The Next Warrent Buffett and Berkshire Hathaway!

Who is the Next Berkshire Hathaway?

Like any great empire, it's time for Berkshire Hathaway to fall from the top and relinquish the throne of SuperStock to a contender. Berkshire is simply too big to sustain the kind of growth seen in previous decades as evidenced by flattening returns over the past few years. Although Buffett and his team may find a second wind to their astronomical past success, it would seem that as Buffett readies to pass on the crown, it may be time to consider a new ruler altogether in the multinational conglomerate superstock competition.

There seem to be a number of contenders for the next gold medalist in the fight to become the Goldilocks stock story of this new century. The top candidates mentioned most frequently by financial analysts, writers and researchers are Markel (NYSE: MKL), Sears Holdings (Nasdaq: SHLD), Fairfax Financial (TSE: FFH.TO), Leucadia (NYSE: LUK), Brookfield Asset Management (NYSE: BAM), Alleghany (Y),  and Harbinger Group (NYSE: HRG).

Markel (MKL): Located in the US, Markel Corporation markets and underwrites specialty insurance products and programs to a number of niche markets. It operates in three markets: excess and surplus lines, specialty admitted, and the London markets.

Markel's chief investment officer, Tom Gayner, is a conservative investor like Buffett who has returned 14% annually over the past 10 years compared to the sideways trading S&P 500. Gayner is a long-term value investor, investing in companies with high return on equity, low price over book and low price over cash flows.

Sears Holdings (SHLD):

Sears Holdings Corporation, through its subsidiaries, operates as a retailer in the United States and Canada. The company operates through three segments: Kmart, Sears Domestic, and Sears Canada.

Man at the top, Edward Lampert started his own hedge fund in his 20's, with an investment style similar to Warren Buffett's, averaging returns of 29% per year.

Fairfax Financial (FFH.TO):

Fairfax is run by Prem Watsa, another long-term value investor dubbed “the next Warren Buffett”. Watsa is best known for his most famous calls include selling half his stocks before the 1987 crash and buying S&P puts before the index dove in 2000. He also bet against the Japanese Nikkei but his biggest success came just recently when he bought credit default swaps on the premise that banks and financial institutions would struggle if a credit and liquidity crisis arose.

Since 2005, Fairfax revenue has stayed at roughly $5 billion. Net earnings, however, have grown at 100% compounded annually, from $53 million in 2005 to $856 million in 2008. The market price of Fairfax shares listed on the NYSE has doubled in value over this period. According to filings, Watsa has returned a compounded 23% annualized return in book value between 1993 and 2008.

There are very few who can match a record like that. Over the last ten years, Fairfax’s wholly owned investment management company Hamblin Watsa Investment Counsel has produced a common stock investment return of 19.1% compounded annually, against a (1.4%) decline for the S&P index over the same period.

Leucadia (LUK):

Leucadia National's Ian Cumming and Joseph Steinberg  have their hands in every sector, invest fearlessly, and buy good companies at low prices. Invested in a diversified portfolio of stocks and businesses, Leucadia has generated impressive returns and gained dedicated fans amongst value-oriented investors.

Leucadia is considered to resemble the Berkshire Hathaway of 20 years ago. But unlike Berkshire, Leucadia tends to focus on speculative companies rather than operating businesses and presents an attractive play on its depressed investments and on the ability of Cumming and Steinberg to continue to find new investments.

Brookfield Asset Management (BAM):

Brookfield Asset Management Inc. is a global asset manager focused on property, renewable power and infrastructure assets with over $100 billion of assets under management. The company's investment guidelines include investing in areas of competitive advantage, aquiring assets on a value basis with a goal of maximizing return on capital, building sustainable cash flows and recognizing that superior returns often require contrarian thinking.

The company's remarkably consistent objective over the years simply has been to earn a 12% to 15% compound annual return per share. 45 year old Bruce Flatt runs a conglomerate that manages $108-billion worth of real estate, utilities and infrastructure across the planet. In the nearly a decade Flatt has been in charge, Brookfield has emerged as the world's biggest owner of prime office space, and its 165 power plants constitute one of the largest hydroelectric portfolios.

But more impressive is how Brookfield weathered the 2009 flashcrash that crippled many of its rivals. Over two years, as its stock plunged by two-thirds along with the markets, the company quietly added to its capital and waited out the storm.

Alleghany (Y):

Alleghany has found its comfort zone in property/casualty insurance with real estate mixed into the formula. Its goal is to create stockholder value through ownership and management of a small group of operating businesses and investments.

Alleghany’s subsidiaries include Capitol Transamerica and RSUI Group. In its last quarter, the company beat EPS estimates by 1.19 (4.85 actual vs. 3.66 estimated). Alleghany Corporation has had an average earnings growth of 1.9% over the past 10 years. As of the end of February, Alleghany holds $825 million in cash for use in future investments and has no debt to note.

Harbinger Group (HRG):
Harbinger's strategy is to buy controlling and significant equity stakes in companies competing in six industries: Consumer products, insurance and other financial products, telecommunications, agriculture, power generation and lastly, water and natural resources.

Harbinger Group Inc. is a holding company with approximately $144.8 million in consolidated cash, cash equivalents and investments as of June 30, 2010. HGI's principal focus is to identify and evaluate business combinations or acquisitions of businesses. HGI continues to review acquisitions and business combination proposals with the assistance of its advisors. A majority of HGI's outstanding common stock is owned by investment funds affiliated with Harbinger Capital Partners LLC.

Have a look at these companies for yourself.My current favorites are Leukadia, Brookfield and Fairfax.

Disclosure: the authors owns shares of BRK.B.
  

Time To Buy Apple!

I don't own Apple stock. But I do consume alot of Apples. 

We collectively own several Apple products in the household including an iPhone, 3 iPads, 2 Apple notebooks, and 4 iPods.  We also own 2 Blackberries, a Dell desktop and a Dell mini laptop--which is not very popular since the iPads entered the picture. Sure I miss Flash and a few other applications that make my personal iPad frustrating on occasion, but not enough to force my hand to replace my tablet with a RIM Playbook.

I firmly believe Apple stock is undervalued.

I have not been a bandwagon stock purchaser, and therefore Apple shares elude my portfolio.

According to Recognia, the little research program that comes with my brokerage account, Apple shares are undervalued by 67%. Wow. For comparison, Google shares are noted as undervalued by 72%., Microsoft by 20%, and Nokia--the major competitor for Apple's iPhone, is listed as overvalued by 17%.

Stephanie Link of The Street recently commented that Apple is the "It" product story of the world. Apple is all about applications. They have the most, boasting 65,000 and growing. They have a huge share of the cellphone and tablet market--in fact no other company comes close.

Apple has the uncanny knack of being able to create products that we never imagined needing and making them a "necessity".

Cueing Up for Apples

Ya, there are line ups for products, backlogs and some disgruntled customers frustrated at the lack of immediate gratification, but few walk away and most are content to wait. No one doubts Apple can meet demand. And certainly if they continue to produce the products consumers want, line ups will continue to form.

Recent history supports Apple's market dominance as always the first one out of the gate on new technology. Apple has alot of cash, great management and a strong research and development team.

Apple Looks Enticing Right Now

At the current price of $350 per share near it's 52 week high, Apple stock is still very attractive. Analyst estimates predict numbers between $375 and $450 for intermediate term stock growth and the Chinese market for Apple products is growing exponentially as they too ride the cultural move from laptops to tablets.

Looking at the Yahoo Finance technicals, RSI is neutral, the stock is trading above its 200 day MA, Slow Stochastic is ticking up and volume has been average but landing on the sell side of the pendulum since mid March.

So is it time to buy Apple?

Recognia produces several bullish signals of late: a gap up, price cross over 50 day MA, MACD and Slow Stochastics pointing in the right direction and good momentum. First target price is $365.28, an area of previous resistance, and when you add up the psychological factors, more than 90% growth year after year and the current technical indicators, I can't find a reason not to buy me some Apple.

As well, the US dollar is currently riding lower than our buck which gives me further incentive to take a position.

Analysts Love Apple

Most analysts consider Apple a strong buy or buy with only one analyst out of 54 listed on Yahoo Finance considering Apple a sell--who is this guy anyway? Perhaps he owns Nokia.

Apple beat the S & P 52-week gains by 41% (10.65% versus  31.61%) with 921.28 million shares outstanding, a few of which will be mine after the Easter holiday.

So, it's apple pie for Easter, and Apple shares when the markets reopen. 

Happy Easter and Happy Investing!

Disclosure: the author does not own shares of Apple, Nokia or Google as of publication.

Silver is the New Gold

The price of silver has more than doubled in the last 12 months rising four times faster than Gold which climbing to its most expensive level versus gold since 1983.

Like gold, silver is used as a hedge against the weakness of the dollar. Silver is the most widely used precious metal in industry from semi-conductors to solar panels, and political uncertainty in exporting countries like Peru also create further buying interest.

Silver as a Hedge Metal?

In 2008, the price of silver fell to below 10 dollars as it was considered simply an “industrial metal” with much in reserve. As the recession seemed to herald an imminent depression, investors began buying Gold and Treasuries reminiscent of reactions during the 1929-1932 depression, leaving silver out of the loop.

Back in the 30's, silver was considered a base metal, with abundant supply somewhere short of 5 times the actually domestic demand for industry and coins in North America and there was little interest in it as "precious".

Silver made a slow comeback until the late 1970's and on Silver Thursday in 1980, the price of silver collapsed again in the face of government dishoarding and mine supply increases. There was no sign of silver shortage and gold continued to lead the world as the base monetary metal of exchange.

These days, the mindset that gold remains the only hedge against market collapse and inflation is wavering. Although most gold investors would consider silver as ever-abundant and of little interest, recent history would suggest otherwise.

COMEX, an exchange warehouse stock pile of silver has less than 50 million ounces for sale as of a year ago, significantly less than the hundreds of millions of ounces accessible in previous decades. COMEX trades millions of paper ounces of silver per day, the majority never settled in actual physical silver bars, creating a liquidity based on leverage that sets the world price for the white metal.

Supply and demand seem to be mismatched. Is there truly enough  physical silver to fill the volume of COMEX business or is this simply a paper play of in-out IOU's of an irreplaceable stockpile? Would the banks be able to deliver on short sales? Are we simply buying and selling monopoly money masquerading as a silver bar? And what happens if buyers call in their purchases in actual physical silver all at once? Is there enough of the stuff to translate paper into metal?

It would seem that the silver market does not truly require new investments for prices to be forced higher--current paper holders simply have to demand conversion to physical silver.

Why the demand for silver?

As with other precious metals, silver is not in abundance, has been historical used as direct currency, and is pretty. Bottom line. We wear it as jewellery and we print coins from it. But there are other more important applications for silver that are growing in global industry. And annual production of the metal has been significantly less than annual consumption of late leading to growing declines in reserves.

Industrial applications of silver accounted for over 400 million ounces in 2005. Silver is used as a electrical conductor, heat conductor, a flexible metal to shape small wires, and as a catalyst in the plastics industry for manufacture of polyesters and solid plastics.

Billions of silver-zinc batteries are produced annually to power small electronic devices and silver is used in conductors, switches, fuses, vacuum cleaners, dryers, microwaves, dishwashers, computer keyboards and hundreds of other daily use appliances. 

Automobiles contain silver tipped contacts and switches; marine motors, jet engines and tankers all rely on silver tipped electrical circuits.

Silver is used in medicine as an antimicrobial, in photographics, Xrays, and of course to adorn our bodies as jewellery. Silver is used in solar panel production, semiconductor manufacture, and as currency.

What Would Warren Buffet Say?

Well, as usual, I like to pass my thoughts through the buffetometer and this is what I learned: Warren Buffet reportedly purchased 130 million ounces of the white metal in 1997--the legal limit an individual could personally own.

Bottom line, silver is the new gold. Silver applications are increasing, silver stockpiles are diminishing, silver mining may not meet demand. So buy silver.

Disclosure. The authors own shares of the US ETF Global X Silver Miners (SIL).

The Alpha of Canadian Hedge Funds

Meet The Top Dog of the Canadian Hedge Funds

I recently overheard a couple of colleagues chattering about investing in hedge funds and between the technical jargon and comparison gibberish, the only phrase I clearly understood was this:

"If I had 150 thousand bucks, I'd give it to Steve Palmer."

Researching the Markets

After a single quarter of trading, I seem to be at a near break-even point. Having heard horror stories of newbie traders losing 50% or more of their investment dollars in the early days of their trading, I suppose a mere 0.5% earnings profile is not such a bad place to start. Of course I could have earned more working at my regular job, but I see it as an educational  sacrifice that cost far less than any university level course on the markets.

So what did I learn? Other than "keep green on your screen", a favorite Toni Turner sign-off to her twitter updates, I learned that there are good gurus, bad gurus, good funds, bad funds, and that everything is in flux always. I learned there is no sure thing and that psychology plays a major and often under-rated factor in the markets. I learned that technical indicators and Newton's laws of physics also play an often under-rated factor in the way the markets naturally move. I learned I am stupid about these matters and should listen to people with a track record while at the same time executing my own due diligence to confirm that at the very least I agree in principle with the advice.

So what does this have to do with Steve Palmer. Well, everything. Mr. Palmer fulfills the criteria of a good guru and manages a fund that fulfills the criteria for a first class investment. Of course, I would need 150 grand to walk through his Front Street office door, but hey, at least I have a goal.

So Who Is Steven Palmer?

Steven Palmer is a founding partner and Chief Investment Officer of AlphaNorth Asset Management, and runs their Partner Fund. After launching his investment career in 1997, Mr. Palmer became the Vice President of Canadian Equities at a major financial institution and subsequently managed a pooled fund of primarily small cap Canadian companies achieving a first rate ranking and returns of 35.8% over 9 years as compared to 10.0% for S&P/TSX Composite Index and 13.0% for the BMO small cap index.

He has an impressive track record for his young years and seems to make people lots of money, particularly investing in small cap Canadian companies, one of the most volatile, yet potentially most lucrative, investment fields.

Why is AlphaNorth so Attractive?

AlphaNorth Partners Fund is a "long biased hedge fund" launched in December, 2007, focussing on Canadian equity securities and offered to "accredited investors".

Returns Since Inception
(Dec1, 2007 to February 28th, 2011)
                                                            Annualized    Cumulative
AlphaNorth Partners Fund               48.7%            262.9%
TSX Venture Index                           (4.1)%            (12.6%)
TSX Total Return Index                    4.0%               13.7%

Sure the fund dipped low in 2008 with nearly every other fund on the market, but it regained its lofty standing with a vengeance to earn an average annualized return of 48.7% since December, 2007. Big performance, big fund and a big ticket price of $150,000 initial investment. Not for the average Canadian, not for the faint of heart.

The Historical Accredited Investor

Bottom line, you have to have money to make money. And you need to be an "accredited investor" to buy a piece of AlphaNorth. A hedge fund is a high risk investment. And historically, the "accredited investor" class was designed to protect investors and investees against market crashes that could potentially wipe out personal or fund net worth.

Following the 1929 market crash and subsequent great depression, the US Congress intervened to set strict rules in place to in essence, "clean up" the practice of securities investing. Thus the Securities Act of 1933 and subsequent birth of the SEC, led to law that was passed which required companies to provide detailed information to investors so that they could make informed decisions. This Act also defined which investors could invest in certain securities, thereby creating the "accredited investor".

An accredited investor was defined as having "a net worth of at least one million US dollars or having made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount the following year."
Accredited investors have access to a level of investments such as hedge funds and other potentially high yield funds that the average Canadian unfortunately does not. And in all fairness, the law exists to protect that average Canadian from losing everything they own if a volatile investment such as a hedge fund crashes and burns up their life savings. It also protects the fund from having low risk tolerant investors run away at the first sign of a negative market flux.

Hedging With The Hedge Funds

From Wikipedia: "A hedge fund is a private investment fund which may invest in a diverse range of assets and may employ a variety of investment strategies to maintain a hedged portfolio intended to protect the fund's investors from downturns in the market while maximizing returns on market upswings."

Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s annual return is higher than that of the previous year.

Check out Steven Palmer's AlphaNorth Partners Fund here.

Happy Investing