The Financial Analysis Guy

Since I hang out in Vegas where my job and family are, I tend to wake up to the opening bell on CNBC around 6:30am PST.  When I woke up this morning, I was giddy with the idea of Ben Bernanke and the Fed coming to the proverbial “rescue” of the credit markets.  I was beside myself actually.

Financial Analysis Guy is a long-term investor…no kidding
I am a very long term guy, very Warren Buffett-like, when it comes to investing.  I am a land investor in Vegas and I know that if my investment doubles in 3 years, I earn roughly 25% IRR (Internal Rate of Return) - not bad.  If it doubles in 2 years, I am a very happy 36% IRR.  Which is about as good as you can get with a large sum of cash invested in a passive investment - regardless of what the infomercials or phone-jockey’s that call you at 7:00 am at home will tell you.

Now, since the Oracle of Omaha has increased his book value in Berkshire Hathaway by 23% compounded annually over his management life, I know this is the mark that everyone is shooting for.  Most “professionals” in the business will say they earn way beyond this, but they are lying or at the very least misrepresenting.  Some years they earn way beyond this, but some years they are down 30%.  So, over time, their compounded annual return will probably be something like 10%.

Since I am a long term guy, I know that my portfolio being down 25% year to date is not that big of deal - kind of like The ‘Stones (Detroit Pistons if you are new to this blog) being down be 25 points at halftime.  Chauncey and the guys would like to be ahead by 25, but realize it is only halftime and A LOT can happen before the game is over.  Just like my investing, come talk to me this time next year to see who is smiling.  So long as Benjamin Bernanke (Uncle Ben as many like to call him) continues to loosen credit (jargon for lowering the Federal Reserve Funds Target Rate), I know that equities will rise over time.  This is a fact, not a theory. 

Fed and Uncle Ben
The other tool Bernanke and the Fed Committee can use is injecting funds into the credit market by buying “stuff” from the major banks.  They call this injecting liquidity through the purchase of debt instruments…YUCK!  What the heck does that mean?!?

Well, the credit crisis is here because the Wall Street guys and gals (not the Financial Analysis Guy) can not get enough funds (cash flow) in the house after they have lent it out.  They need to sell their debt on the secondary markets after they create it through the lending, in order to free up funds to keep the lending machine (mortgage creation and other commercial paper) cranking.  As of recent memory, they bundled these individual mortgages into CDO’s (Collateralized Debt Obligations) maybe to the tune of 10,000 or so and sell them to investment houses (Private Equity; Hedge Funds; Pension Funds; Endowments; etc.) - pieces at a time.  As long as the underlying obligations don’t default in mass quantities, these are great investments to supplement their investment portfolios…whoops, again, a whole other topic…

If no one is buying these CDO’s, then lenders can not lend more money.  If lenders don’t lend money, then business shuts down and people start selling whatever they can sell (regardless of how good the investment is)  just to raise cash.  This is the equivelent of everyone heading for the exits at the same time in a crowded theater - mass panic!  Since no one is lending and everyone is selling - hence, the fabled CREDIT CRUNCH. 

The FED to the Rescue
The Federal Reserve Bank has decided to buy these collateralized debt obligations to the tune of $200 Billion (yes, with a “B”) over the next 30 days.  This is a HUGE thing to the markets.  Now, there is liquidity being injected.  Now, the other buyers have a feeling that there is hope.  Where there is hope, there is better times ahead.

The Federal Reserve is basically saying to everyone, we got your back.  Just like The Wolf in Pulp Fiction - they are coming “DI-rectly” - classic movie.  If the Fed is buying, so should everyone else.  If that happens, you will begin to feel like the world isn’t actually coming to an end (25% decline in just 2 months!!!).  If the world is not coming to an end, then even The Lemmings of Wall Street (another Graham/Buffett thing) will decide to come back to equities. 

I love waking up to seeing the market up 4,850,938,408,230,480 points…or something like that…makes me giddy since I have a lot of equities in my portfolio.

Here at the FinancialAnalysisGuy website, Warren Buffett will be the subject of my posts over and over again.  I have this saying I use for my father that is fitting for Buffett too.  “Every year I get older, my father gets smarter and smarter.”

Just like every other man in his teens and twenties, I knew everything and my Dad was a relic.  He wasn’t the smartest guy and he showed it over and over again - at least that is what I thought at the time.  Then, at some point, I started gathering experience and going through in life what he went through.  I realized, at some point, that just about everything he told me early in life was true. 

When I entered my thirties, it was readily apparent he was MUCH smarter than what I game him credit.  And every year since, it seems he gets smarter and smarter.  I love that guy and he truly is the most important mentor in my life.

Then there is Warren Buffett.  I suppose he is a ton like my father.  Down to Earth; folksy; easy-going; a simpleton really.  But when you get down to it, a very complex individual when it comes to his feelings and how he views the world.  Just like my Dad, Warren Buffett seems to get smarter and smarter as years pass.

In the latest Forbes article on the World’s Richest Man, Buffett is catching the press again by surpassing his good friend Bill Gates and the ever-ominous Carlos Slim.  This is to his company’s, Berkshire Hathaway, surging stock price (even though he gives some of it away every year!!!) 

How amazing is the Oracle of Omaha?  Seriously, even when he is wrong on his analysis and investment, he is barely wrong and there is always a silver lining.  He does things differently than most in the business and he catches a lot of flack from the establishment because of it.  He does not like the stock market and despises the 2 and 20 crowd of compensation (2% annual fees and 20% of the profit). 

What amazes me the most about the guy is his nerve.  One of his favorite quotes that he lifted from the late-great Benjamin Graham, the Godfather of Financial Analysis, is to “be fearful when others are greedy, and be greedy when others are fearful.”  This is the man’s secret to success.  Even more so than successful stock picking and financial analysis. 

(Also, as a sidebar, if you have not read Benjamin Graham’s book, The Intelligent Investor, the absolute Bible for financial analysis and investing, I would suggest doing this ASAP.)

I can tell you from my own experience that to be able to check all emotions at the door and invest based on sound math and financial judgment is 90% of the battle.  Emotions play such a huge roll and this guy has mastered them.

I can’t wait to visit all the different ways this man does his financial analysis.  He is the master and I will hit on all his subjects over time.   I can’t wait…