Newsletter September 1, 2007
InvestorsFriend Inc. Newsletter September 1, 2007
Back to School – Information is King
School is all about information and learning. It has been said that we are in a knowledge economy and that information can be the most valuable thing in the world.
Sometimes it seems like physical goods like food, cars, houses, and clothing must be worth far more than mere information.
But consider the old saying that goes something like “give a man a fish and you feed him for a day, teach a man to fish and and you feed him for a lifetime”. This old proverb recognizes that the value of the information on how to fish is more valuable than a given quantity of fish.
Consider what is the value of all the knowledge that humans have accumulated about how to farm and raise food.
What is the value of the knowledge and information about how to manufacture a car?
Consider too, what is the value of a good stock investment newsletter?
We truly are in an information age and proprietary information can have enormous value.
Consider banking and insurance. This is one of the largest “industries” in the world today. But they do not produce a tangible product. Their stock-in-trade is information. The bank studies who is likely to pay back a loan. The life insurance company endlessly studies the probability that an average person of a given age and other characteristics will die in a given time period.
A few years ago there was a movement that said “information wants to be free”. People did not want to pay for information, including the “information” that constitutes a song or a movie. Some information is indeed free. But even free information has value when it is organized and collected and made available. New information costs money to assemble and will not be free.
In terms of investments, the best information businesses are likely to offer good returns. One of the great characteristics of information is that once it has been produced, it can often be sold or licensed an unlimited number of times at no additional cost to the owner of the information. (That spells big profits.)
In Praise of eBay
The eBay auction web site is one of those rare businesses that really transform our way of doing things.
Here just a few of the ways in which eBay is a wonderful thing for its users:
eBay is the ultimate in recycling. Rather than have a book recycled into paper or a pair of fishing boots recycled into rubber, it’s infinitely better to enable others to simply re-use these objects again.
eBay saves landfills. Let’s face it a lot of stuff sold on eBay may have been otherwise destined for the landfill. Most of us don’t have the time or patience to conduct a garage sale to get rid of unwanted things.
eBay adds to living standards.
Ultimately living standards are increased if we take objects that are not being used and put them into the hands of people who can use them.
eBay created hundreds of thousands of business opportunities. Many people make their living re-selling things on eBay.
eBay obviously greatly expanded the potential market for sellers and for buyers. The whole world becomes a single open market place.
eBay cuts out the middle man. Consumers all over the world can sell directly to each other without having to use wholesalers or retailers.
eBay increases competition. Local merchants face competition as their customers scour the world through eBay.
If you are not yet an active user of eBay, check out their Site here. Maybe there are some things that you can obtain more cheaply on eBay. Or maybe it can be a great way to clear out your garage and basement.
Click now, to explore the eBay Web Site. www.ebay.com
Here are some ways in which eBay is a wonderful business for its owners:
It’s hard to compete against eBay. Once eBay became established, sellers of objects want to use eBay because that is where the purchasers are. Purchasers go to eBay because of all the products listed there. eBay benefits from a network effect, the more users there are, the better it is for all parties. eBay is basically a natural monopoly. It’s very hard to compete against that.
eBay’s business is incredibly scalable at relatively little additional cost. If eBay’s user base and traffic doubles in size, they can probably handle that with relatively little incremental cost to eBay.
eBay’s incremental cost on a transaction is probably approximately zero. Therefore the larger they grow the higher their net profit percentage can grow.
eBay is one of the stocks on which we currently have a Buy / Sell rating which is available to our paid subscribers.
The Best Businesses in the World
It has been said that a “toll-booth” would be one of the greatest businesses to own.
Imagine if the government let you simply erect a toll booth on an extremely busy road. You could collect many from every passing vehicle and yet (assuming you did not own or operate the road itself) your costs would be minimal. Your gross profit would be 100% and your net profit might be close to 100% as well. If your only costs were for the toll building and staff, your return on investment would be astronomical.
But what use is the above since no one is going to let you erect such a toll booth? Well, it’s useful to look for businesses that seem to have some characteristics of our ideal toll-booth.
Consider Microsoft. Almost every computer sold is equipped with Microsoft’s operating software. Therefore Microsoft can charge a toll-booth-like price for its software. Returns on investment for Microsoft’s operating system software have indeed been astronomical over the years.
Consider eBay. Having established the dominant online auction Site, eBay collects a “toll” on every transaction on its Site.
Consider Visa, Mastercard and American Express. Given that there are only a few dominant credit card companies, merchants are forced to pay a “toll” to one of these big companies on most of their sales.
Consider Rail Roads. There are many cases when shippers have almost no choice but to use the rail road that runs closest to them. In these cases rail roads can collect monopoly-like “tolls”.
The government regulates many monopoly-toll-booth-like companies such as electrical and gas utilities. But there are many duopolies and near-monopolies that have been established and that are not regulated. These businesses can make excellent investments for you if purchased for reasonable prices on the stock market.
When rating stocks as Buys or Sells, we look for indications that the company has “toll-booth” like characteristics. Past successes that we have had in this area include investments in Canadian National Railway, The Toronto Stock Exchange Group, nd Shaw Communications.
Invest Like Warren Buffett
Warren Buffett is approximately the second or third richest person in the world. Some people think he is yesterday’s news. They are wrong. About 14 months ago Buffet pledged to give away his fortune over a 20-year period. He was then worth about $43 billion. He has since given away $4 billion. But his net worth has not fallen. Instead it has risen to over $50 billion. This represents his approximately 30% holding in Berkshire Hathaway. That stock was recently up 29% since June 2006.
Some will complain about the rich getting richer. But let’s remember each of us had the chance to duplicate Buffett’s performance by buying shares in Berkshire Hathaway or by investing in the manner that Buffett teaches.
Recently Buffett was buying shares in a rail company, Burlington Northern Santa Fe. I will be adding that stock to our list and putting it through our analysis framework. This will help me in my quest to better understand how Buffett selects stocks.
Performance of our Stock Picks
In 2007 to date, (September 1) our Strong Buys are up an average of 10.9%, and our Buys are up an average of 8.0%. My personal portfolio is up 3.8% in 2007 to date. Our model racking portfolio is up 4.4%. By comparison for 2007 to date the TSX is up 5.8% and the DOW index is up 7.2% and the S&P 500 index is up 3.9%. Over the years we have so-far beaten the index every calendar year and most years by a wide margin.
Shawn Allen, President
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Bargain opportunity on bronze statutes and decorative pieces (off topic, I admit)
A friend of mine started a company and early this year imported a stock of bronze statutes and decorative pieces. He intended to wholesale these to retailers. Sadly he was unable to gain traction in getting sufficient retailers to stock his products. Now he is selling off the stock at very substantial price reductions. Many are half price or less.
I was at his open house and was certainly impressed. Some of these are quite large and could be used outdoors. Most of the pieces are, I believe, for display on a small table or the like. Frankly, I am no connoisseur of such things but to me the articles looked to be of high quality and some would be suitable to decorate the finest of new homes.
Prices now appear to range from about $150 to $3200. The original prices were $300 to $7500. For $229 for example you can get a fish figure that is over 2 feet long and over 24 pounds. The $3200 statute is stunning and is basically life-sized (6 ft and 218 pounds) and would be suitable for a finer home or business and could be used outdoors.
My friend is able to ship these pieces anywhere in North America. He is located in Sherwood Park, just outside of Edmonton.
If you have any interest in such baubles, check out his Web Site at http://www.animagusimports.com/retail/catalog/
At these prices, these articles will not last long. (In fact, I almost hesitated to post this, because I may want first dibs myself!).
P.P.S. The following was added to this newsletter September 3, 2007
Attention, any Dentists reading this: (everyone else if you have any dentist email pals you may want to forward this)
My latest newsletter spoke of the huge value of information. Coincidentally a friend of mine in Calgary has a package of information available that will be extremely valuable to any Dentist who is interested in learning how to make more money from his or her practice. My friend Dr. Dave Robertson, DMD owns a $6 million per year multi-dentist practice in Calgary. And he works only 2 days per week. Dave told me last year that he was thinking of setting up a program to offer all his dental management tricks and tips to other Dentists. Just today he emailed me and it is up and running.
You may think you have seen and heard all this before, but Dr. Dave is the real deal, he’s the guy working 2 days per week and making a LOT of money. Check out Dave’s program at http://www.dentalmanagementsecrets.com/ There is a lot if information to read there. After he describes it all you will likely be shocked at his low introductory price for all these secrets.
P.S. If you make a purchase from him let me know.