RECENT INVESTMENT THOUGHTS
As the co-manager of the Lakeside Fund, along with my co-manager, Anne Getz, we made several mistakes during 2010 including some in the fourth quarter. Most of our mistakes were in selling shares of companies too early, missing out on higher prices. Nestle is a perfect example of this. We sold 600 shares in September at $53 per share and as of the date of this report, Nestle is selling for over $55 per share. Some of the increase is due to the recent appreciation of the Swiss franc, Nestle being based in Switzerland.
Selling our Accenture stock in August for $37.54 per share cost us $10 per share at today’s price of over $48 per share. When we sold our shares the market appeared to have downward momentum which concerned us and we erred, as we usually do, on the side of caution. We sold NVE Corp. in August at an average price of $40 per share and today it is selling for almost $58 per share. We sold Ebay too early and it too rose after we sold our shares. But even the great investor Warren Buffett makes these sorts of mistakes, and admits his mistakes freely. His purchase of Dexter, a shoe company, cost his shareholders $3.5 billion. There are many more examples of bad investment moves he admits to making over the years. One of Buffett’s investment principles is: "When investing, pessimism is your friend, euphoria the enemy." Following this advice has cost us money but has saved us more than it has cost us.
There were companies which we studied in 2010 but for one reason or another we decided against investing. We first looked at Cameco at the beginning of 2010, which is a Canadian uranium company, selling then for $24.50 per share. Today it is around $40 per share. When we first looked at Panera Bread Company, also at the beginning of 2010, it was selling for $72 per share and today it sells for $101. Boston Beer, which makes and markets Sam Adams Beer, was selling for $67 per share back in September when we started studying this company, but we felt it was overpriced. Today, Boston Beer sells for $95 per share, an increase of 41% in just three months. In each instance we felt that the companies were overpriced, but many other investors apparently didn’t agree with our assessment. But there were many other companies which we studied and which we felt were also overpriced which turned out to be just that --- overpriced. Fortunately, we didn’t invest in these companies.
We are ever mindful of how the financial markets can be victims of momentum, quickly swinging downwards, or upwards. Until the economy stabilizes for an extended period, huge upward and downward movements in the markets will be the rule.
Our investments in gold and silver through two ETFs, iShares Comex Gold Trust and Central Fund of Canada, continued to comprise a large portion of Lakeside Fund throughout 2010. We tend to agree with economists who believe that the dollar will continue to decline in value against other currencies, including the Chinese yuan, and as the dollar depreciates the cost of gold and silver should continue to rise. Some “experts” believe that gold is heading into bubble territory, if it is not already there, and that is an ongoing debate which we follow closely. We disagree that gold and silver have peaked but we’ll continue to look at these two commodities closely. We did take some profits in gold and silver in 2010 as reported above and earlier in 2010 we reported making a profit when we sold our investment in Titanium Metals Corp.
Many economists believe that 2011 will be the year when many states will default on their financial obligations. Should this occur interest rates will rise, the dollar will become weaker and presumably commodity prices will climb higher. At least that is the economic theory. In a televised report entitled “The Day of Reckoning” on 60 Minutes on December 19, Steve Kroft reports that a number of states are on the verge of defaulting on their debt obligations and that the day of reckoning is at hand. Kroft’s report can be found on YouTube at www.youtube.com/watch?v=nP3b0_fnPxQ and is worth watching.
So I’m wary of the U.S. economy and I continue to look closely at Chinese companies and companies in other emerging markets. For example, we have a small investment in BYD Co. Ltd. (Chinese battery and auto manufacturer), but we sold the bulk of our holdings during the third quarter. BYD has declined almost 50% since we sold most of our shares. We lost money in China Green Agriculture. These were plays that didn’t work out in 2010 as we would have liked, but we feel that we need to keep our eyes on these markets as they are becoming larger and larger in the global economy.
Investors continued to be ripped off by scam artists in 2010. Ponzi schemes seem to proliferate. A new twist on Ponzi schemes involved Louis Michael Pihakis, an 80 year old who has been indicted for his “advance-fee” scheme in which he falsely promised business people multi-million dollar investments from a nonexistent trust in return for an advance fee that was typically several hundred thousand dollars. And in Louisiana, 73 year old Judith Zabalaoui was convicted this past year and is now in prison for persuading over 35 people, mostly elderly, to invest in two nonexistent companies that promised “safe” returns of 13% to 26%. Clients gave her power of attorney over their assets. Judith spent more than $3 million of their money on her personal expenses --- clothing, vacations. New scam artists fleecing small and large investors alike are caught and then reported in the Wall Street Journal every couple of days it seems.
On another criminal front, the SEC began in 2010 investigating insider trading involving hedge funds and publicly traded company consultants with inside corporate information. This investigation is probably long overdue. Insider trading does not necessarily cost average investors, but it gives hedge funds receiving the inside information a huge advantage, and that is why it is illegal to trade on inside information. In one instance an insider was paid $200,000 for providing hedge funds with nonpublic information about various companies. Indictments have been served on the participants. Some have pled guilty.
The moral of the story: Be wary of any investment advice that you receive, as well as investment “opportunities”. My advice is to follow the above cited Buffett adage: "When investing, pessimism is your friend, euphoria the enemy."
January 25, 2011
Sincerely,
Jeff Lydy
jefflydy@gmail.com
419-283-4586