Archive for August, 2011

John Bell and Internet Frauds and Scams

Posted in Exposing Corruption on 18, August 2011 by nathanbusch

Dear Audience:

Peggy mentioned to me yesterday that our mysterious “John Bell” had sent yet another e-mail.  Today, I was able to study this latest e-mail.  My comments follow copy of the e-mail.

************** the e-mail **************

When you invest two things are important:

A) The price you pay.

B) The future profits of the business you buy.

In an ideal world every investment you make
will be in a good company at a cheap price.

The price being cheap keeps your risk low
and increases your return.

And a good business will not only continue
for a long time it will also have the
opportunity for growth.

To find these opportunities (good companies
selling at bargain prices) we need to figure
out exactly what it means.

What makes a “good” business?

What price is cheap and how is it measured?

Firstly let’s discuss finding good companies.

The mark of a good business is the return
on capital.

A good business is one that can use a small
amount of money to make a large amount of
money.

Most businesses in the US earn roughly 10%
on their capital.

That’s the average.

So a good business probably earns roughly 20%
on their capital.

An outstanding business may earn 40% on
its capital.

You get the point.

The higher the Return on Capital the better
the business.

This is the reason companies like Facebook
and Google can grow so big so quick – They
have HUGE returns on capital.

I measure Return on Capital as:

EBIT/Net Working Capital + Fixed Assets

The chief advantage of owning a “good”
business is that it can reinvest its
earnings at this higher return.

The ability to invest money at a 30%
return is valuable, very valuable.

But finding a good business is only half
the battle.

You also need to buy that good business
at a cheap price.

This price part is probably even more
important than the return on capital part.

Imagine you just inherited $1m and plan
to invest that money to earn a good return.

First you consider government bonds. At
no risk you can earn a 6% return.

Not bad.

But you also notice two businesses are
for sale in your town.

Business A will cost you $1m and earn
$100,000 per year.

Business B will also cost you $1m but
will earn $200,000 a year.

Which is the better option?

Of course it’s B.

This is because the Earnings Yield is
higher.

Business B offers a 20% return (or
earnings yield).

While Business A offers a more standard
10% return.

All else being equal you want to buy
businesses with high earnings yields.

The easiest way to measure earnings
yield is the P/E ratio.

Price per Share/Earnings per Share

In summary, smart investing can be
broken down into buying above average
companies at below average prices.

John Bell,
HacktheStockMarket

************** the end of the e-mail **************

I wonder if those that have subscriptions with the “John Bell” service are experiencing excessive chagrin at about this time.  The e-mail contained absolutely no new information or concepts.  In fact, the “return on capital invested” and “earnings to price ratio” method of evaluating stocks is neither new nor particularly useful to discerning investors.  Mr. Joel Greenblatt first published his work on this problem in 2004, or perhaps 2005; Mr. Greenblatt tested the model against actual market data predating 2004 by 17 years and found that the method provided average annual gains of more than 30%.

Jammin Java Corp. is a clear case study supporting my conclusion that “John Bell” does not actually employ the magic formula investing protocol of Mr. Greenblatt.

Several weeks ago, I called the next “John Bell” penny stock scam.  GBLS: of course, I could be wrong.

I will not be defeated and I will not be deterred from my mission of exposing corruption and frauds.

Nathan A. Busch

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Norwegian Kronor or Not?

Posted in Life in the Country on 10, August 2011 by nathanbusch

A friend recently solicited my opinion on the purchase of Swiss franc or Norwegian kronor as a safe strategy against inflation rather than purchasing gold.  The following is my response.

As to the Swiss franc and the Norwegian kronor: conservative, right-wing media outlets, including Internet sites, have put out a lot of hyperbole over the past six months or so stating that the franc and kronor are safe harbours for monies originating from investors in the United States. This has caused, in my opinion, the franc and kronor be oversold the same as gold has become. Let us think about this issue for a few minutes: what good is gold? You cannot eat it, you cannot drink it, you cannot produce anything beneficial with it. To obtain gold, one has to dig it out of the ground, pollute the earth with very toxic chemicals in the refining process, and then dig another hole in which to hid the refined gold. My attitude is the same for currency. In and of itself, it is useless and has no value.

Let me explain this last statement so that your thoughts are clear on this subject: currency is only useful if it can be moved around between individuals in the marketplace. For instance, if you were to purchase, say, 500,000 Norwegian kronor and put these into a vault, of what use is that? You might as well put the equivalent cash in U.S. dollars into the vault. As far as utility is concerned, the end result is the same. What if, in two years from now, the market for kronor vanishes. Then your investment is worth less than what you paid, and you have gained no incremental value whilst holding the currency.

Having said all of that, consider that I am holding some British Sterling Pounds. Currently, that currency is in an account open to the fluctuations in the US$/UK£ exchange rate. I am not doing this because I am speculating on currencies or on commodities. This is because I am accomplishing three things: first, the UK£ is appreciating at a rate of about 7% per year against the US$, which is not too bad for a relatively conservative position; second, I am betting against both the U.S.$ and the U.S. economy; and, third, when the U.K. stock and bond markets adjust to be more in line with my investing criteria, I will invest directly in U.K. companies using U.K.£. The benefit of this last point is not to be lost. Appreciation of the shares, or bonds, held in U.K.£ will be magnified against the U.S.$. Also, the dividends on the stocks and interest on the bonds will be paid in U.K. £. Again, the gains will be magnified against the U.S.$. Whilst this investment strategy is subject to the vagaries of the exchange rate, as long as the exchange rate remains above a certain level, I am in a winning position. Compare this philosophy and plan with the concept of holding commodities. Commodities gain nothing in the end. Speculating on foreign currency will only have negative long-term consequences. Investing using foreign currencies in foreign markets will provide a positive long-term result.

One more point in the philosophy of investing using foreign currency indicates a considerable benefit: diversification across economies and geopolitical boundaries. This can only be a good thing.

Investing requires a mind set different than being an entrepreneur, speculator, or gambler: you must have titanium nerves, look to the very long-term, which means more than 20 years, and be a grouchy contrarian.

Nathan A. Busch

Inflationary Pressure is not Necessarily an Evil

Posted in Life in the Country on 7, August 2011 by nathanbusch

There has been a growing amount of debate and thrown barbs in both the mainstream media and the Internet lately regarding perceived or possible inflationary pressure on the economy of the United States.  Such commentaries on this issue seem like a debate, or political campaigning, rather than a meaningful deliberation about prudent investment strategies.  Towards deliberation, I offer the following observation and analysis.

If I remember correctly, the last of the “Jimmy Carter” era 30-year Treasuries matured in 2007.  Whilst studying these particular Treasuries, I noticed some had a coupon rate of 17.5%.  That rate was neither particularly high nor particularly low for the particular type of treasuries.  Now, if you were a farmer and had to take out a $100,000 loan in 1977, or 1978, with a 17.5% interest rate, you probably fell victim to the farm crisis that gripped the country in 1985.  In fact, many farmers did lose their farms precisely because of the crushing interest rates.  The interest rates were driven by of out of control inflation, a petroleum crisis initiated and controlled by OPEC, and a president more interested in micromanaging the day-to-day affairs of the White House than in managing the economy.

Recall, further, that within a few years after Ronald Reagan defeated Carter, inflation was brought under control and the coupon rate on the 30-year treasuries dropped considerably.  For those investors who take a long-term view of investing and personal financing, this fact is essential to both remember and understand

Nevertheless, suppose that you were a prudent investor and bought, say, $100,000 of the 30-year treasuries in 1977 that were yielding 17.5%.  Also, say that you were sensible enough to invest the dividend in instruments that were yielding reasonable returns, say 10% per year, and you did so for 30 years.  You would have received a total of $525,000 in interest payments from the treasuries and you would have received the $100,000 face-value of the treasury at the end of the 30 years.  Much of that $525,000 would have been received in years in which inflation was relatively modest.  Returning to our computations, investment of the annual $17,500 dividend at 10% would yield a portfolio worth $2,878,645.40, not accounting for taxes and not accounting the initial $100,000 paid for the treasury, at the end of the 30th year.  If the original $100,000 and the $2,878,645 portfolio were invested from 2007 through 2011 at the same 10% interest rate, the current value of the portfolio would b $4,361,034.

Even with the years of high and low inflation between 1977, or 1978, and the current date, I cannot imagine anyone today complaining that either $2,878,645 or $4,361,034 is a paltry amount of money, particularly when that amount arose out of an investment of $100,000.

I am currently hoping for a few years of extremely high inflation.  I will purchase as many high coupon rate, 30-year treasuries as I can afford.  Then, I will see a secure long-term financial situation based upon reinvesting the  interest.

As anything in investing, it is essential to take a long-term view.  Sure, the situation might be a bit rough at times, and the short-term financial situation might be difficult: however, investing prudently at the correct time will provide a secure long-term financial position.

Nathan A. Busch

Reasonable Voices Must Not be Silenced

Posted in Exposing Corruption on 7, August 2011 by nathanbusch

To my audience:

I apologize for the carnage that was visited upon my blog.  I have suffered an attack on both my blog and my own physical security:  apparently, someone did not like that I was investigating the “John Bell” stock SCAMS.  I have long been dedicated to exposing corruption where ever it may be found.  As time passes, I have become ever more committed to the cause.  Therefore, although I may be temporarily encumbered by the actions of others, I will not be deterred from my mission.

To my audience, I send my deepest gratitude.

Nathan A. Busch