mentioned above can be construed as investment advice. All Research is written and produced as an information source only, and is not a solicitation to buy or sell securities. Investing in securities is speculative and carries a high degree of risk. All information contained in this research should be independently verified. Investors are reminded to perform their own due diligence with respect to any investment decision. Factual material is obtained from sources believed to be reliable, but Peter George Psaras is not responsible for any errors or omissions. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Homebuilder Industry Analysis

Last week the Federal Reserve raised interest rates for the 17th time in a row. This is dire news for the Homebuilder Industry because with every interest rate hike, it gets that much tougher for new home buyers to afford to buy a home. It also introduces an additional negative factor into the equation, in that existing homeowners become worried as to whether they are losing equity in their homes. This may induce them to panic and to put their homes up for sale. These same homeowners, many of whom took out ARMs (Adjustable Rate Mortgages) or “Interest Only” mortgages a few years back, will soon see reality knocking at the door.

Reality will come in the form of higher mortgage payments adjusted to current interest rates. Fortunately, many homeowners have seen their homes appreciate in value significantly over the past 3 years and this signifies higher equity in their homes. As a consequence, some were able to get fixed mortgages, but nevertheless may be concerned about falling house prices in their area, which may induce them to sell as well. With each existing home that goes on the market, it makes it that much harder for the Homebuilder Industry, as existing home sales constitute strong competition.

As an analyst, I like to take theories such as the one presented above and go out and see for myself what is happening on Main Street. Over the past few years I have been driving around the various neighborhoods in the metro Seattle area and have been on the lookout for “For Sale” signs. About three years ago, we were in a “sellers” market and “For Sale” signs were non-existent. This was due to the fact that whenever a home went up for sale, there were a dozen buyers waiting in line to make a bid for it, making the need for a sign superfluous. Exactly the opposite scenario is in place currently. Within a three-mile drive on West Mercer Way on Mercer Island, Washington, the other day, I was able to spot 23 “For Sale” signs. Mercer Island exemplifies a nouveau riche residential area that is located just a few miles from the central Seattle business district. Its residents are good examples for our analysis because they are the type of consumer that the Homebuilder Industry targets when marketing their homes. Perhaps one can argue that this was an isolated event and that it has no bearing on the rest of the country. However, I should mention that I received further verification of this scenario the other day when listening to CNBC commentator Ron Insana. Mr. Insana took a similar drive in Nyack, New York, a suburb of New York City. He reported very similar findings to those that I saw on Mercer Island. Nyack, like Mercer Island, is a key market for the Homebuilder Industry.

The scenario I have just outlined is part of what a qualitative analyst does. A qualitative analyst masters his trade, in part, by studying the works of Philip Fisher (the father of Qualitative Analysis) whose masterpiece, Common Stocks and Uncommon Profits, is a must-read for anyone who is serious about investing. It is a road map of things to look for on “Main Street” which signify just how good a company, its management or the Industry as a whole, is performing. Fisher analysis also works well with macro-economic analysis when trying to predict how the economy will affect a particular industry.

By contrast, quantitative analysis is not instructive in analyzing the Homebuilders at the present time. Quantitative analysis was brought to the forefront in 1934 by Benjamin Graham in his masterpiece Security Analysis which he wrote with David Dodd. Prior to Graham’s work, those who analyzed companies in a quantitative fashion were statisticians and later, were called Security Analysts. A quantitative analyst “crunches the numbers” or analyzes companies in a bottom-up approach by analyzing its financials. Value is then assigned by analyzing each company in an industry, comparing companies with each other within an industry, and then forming a conclusion on the Industry as a whole. This value analysis is micro-economic in nature, and is the basis of Value Investing.

Now it is important to explain why quantitative analysis is not useful in analyzing the Homebuilders. Listed below are the eleven major players in the Homebuilder Industry that are worth noting.

Beazer Homes USA BZH $45.20 $10.46 4.32 23%
Centex Corp. CTX $47.48 $9.67 4.91 23%
Horton D.R. DHI $23.40 $5.03 4.65 23%
Hovnanian Enterpr. ‘A’ HOV $28.65 $7.09 4.04 19%
KB Home KBH $44.09 $10.54 4.18 24%
Lennar Corp. LEN $43.13 $8.60 5.02 21%
M.D.C. Holdings MDC $51.48 $11.24 4.58 21%
Pulte Homes PHM $27.23 $5.65 4.82 19%
Ryland Group RYL $43.04 $9.67 4.45 27%
Standard Pacific Corp. SPF $25.01 $6.51 3.84 20%
Toll Brothers TOL $26.05 $5.15 5.06 22%

SP = Stock Market Price
PE = Price to Earnings Ratio = SP/DEPS
DEPS = Diluted Earnings Per share
ROE = Return on Equity = DEPS/Shareholders Equity

If we were to view the foregoing table solely from a quantitative point of view, these results would be considered excellent. Indeed, as a group, the Homebuilder Industry’s results are superior to any other industry out of the 440 main industries that the federal government tracks for its Standard Industrial Classification (SIC 440) tables. In 2004, I wrote an article and concluded by saying that the Homebuilders as a group should be considered a superior investment and I actually picked it as my “Industry of the Year.” I was justified in saying so because the companies in the foregoing list skyrocketed in value and made some amazing gains.

However, despite the fact that the quantitative figures (“quants”) are excellent, the qualitative analysis is quite dire. Companies in the Homebuilder Industry are required to deal with increased commodity prices (raw materials), increased competition (existing home sellers), and a customer base that is rapidly getting priced out of the market (over-leveraged consumers). On top of this, the Federal Reserve is still uncertain as to whether it will raise interest rates again, and this produces way too much uncertainty to have any confidence in the Homebuilders as a safe investment. Moreover, if the real estate market gets flooded with existing homes, then envision the opposite scenario of what occurred in 2003-2004, and instead of a seller’s market, we will enter a buyer’s market. If this turns out to be the case, then home values will drop sharply and the equity that was accumulated will slowly erode. If the Federal Reserve continues to raise rates, then this process will be accelerated.

As if I have not already painted a picture imbued with sufficient foreboding, there is more. I am concerned that if this pattern were to continue or to accelerate, it could negatively affect the US economy as a whole, for the following reason. Over the past few years, consumers have felt very rich because they have made large equity gains in their homes, with some areas of the country experiencing 100%+ gains. These increases have created a wealth effect that has permitted the same consumers to borrow off this equity, particularly since banks and mortgage lenders have flooded the market with opportunities for second mortgages, home improvement loans, and credit card offers. So now we have consumers who have exploited the strong equity in their homes in order to buy cars, furniture, take trips, or renovate their homes, if not to buy a second home. When lending money, creditors based their decisions on the accumulated equity in the applicant’s home.

If we were to have a few more rate hikes by the Federal Reserve, then the pressures on homeowners will increase and they may panic. When those ARM loans get adjusted to current interest rates, we may see nationwide sticker shock. This will force many to put their homes up for sale immediately in order to avoid bankruptcy. If the number of homes put up for sale grows to the point where there are not enough buyers to purchase them, then the lender community will be forced to start foreclosing on those who can not make their mortgage payments. When this starts to happen, then banks and financial institutions will be required to take what would have been their profits and set that money aside for “reserves for bad loans.” Consumers will begin loading up their credit cards in order to pay their loans and the credit card industry will start to have problems as well. Consumer spending will be anticipated to dry up and other industries such as the retail industry will suffer. Companies that supply these industries will also be forced to slow down operations and thus a spiral effect will take place in the economy. Housing is the backbone of the wealth effect and when people become concerned that they will not be able to pay their bills, then consumer spending all but stops.

In conclusion, it is important that the Federal Reserve stop raising interest rates. With every rate hike comes further increase in the probability of personal bankruptcy or worse, the risk of a recession. Recessions are ugly beasts and everyone suffers. For those interested in the extent of damage caused by a recession to the Real Estate Industry, look at the years 1989-1991. Any way you look at it, the Homebuilder Industry is a dangerous place to invest unless interest rates were to be reduced.

Note: Peter George Psaras is not an Investment Advisor and nothing mentioned above can be construed as investment advice. All Research is written and produced as an information source only, and is not a solicitation to buy or sell securities. Investing in securities is speculative and carries a high degree of risk. All information contained in this research should be independently verified. Investors are reminded to perform their own due diligence with respect to any investment decision. Factual material is obtained from sources believed to be reliable, but Peter George Psaras is not responsible for any errors or omissions. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.