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GE Is David Hartzell's Highest Conviction Holding - Here's Why

If you're not concerned about CRE you're not paying attention. Of course the big REITs are still okay - they've been able to raise capital at overvalued equity prices and no bank wants to cut off a commercial borrower who's sort of performing (that is, as long as you keep rolling their debt at low rates/easy terms and no more vacancies arise they can service the debt - under forseeable levels of moderately increased stress they can't) when they're nearly swamped with the residential real estate foreclosures.

The unfortunate reality of our current recession is that consumption hasn't yet shrunk enough - people are still spending like they used to in spite of being unemployed or losing chunks of their income (see the big WSJ article about this a couple weeks ago). That means that marginal retailers are still hanging on with only moderately decreased sales. There are plenty of retailers who cannot sustain any increased pressure from their lenders or any further drop in sales - everyone is counting on a big holiday season, which is why you see so much hype about it in media. You will see retail/commercial bankruptcies in the beginning of 2010 - the question is just how severe.

Even currently, as I walk around NYC I see lots of prime vacancies that in the boom times would have been snapped up. Anyone who hasn't been in NYC commercial real estate since the bad old days has no idea how cash-flow negative they can go. Neighborhoods that are beautiful and high-rent today were vacant wastelands before the 80s.

As to GE, if you assume that everything is going to be fine of course it's a great buy at trough valuations. But to pretend it's some kind of sure bet is to decieve yourself based on the name and history of the company. Cheap stocks are cheap for a reason. If you can analyze ALL the factors and feel that you can forsee a better future, they are the best opportunities. But when they're so dependent on the economic cycle and access to the credit markets, you can't guarantee yourself a good return the way you can with a less dependent investment. Even more importantly, with necessarily limited current knowledge there's no way to predict where GE will be a year from now. A smart investor would be willing to hold it for as long as it takes to reach fair value, knowing that in the meantime one is getting the cashflow at a cheap price and has the opportunity to reinvest it at a desirable rate of return.

Dividends vs. Stock Buybacks

The GE example in the article is right on - surely this company, with huge liabilities matching tons of risky assets, could have seen the need for more reserves or debt repayment rather than continuing buybacks at prices where the return couldn't possibly be that great.

IBM and MSFT are different cases because they don't have GE's debt load or risky assets. Their cash flows are about as stable and predictable as they get outside of utilities, their debt is low-rate and manageable, and their reserves are adequate. There's no good reason they shouldn't repurchase shares. IBM has done a great job generating positive returns since 1998 when many tech companies have destroyed shareholder value with poor acquisitions and strategies. They also have seriously increased the dividend in recent years. MSFT has been somewhat less successful, I think because they haven't found the right way to enter new markets and drop unprofitable businesses (example: MSFT continuing to burn money online while IBM exits a weak laptop business to focus on software). But even still, many many stocks have done worse than MSFT, and the share price has been on a decent run of late. You have to remember that good buybacks increase real returns (you hold a larger share of a profitable company) while share prices reflect lots of speculative factors (people would pay ridiculous multiples of earnings in the late 90s - the bursting of the bubble was due to a shift in this perception rather than MSFT or IBM management errors).

Lightway: Please explain how IBM and MSFT could have grown larger than their current size by reinvesting more cash in their business (remembering that both carry large cash balances even as it is). I would argue that MSFT in particular currently is in too many businesses with lower margins than their home and office software - internet search, gaming, etc. I would rather see the company run as a cash-flow generator that investors can direct to their own investments in independent tech smallcaps than see MSFT make a bunch of overpriced acquisitions or internal growth initiatives that get lost in a huge corporate culture.

Berkshire Hathaway: Proof That the CDS Market Is Irrational

The idea that anyone can make any real money shorting and distorting heavily-covered large-cap stocks & bonds is the height of foolishness. There are huge pools of capital looking for undervalued investments all the time. If a struggling financial company were actually solvent, somebody would arrive with the refinancing option or new equity capital necessary to ride out short-term fluctuations. They would extract expensive terms and existing holders would be hurt, but there's a lot more money looking to buoy company solvency and lift pricing to accurate levels than there is looking to take apart healthy companies for short-term gain.

Over the past year+, every step downwards in pricing has been accompanied by bottom calls and inflows from value investors (private equity, Buffett's buys, foreign investment in C/MS, equity offering from GE & WFC, etc.). The fact that companies have continued to move downwards each time is due to very real problems in our economy and within these companies. On the back end some companies will survive and rise quickly in price, but more may still fail. At the start of this crisis people were saying things like "Sure WB and WM have problems, but C and BAC can NEVER fail; it's a sure double from current prices (~20 and ~35) if you can hold for 5 years". Does anyone still want to ride that train?

Investors may have become irrationally fearful about some companies (look at current pricing on MSFT/JNJ/T/VZ/etc - not as exciting as the banks but hard to imagine negative returns or returns inferior to treasuries for much longer) - but there are real reasons to be fearful about banks. People were scared to invest in banks long before anyone concieved of CDSs; the US had regular financial crises in any economic downturn for the first 150 years of its history. One of the major causes of this crisis was that we forgot that fear of banks after the success of reforms like FDIC and the relative lack of pain for large US banks in the S&L bailout/early 90s recession.

On Buffett-Back Riding

Artful Dodger: You're simply wrong about Buffett's stock selections. First of all, he was nothing but a stockpicker in his early days when he achieved returns in the high 20% range. Secondly, take a look at the table on page 15 of www.berkshirehathaway..... I realize that it's not up to date, but I think it pretty effectively makes the point that Buffett has done very well with some stock selections: Washington Post, Coke, and AXP/WFC if they ever come back (doing better than other financials anyhow - we'll see). He made a great medium-term trade in PetroChina a few years back. He started in GEICO as a stock investor, although he eventually made it a fully-owned BRK company. He played FNM/FRE very intelligently and got out at the right time. Of course everything he's bought in the last couple years is down, when every stock is down, but that doesn't mean stock picks haven't been effective. Think about the investments that 20 years of Coke dividends have funded.

More importantly, I can't think of a major Buffett stock holding that has totally blown up. He has achieved the returns without taking big risks. Anybody can buy a basket of pharmaceuticals with drugs in testing or trade tech startups during the bubble and possibly get lucky - but they're going to also lose big chunks of money at times. Buffett hasn't picked positions that lost big sums of money.

Fear and Loathing in 2009

Nonsense after nonsense. The original post makes no sense: nothing but bearish sentiment followed by sticking to positions that the writer is married to because he's facing huge losses on all of them.

whisperonthewind: Do you know anything about banking? Why would banks pay 4 or 5% for standard deposits that could depart any day when the government is essentially handing out free money? Are you that stupid? Many banks are issuing new mortgages at 5% and below - where do you think their interest margin is going to come from if they start paying equally high rates on deposits?

I should know: You already know that you were wrong once (driven and derided by greed in July - selling WFC for 20? What did you think, that we were never going to have any banks again? You should go into business as a contrarian indicator!). Now you're wrong again. WFC is not the First National Bank of Purple Unicorn-Land. They were in every type of bad lending - interest-only, subprime, Alt-A, HELOC, no-doc, ARM, etc. Maybe they didn't go as far into the joys of negative-am ARMs as Wachovia, but they remedied that mistake by purchasing them. Why would you trust any bank's marks when all of them have had to take further writedowns and loss reserves every quarter for the past year? Of course financial bulls will eventually be right, but it doesn't really matter if you're right about one bank (which you accidentally sold) 10 years from now when your other investments have blown up along the way.

GE: Not-So-Good Things Come to Light

GE has some covenants requiring them to support GE Capital from the industrial side of the business, but none of these are worded very strongly, and there's a reason that substantially all of the debt is in GE Capital - they didn't set up the corporate structure that way just because they thought it was cute. There's no reason for it except that some wise manager back in the day thought "Worst-case scenario: we dump the Capital unit into bankruptcy or sell it off cheaply and get back to making lightbulbs". Maybe it also allows some balance-sheet games, but the SHtF scenario is the main point.

Three Stocks To Be Held To Infinity and Beyond

So much poor reasoning in these responses. I realize the original article isn't perfect, but:

johnj0522: Your point is irrelevant. The 150 shares of GE in 1987 would be 1821 shares today. The author misspoke but it doesn't affect the conclusion of the argument. He didn't double-count splits. Google Finance (and some other financial sites too) adjusts for splits going backwards to make these calculations easier.

multiple posters about dividends: this article isn't about dividends. It's about returns ex-dividends, because those are easier to calculate and the author is trying to make the point that these stocks were acceptable holds even without thinking about the dividends (if you reinvest they become excellent investments, in hindsight).

Reckless: You can look this up yourself. Gannett is about flat, but anyone who held print media through the highs this company hit in 2005 is a buffoon who deserves to lose his money. With the dividends at least he's still making a profit. Citigroup is up more than 4x from 1987 (and you could have gotten it at the same price or cheaper as late as 1992), before you even look at the dividends, which are pretty big. Maybe you could work harder at cherry-picking?

RobertM73: You are as wrong as a person can be. Read any history of investing and you will see that anyone who invested intelligently during the 30s made tons of money in the 40s and 50s. That's why people like Graham and Fisher are famous - they made their fortunes in those markets. Even from the peak of 1929 it wouldn't take until anywhere near the late 60s for investors to be made whole. Even if you use the ridiculous metric of ex-dividend DJIA (which is a narrow, price-weighted, subject-to-change index that no one should base generalities off of), the Dow hit its 1929 price peak in 1954. Of course, nobody in the world invested all their capital at the peak of the 1929 market and then did nothing for the next 25 years except spend dividend checks, so actual investor returns were massively positive for this period because the '30s created buying opportunities and dividends kept compounding.

those bemoaning inflation/talking up gold: Show me the asset class that provides better risk-adjusted long-term real returns than stocks and I will be happy to invest some money in it. It sure isn't gold, which is lucky if it matches inflation and provides any real return whatsoever. If you bought gold at its peak in 1980, you were just made whole this year, in NOMINAL terms with NO dividends. You've had a block of metal in your house for 28 years and now its purchasing power has been eaten up by inflation. If you want to talk about mustering a flat real return in the long term,, you would have had to buy gold at one of those times when no one else way buying it and held it for the nice 2000s run we've had. I realize it looks good in the last ten years, but that's because you've caught an sentiment-driven uptrend in an commodity asset with minimal function that produces no earnings. Gold cost more in real dollars in 1980. Gold cost roughly the same amount in real dollars as far back as 1974. What makes you think that this is a logical investment to buy and hold?

Review of Current Losing Positions: NZT, ACAS, SKM, GE

jjason: I think you're missing several of the points.

Your #3 is nice, but when the book value of a company is largely determined by a number that they make up for loans that may or may not be repaid and business interests that may or may not be profitable, it's concievable that the book value might drop in the future. The fact that the company can be bought for less than said book value is one indication that maybe their internal valuations aren't quite accurate.

Your #4 is also very nice, but companies love to make this claim when they write assets down and it's not always the case. If it's Warren Buffett noting a share-price decline in Coke, maybe you should believe him. If it's some guys telling me that their junk bonds and mortgage-backed securities totally won't default because those underwater homeowners and small companies paying 15% interest are risk-free money, I'm a little skeptical.

#5 really depends on your definition of "over-leveraged". What kind of rate are they paying on that debt? How well is it covered by income? If income craps out, how long before the debt eats up the equity and company has to raise capital at unfavorable terms?

#6 would be sweet if any evidence were attached.

I don't know why people can't just accept that risk and reward go hand-in-hand. You're not getting a risk free 15-20% yield when you buy shares today in companies like ACAS and ALD. You could make a lot of money or you could lose all your money. If you want risk-free you have to put up with Treasury yields.