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Published by: Lyon Capital Management, LLC - A Registered Investment
Advisor
24B Grove Street * Pittsford, NY 14534 * Tel: 585-248-9821 *
www.lyoncapital.com
What's Up With Warren?
By Doug Lyon, CFA
In his most recent annual letter to shareholders, Warren Buffett states "Prices
are higher for both businesses and stocks." He says that in the current market
environment he uses a Ted Williams discipline when committing new funds. Paraphrasing from
Mr. Williams' book "The Science of Hitting," Mr. Buffett says that swinging at only
the best pitches will increase the chances of batting .400, while swinging at the
worst pitches will allow him to hit only .230.
The analogy drawn to investing, something to remember in our roller coaster market is:
be patient and wait to buy a stock when it is undervalued. This is the investment approach
taken at Lyon Capital Management. Don’t buy just to avoid being out of the market
when a stock is "high and outside."
Who is Mr. Buffett and why do we care what he is saying? Warren Buffett, originally
from Nebraska, got his start with a New York City money management firm. In 1956 he
returned to Nebraska and started his own limited partnership investment fund. He ran the
fund until 1969 when he dissolved it because he felt there just weren’t enough
undervalued companies on the market.
In 1969 Buffett purchased the, now famous, Berkshire Hathaway which, at the time, was a
small textile company in Bedford, MA. To this base he has added insurance companies,
banks, department stores, and food and media companies.
In the late 80s he prevented corporate raiders from taking over Salomon Brothers, and
then in the early 90s he took over as interim chief of the firm during the shake-up
resulting from illegal bond-market activities. He brought the firm back onto solid ground.
In 1989 he became the 2nd largest stock holder in Coca-Cola. Today he is the largest.
Mr. Buffett has an outstanding track record as a "value" investor - one who
finds companies undervalued by the market and then patiently waits for the value in them
to be realized. His fortune rivals that of Bill Gates - a close personal friend.
You may ask, "How does one go about purchasing shares in Mr. Buffett's
company?" Currently regular shares (class A) sell for about $66,800 each. But
recently class B shares became available. They sell for $2,215 a share. Class B shares
have a voting power equal to 1/200th that of A shares. Each A share is convertible into 30
class B shares.
Mr. Buffett’s annual letter to his shareholders appears in the Berkshire Hathaway
annual report. Reading these letters is like getting a graduate degree in investing.
(See our article on page 3 for how to access current and past Berkshire Hathaway
shareholder letters by Mr. Buffett.)
If you’re interested in learning more about the value investment style used by Mr.
Buffett and our application of it, please call us at 585-248-9821. $$
Board-ering on a Good Investment
by Doug Lyon, CFA
When researching a company as a potential investment, evaluating the board of directors
is an important step. At Lyon Capital Management we seek to know whether or not the board
of a company tends to act in the shareholder’s best interest or in their own!
According to CalPERS ( the California Public Employee's Retirement System), the largest
public pension plan in the United States, and a group known for shareholder activism, the
ideal board is likely to be one which has the following characteristics:
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The CEO is the only company employee
who is a director. Non-independent directors, beyond the CEO, comprise no more than 20
percent of the board. The chair of the board is an independent director. |
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Independent directors meet at least
once a year without the CEO or other non-independent directors. |
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At least 50 percent of the
director's compensation is in stock. |
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Important committees, such as audit,
director nomination and evaluation, CEO evaluation and compensation, and ethics, consist
entirely of independent directors. The chairs of these committees have access to their own
advisers. |
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The board establishes performance
criteria for itself, including standards for individual director attendance, preparedness,
participation, and candor. |
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The independent directors establish
performance criteria and compensation incentives for the CEO. The board has a CEO
succession plan. |
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All directors have access to senior
management. The board also has a formal program for dialogue with shareholders. |
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No director sits on more than two
other boards. A company’s retiring CEO may not continue to serve on the board. |
(Source: The Federal Reserve Bank of Boston Regional Review)
Criteria that Lyon Capital Management adds to this list include:
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A board size between 5 and 10 dilute
decisiveness. |
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For top officers of the company, the
value of their stock holdings should be at least equal to their salary. |
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Management should be focused on
growth and profitability for shareholders. |
It takes some digging to find out whether or not a company meets these criteria. Much
of the information is found in a company's proxy statement.
Knowing the characteristics of a corporate board is just one important piece of the
investment research puzzle. At Lyon Capital Management we consider these factors along
with many others. $$
Stock Buy-Backs ... Why We Like Them
By Doug Lyon, CFA
IBM bought back 174 million shares or 15% of its outstanding shares over the past 5
years while cutting the cash dividend over the same period.
Coca Cola bought back 157 million shares or 6% of its shares outstanding over the past
5 years. The company has plans to continue to use excess cash flow to buy back stock.
Phelps Dodge, the large copper producer, has used excess cash to buy back 17% of its
shares outstanding over the past 3 years.
Stock buy backs are, on balance, viewed as favorable by Lyon Capital Management for
several reasons.
First, using excess cash for buy backs as opposed to cash dividends is a way to
generate shareholder returns that are taxable only when the investor sells and then
taxable at a rate that is potentially 1/2 that of dividends. (Currently the maximum tax
rate on capital gains for investment held for 18 months or longer is 20% compared to the
maximum marginal tax rate of 39.5% on dividend income.)
Secondly, using excess cash to buy back stock is preferable to making unprofitable
investments that distract a company from core competencies. Eastman Kodak's ill-advised
investment in Sterling Drug would almost certainly have been better spent buying back
company stock.
Thirdly, buy backs are a way for company managers to return unneeded capital to the
owners of the company (the shareholders). In this age of increasing productivity less
capital is needed to generate a dollar of sales or earnings.
Finally, buy backs are a way to reduce a company's cost of capital. With less equity in
a company's capital base, it can provide shareholders a higher return on their investment
with the same level of earnings. Looked at another way, the same level of earnings can
produce more earnings per share; thus each remaining share of the company is worth more.
If buy backs are not part of your investment strategy, consider them or hiring a
professional who does. $$
Some Statistics to Bank On
The odds are 1 in 4 that an American family is taking care of a relative or friend age
50 or older.
30 percent of American women die after age 85.
The number of months in the past 15 years that the U.S. has been in recession is 8.
Sources: National Survey of Caregivers, Boston Globe, T. Rowe Price
Investment Research in the New Millennium
By Kate Lyon
When you use an investment manager, be sure he or she is using the latest technologies
to do research on companies selected for your portfolio. Find out how comfortable your
investment manager and staff are with technology. In the late 90s and on into the next
millennium a high comfort level with technology and its use will be key to staying abreast
of the latest company information and trends in the marketplace.
At Lyon Capital Management we use many technology tools to gather company information.
We also rely on grass roots investment research - digging it up ourselves. Much of this is
done now on the internet where current information is quite readily available. Below are a
few web sites that as an investor you might find interesting.
www.berkshirehathaway.com
Warren Buffett’s company web site. Current and past shareholder reports written by
Mr. Buffett are found here. If you dig deep you will find Buffett witticisms like how to
become a millionaire. Answer: "start as a billionaire and buy an airline." This
site is definitely for the serious investor.
www.[company].com
Substitute the company name for [company] to get to most corporate web sites. Once you
get there, an endless supply of information about the company is available. Just remember,
it's like the annual report: written with the best possible marketing spin.
www.nasdaq.com
You can access this site to view a chart of the current day's activity both with the
DOW and the NASDAQ market. You can get quotes for your NASDAQ stocks in both a
"flash" and "info" format. Unfortunately the New York Stock Exchange
doesn't provide a comparable service. So the next best thing might be to ...
View your portfolio electronically and securely, at any time, when you are a client of
Lyon Capital Management. For information or answers to other investing questions, email us
at lyon@frontiernet.net
Lyon Capital Management is an investment
management firm based in Pittsford, New York.
We invest in individual securities (stocks and
bonds) for our clients who are primarily individuals and businesses.
We use a value-contrarian strategy.
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