Saturday, March 10, 2012

"Burton G. Malkiel , Professor of Economics at Princeton University challenges the veracity of the concept of this blog which is based on Fundamental Analysis. Looks like it's time for a throw-down!"

Dow Jones Industrial Average 12,977.57 (Down) Week ending 03-02-2012
Dow Jones Industrial Average 12,922.00 (Down) Week ending 03-09-2012

Burton Malkiel in his landmark book "A Random Walk Down Wall Street" which was first published in 1973, (I have the Six edition, 1996), examines his basis thesis that "the market,  prices stocks so efficiently that a blindfolded chimpanzee  throwing darts at the Wall Street Journal can select a portfolio that performs as well as those managed by experts". In other words, just throw away your fundamental or for that matter technical analysis of stocks and just go buy S&P Index funds from Burton's buddy Jack Bogle at the Vanguard Group of Investment Companies.

Before I start jumping all over this thesis, I would recommend getting a copy of this book, because it is loaded with good information about "Risk" and "Beta" and speaks on a range of investment vehicles. First, Index funds are by definition "Average" . They purchase all the stocks in a sector both good and bad and you can only end up with average. Now average, might look good if you are an investor with no discipline in your purchasing of stocks and are always speculating on bad stocks and losing money. The reason that the Index investing has worked at all over the years, is because of another investment premise that is very good, that of purchasing small amounts of stock consistently over time whether the market is up or down. This is a very good method, but why not apply it to good fundamental stocks instead?

Malkiel finds weakness in Fundamental Analysis at three points. First the information and analyst may be incorrect. He challenges that stock analyst cannot be clairvoyant on earnings predictions. Well with the Sarbanes-Oxley rules on financial disclosure and the wealth of public information available this is not as much of a concern. It must be understood that random events can influence a companies earnings. Second, he says the analyst"s estimate of "Value" may be faulty. Well if Freewilly is your analyst, I will admit that sometimes I find estimating revenue growth for a company as somewhat problematic. I will keep you out of trouble though because of the many alternate investment choices. Third , the stock market may not correct it's "mistake" and the stock price might not converge to it's true value estimate. (Witness the stocks of GM and Ford last year, GM my biggest loser! Serves me right for investing along side the US government!). Yeah, that happens sometimes, but not to often with well managed companies.

Never under estimate the intelligence of a Chimpanzee. Nor that of an amateur stock blogger. I have been so busy that I didn't get my pick out to press last week but I purchased it anyway based on fundamentals and a double catalyst.
Verifone (Symbol PAY, $47.80) I purchased on Monday and it was down on Monday. On Tuesday with the Dow down 200 Points, Verifone (Pay) was up 3 and 1/2 points. What are the catalyst? ................................

"VeriFone to Enable Isis NFC Mobile Commerce Access for Millions of Retail Checkout Lanes Nationwide. VeriFone Systems, Inc. (NYSE: PAY), today announced an agreement with Isis, the joint venture between AT&T Mobility, T-Mobile USA and Verizon Wireless, to integrate the Isis Mobile Commerce Application in current and future NFC-enabled product lines. The companies have also agreed that their sales, marketing and implementation teams will collaborate to target large retail and petroleum/convenience merchants in previously announced Isis launch markets of Salt Lake City and Austin." The Smartphone strikes again!  The second catalyst is something I picked up in conversation. That is the rumor that with the advent of the SIM chip on the credit card and the new layers of security being put in place, that basically every credit machine that is in the field, is in effect, currently, obsolete,  because they can not read the new SIM chip cards. This is not a bad bit of news for Verifone, who just bought Hypercom and who along with Ingenico, make most of these machines. 

The company, which already had a 5 year revenue growth rate of 11% and a Return on Equity of 31.3%, looks to be in a very good position. 2012 earnings per share is projected at $2.66 and for 2013 it is $3.25 per share (if you can believe the analyst!).

So I will conclude, randomly, by saying that a group of good fundamental stocks will beat an index of average stocks hands down every time.  Best of luck and buy in small increments over time.

Also, Freewilly welcome the IDX -Indonesia Stock Exchange to our site this week to be added to our Stock Exchange column on the right side.


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