And the blogging returns. Thanks all for your patience. It has been a wild few months, between market crashes and rebounds, a business “split” so that my partner and I could each focus on our core competencies (yes, it was friendly; and, no, there’s no juicy back story), and so much more.

Late in December, SeekingAlpha asked me to do an interview about my “highest conviction pick” in our portfolios. Surprisingly, it was a tough interview because I felt good about all of our positions. (The only position that had me biting my nails was Jackson Hewitt, which we ended up dumping around $4 when it seemed clear that they would not get RAL funding. A discussion for another day.)

In any event, the interview was just published today. The summary:

When natural gas prices plunged to $3 in September, RIA Joe Ponzio looked for a producer with “strong enough management, economics, and liquidity to survive a deep, prolonged downturn in the underlying commodity.” He found this mid-cap company fit the bill, and while the stock has run up some since then, it remains his highest conviction holding…

For further reading on BreitBurn, you can download these two pages (PDF, 190kb) from my quarterly letter to clients of Ponzio Capital.

Due to the number of sites that reprint my articles, I typically only respond to comments on F Wall Street. For this particular article, I’ll also be responding to comments on SeekingAlpha; so, feel free to chime in on either site.

Click here to read the SeekingAlpha interview.

Jackson Hewitt Tax Service (JTX) is the second largest paid individual tax return preparer in the US (based on the number of individual tax returns prepared and filed with the IRS). In 2009, its network of 6,584 offices prepared 2.96 million tax returns. According to Jackson Hewitt, that’s 3-4% of all tax returns prepared by a paid preparer in 2009!

It’s the second largest player in its industry – an industry that deals in one of the two uncomfortable certainties. (Taxes, though we’ll see how death is playing into it too.) And its stock is down 95+%. What’s not to like?

Avoiding Disaster Through Business Investing

If you recall from various past articles (Enron, Lucent, Amylin, to name a few), you can learn a lot about a business and avoid many disasters by focusing on the business instead of the hype and nonsense on Wall Street and in a stock price.

Of course, you can’t avoid every disaster. Still, by focusing on the business and on buying value on the cheap, you can protect yourself from many unrecoverable losses and, perhaps more importantly, know when to get out of an investment that is turning bad.

We lost money on Jackson Hewitt, but not nearly as much as we would have had we been following Wall Street’s advice:

Uncomfortable Certainties

We all know the old saying:

There are only two certainties in life – death and taxes.

Jackson Hewitt is one of those companies that deals in the inevitable – taxes. Though you’re not required to pay a tax preparer to file your return, people generally don’t want to risk an IRS audit and would rather pay someone to “do it right.”

Furthermore, the tax business is a sticky business in that, once you have someone file your taxes, you’re likely to stick with that person or company (for a while, at least) because you fear the IRS and don’t want a new tax preparer/accountant uncovering past mistakes which could cause you financial and legal problems.

A Fast March

As you can see from the chart below, Jackson Hewitt’s stock was on a fast march to nothing. Shortly after the market’s 2007 peak, JTX was changing hands for more than $33 a share. The Great Recession hit, and Jackson Hewitt’s stock was no exception to the market’s decline.

The Panic

In addition to the recession, Jackson Hewitt was facing problems with its Refund Anticipation Loan (RAL) business. RALs are short-term, high-interest loans made to customers that are ultimately paid back by their tax refunds. You may have seen commercials for these – walk in, file your taxes, walk out with a check.

For Jackson Hewitt and the banks originating the RALs, this was a very lucrative and fairly safe proposition, backed the full faith and credit of the US Government (assuming the tax return was okay).

Panic, however, set in for a number of reasons:

1. JTX was late to the game when it came to online tax preparation software – something its competitors had already done; and,
2. there was/is a long-standing fear that RALs will be banned by the government; and,
3. Jackson Hewitt was essentially at the end of its borrowing ability.

Management

As the old saying goes: You want a business that any fool could run because, sooner or later, it will be run by a fool. I won’t go so far as to say that Jackson Hewitt’s management is a bunch of fools; however, they’re not on my favorite list:

They were slow to the online game (you would think that the combination of falling total returns filed and the fact that everything is going online would be a wake-up call).

They borrowed a bunch of money to buy back the company’s stock at highly inflated prices even though the business was deteriorating (are we value investors the only ones looking at the value of the businesses we buy?).

They relied too heavily on a single bank to provide RAL funding…during a banking crisis…in which the bank was severely hammered…to which they turned a blind eye.

The Price vs. Value

At $33, Jackson Hewitt was grossly overpriced relative to its intrinsic value as an ongoing business, and a clear “no thanks” to a value investor. But what about at $4 to $6? A little back-of-the-napkin math would tell you that this is a business that should generate about $80 to $100 million of operating income (excluding depreciation and amortization) under normal conditions. Capital expenditures are small as the company has been focusing on building its franchise business rather than opening company-owned stores; so, $80 to $100 million (call it $90) minus $8 million in normal capital expenditures puts us at about $82 million a year. Lose another $14 million to interest, $27 million to taxes (say, 40%), and you have about $41 million of pre-tax cash flow.

It’s the third quarter of 2009; so, the best information I have is from the latest annual report, in which Jackson Hewitt shows 38,867,231 shares outstanding, less 10,440,491 in treasury (the shares they paid too much for in their buyback program).

At $6 a share (the high end of our buying range), Jackson Hewitt was selling for $170.5 million – barely over four times cash flow. In any book, that’s a bargain and should have plenty of upside potential over the years.

And though I think that management made a number of missteps over the years, the general public knew nothing about this; so, back in July of 2009, there was little reason to believe that the business would fail. People would still file their taxes; and, with Jackson Hewitt rolling out new kiosks in Walmarts and a new online product, I thought, “Okay – maybe they’ll survive. At $4 to $6, it’s looking cheap.”

No RALs? This Could Be Bad!

By mid-December, the bank that had been providing the majority of Jackson Hewitt’s RAL funding was notified that it could no longer engage in RALs until it shored up its own finances. Houston, we have a problem…or is it? (Yes, but I wasn’t sure at the time.)

Shortly after Jackson Hewitt received the news that about 75% of its financial product revenue (a large portion of its total revenue) might be gone, management moved into scramble mode. By the end of December 2009, a silver lining appeared on this otherwise dark cloud:

(Remember: We’re still focusing on the business, not the price of about $4.50.)

Santa Barbara Bank agreed to sell its RAL division to a private equity company, and to complete the sale before the start of the tax season (just a few weeks away). No guarantees; however, the thought process was this:

Why would the private equity company buy the RAL business, and agree to such a quick purchase in time for the tax season, and not fund Jackson Hewitt’s RAL business? After all, Jackson Hewitt is the RAL division’s largest customer by a very wide margin. You don’t typically buy a business with the intention of alienating or denying to work with your largest customer, right?

So…we hold.

Great Thinking…Even Though It’s Wrong!

By mid-January, financing for the RAL product was still nowhere to be found. Jackson Hewitt stated that 50% of its RAL products were funded, but would not identify where or how that count was tabulated. Was it 50% of its most lucrative ones? 50% in number, not quality? I hate shady press releases and filings.

Sometimes you have to go with your gut. In this instance, my gut was telling me that Jackson Hewitt was putting lipstick on a pig, and that the “50%” was not all it cracked up to be. If it was a great 50%, wouldn’t they be parading that on the news?

50% of Something is Better than 100% of Nothing, Right?

In this case, not really. Jackson Hewitt was tiptoeing a fine line. At the end of this month, the company needs to come up with a $25 million debt payment. When I sold out (around $3.50 to $4 per share), what I knew was that Jackson Hewitt was at the end of its borrowing limits, had just $60,000 in cash on hand, had 50% fewer accounts receivable (on 20% lower revenue), and was facing a $25 million cash payment on its borrowing at the end of April.

If it can’t make that $25 million payment, it violates its debt covenants which means it has two choices — close up shop or enter bankruptcy protection. (I don’t know how willing the banks will be to restructure the debt as Jackson Hewitt’s business is declining and it has no net assets to borrow against.)

The Results: Focusing on the Business

In short, Jackson Hewitt was a loser for me. I don’t typically buy with the intention of selling six months later. Instead, I buy with the intention of selling when the price and intrinsic value converge. Though I prefer to see the price rise to a higher intrinsic value, it sometimes happens that the intrinsic value falls when the business deteriorates.

What did I avoid? From $33 to our purchase price ($4 to $6), Jackson Hewitt had fallen about 85%. By focusing on the business, we avoided that.

From when we bought to when we sold, we lost an average of about 16% (using our various purchase and sale prices). And though I’m not crazy about losing money, we avoided another disaster: the ride down from $4 to $1.66 – an additional 59% loss that we didn’t suffer because we focused on the business, not the price.

Everyone takes losses. They happen. Warren Buffett has lost more money than most of us will ever make. You won’t win them all. Still, get back on the horse. So long as you focus on value and making smart decisions, you’ll be quite satisfied with the results.

In just two short weeks, F Wall Street will be celebrating its third anniversary. My, how time flies! And it seems as though, for three years, we’ve kicked around the idea of having a forum here. I have always been hesitant for two reasons:

1. forums, in time, tend to become very unmanageable and overrun by idiots, stock pumpers, spammers, and gamblers
2. there are already millions of great forums out there, from Alex’s newest forum at Let’s Talk Value to Jae’s value investing forum at Old School

In thinking about the forum idea, I believe that what you want is not a forum, but a place to exchange ideas, talk about value investing, etc – whether or not it’s in a true “forum” format. Thus, we decided to go another route and make some changes here:

• TickerTalk: Look up any ticker symbol on F Wall Street and you’ll find an area to create a TickerTalk. A TickerTalk is a short thought, idea or message about a particular symbol or symbols. For example, I didn’t have time to write an article about the Hospira acquisition of Javelin, but I’m looking at it and would like to discuss it with the community. Check out my TickerTalk on the subject by visiting JAV‘s or HSP‘s symbol page.
• Symbol Lookup: Our web designers had the fun task of going through all of the old articles and tagging them with ticker symbols so you can now look up articles by ticker. I have also contracted with a data company to bring in company data to F Wall Street. We are starting with basic data – name, CIK, etc. Now, you can visit any company by symbol and begin your fundamental research here. For example, check out Google’s page at www.fwallstreet.com/symbol/goog and you’ll find links to their SEC filings, charts, news, and more.
• Submit an Article: If you have at least three TickerTalks and/or comments on F Wall Street, you can submit an article for publication on F Wall Street. You would consider doing this if you want to strike up a conversation that doesn’t fit into a TickerTalk. It’s a lot like starting a forum post, but it (hopefully) won’t get lost in the mix when hundreds of other posts are created at the same time.
• Advertising: For three years, I ran F Wall Street without ads. I have changed that policy now as our costs have soared due to rising traffic (hosting fees) and my desire to bring in more data feeds to really help you find value investing opportunities. There is no good place on the web to do fundamental stock research. We’re changing that. I won’t bog you down with ads; however, I do need to offset the costs of the data feeds. If you want to consider advertising on F Wall Street, check out this page.
• Registration Required: F Wall Street will always be free; however, due to the ridiculous amount of spam – a natural occurance on any popular site – we now require users to create a free account to post comments or TickerTalks. If you register, however, you’ll no longer have to wait for your comments or TickerTalks to be approved. (They will still be moderated to keep discussions classy, spam-free, and on-topic.) Registration takes all of two seconds.

I’d also like to introduce you to two of our newest additions on F Wall Street:

• Joseph Carrozza: Joseph is working for Ponzio Capital this summer doing research on workouts and arbitrage opportunities. One of his jobs will be to discuss his questions and findings here on F Wall Street in the hopes of sparking up some interesting discussions. You can follow Joseph by visiting his profile here. (He’ll begin posting next week.)
• F Wall Street Team: I have hired two assistants to help keep F Wall Street organized. The team will be responsible for moderating comments, accepting articles, and answering questions.

Take the new F Wall Street out for a spin. We’ll keep adding services to make sure that F Wall Street remains the place to teach, learn, practice and discuss value investing on the web!

How will the historians call this one? The European Crisis? Euro-doom? If you’ve been under a rock for the past few months, you may not have noticed the recent downturn in the markets. The headlines are all about the potential default of Greece on its debt, possibly followed in short order by a slew of other EU counties — Spain, Portugal, Ireland and Italy top the list.

Naturally, I have received a few e-mails and phone calls on this one; so, let’s talk about what happens if/when one or some of these countries go down for the count.

Putting It Into Perspective

Before we get all hot and bothered by a Greek default, let’s look at the difference between a country’s default and the sub-prime crisis. Why, you ask? Because of comments like this from one trader:

This is similar to what took place pre-Lehman Brothers.

Nonsense.

When a large amount of homeowners take out mortgages they can’t afford, and the values of their homes drop, they leave the banks holding the bag. A $500,000 mortgage on a $300,000 house is, essentially, worthless to a bank. Sure, it can recover a portion of the money it lent, but $0.60 on the dollar is a huge blow. Do that to the bank a few million times over the course of two or three years, and…voila! You have a banking crisis!

When a country “defaults” on its debt, it typically does not walk away, sending the keys to its foreign bond holders. Instead, the country restructures – slashing its budgets, cutting spending, and perhaps seeing some of its debt “forgiven” by bond holders…in exchange for a higher interest rate on the lower amount. That debt doesn’t go to zero or even $0.60 on the dollar (usually). It gets restructured, perhaps cut a bit, and then worked out over longer periods of time.

Though these are very rough calculations, you get the point — the sub-prime crisis was much larger than the Greek debt crisis. And, they are totally different. Investors are incentivized to buy Greek debt at a discount as they may earn capital gains and interest on their bonds. (A default would not normally stop interest payments altogether. It would instead cause existing debt to be refinanced.)

Investors in sub-prime loans after 2007 would earn no interest (if the loan defaulted), and could only make money from gains. As such, the loans would have to be sold for less than $0.60 on the dollar if the bank didn’t want to hold the non-interest paying debt.

So…What If Greece Defaults?

But it’s still a problem if Greece defaults, right? Not really. And to put that into perspective, let’s use common sense backed by some statistics and history. First, the common sense – and no offense to our readers in Greece, but…what the heck is in Greece from a global economic standpoint? Nothing!

Greece exports a little, but to Italy and Germany (mainly, about 11%), and to Bulgaria, Cyprus, the US (5%), the UK (5%) and Romania. They import a little as well. How “little” you ask? The entire economy of Greece is $331 billion — about 2.3% the size of that of the US. In short, if Greece fell off the face of the Earth economically, we would barely notice.

But It’s The Whole Eurozone!

Let’s say they haven’t contained the crisis — that, along with Greece, Spain, Portugal, Ireland, and Italy all default on their debt. In fact, they all collapse economically. What’s the damage? With GDPs respectively of $1.4 trillion and $2.1 trillion, Spain and Italy are the two “big” elephants in the room. The GDPs of Portugal and Ireland are each about $228 billion. You know…just shy of Apple’s (AAPL) market cap as of yesterday’s close.

First, let’s be realists — the odds of all five countries experiencing a total economic collapse to zero are practically nil. They all need to get spending and debt under control. Maybe they all need to restructure and refinance their debt. But they ain’t all going to zero.

Now, let’s amuse ourselves. What if their combined economies — coming in at 31% of US GDP — all collapsed entirely. What if they all went to zero…

The World’s Second Largest Economy Just Collapsed? Big Deal.

Before its dissolution, the USSR’s economy was second only to that of the United States. In 1989, the GDP of the USSR was $2.7 trillion — about 49% of US GDP ($5.5 trillion). And if you think that Greece’s finances are screwed up, you should see what the USSR looked like before it collapsed! Out-of-control government spending to prop up failed enterprises and fund military expansion and cold wars, all while subsidizing consumers.

In 1991, the Soviet Union was dissolved. The currency was wiped out. Debt defaulted. Civil unrest. Cats and dogs living together. You get the idea.

The Soviet Union essentially went to zero. And how did our markets respond?

Is This a Crisis or an Opportunity?

Some will say that I’m oversimplifying things. I’d argue that they’re overcomplicating things. Image what the news was like from 1989 through 1993, just before, during, and after the collapse of the Soviet Union. Did the media keep a cool head? Did reporters brush it off, seeing clearly into the future that the collapse of the world’s second largest economy was nothing compared to the potential 2010 debt restructuring of Greece’s tiny economy?

Let’s rely on common sense. We’ve survived two world wars, a depression, dozens of recessions, a cold war, and more, including the creation of the Euro. And this is what we’re worried about?

If you had been using some version of the F Wall Street spreadsheets, you’ll likely have noticed that it went kaput. This is because Morningstar decided to stop displaying ten years of financial data on their website, thereby breaking tens of thousands of value investing spreadsheets. As such, I have two important announcements regarding the valuation spreadsheets:

The F Wall Street Spreadsheet

As promised in the book, I will continue to offer a free valuation spreadsheet on this website. The new spreadsheet, updated to handle the Morningstar change, will only work 100% on Excel 2007 or higher. Users with older versions of Excel are free to modify the spreadsheet to get it working (or might consider upgrading to a newer version of Excel). I have included some PDFs for you here — screenshots of the new analyzer:

• JNJ Income Statement
• JNJ Statement of Cash Flows
• JNJ Balance Sheet
• JNJ Summary/Intrinsic Value

To help with your analyses, I had the designer add three additional valuation methods (no one method is perfect for every situation):

• Warren Buffett’s net-net formula (as explained in his early partnership letters)
• Joel Greenblatt’s Magic Formula (which you should read)
• 10 years of future cash flow with tangible equity (for companies that are tough to predict 20 years down the road)

You can also make adjustments to the automated growth rates by entering your own values on the summary page.

Instructions: Simply click here to download the spreadsheet. When you open it, make sure to enable macros (Excel 2007 and above will ask you). Then, simply hit [CTRL+q] to get started. (Advanced Excel users may want to add a button to their Excel Toolbar. Make sure your button launches the StartAnalyzer macro.)

Other Intrinsic Value Spreadsheets

Though I’d love to be able to post a ton of automated spreadsheets here, I simply would not be able to maintain them all. Fortunately, there’s Jae Jun and Old School Value. Jae has built some amazing value investing spreadsheets for you. Though you have to buy them, they come with 90-day, 100% satisfaction money-back guarantee.

My spreadsheet will definitely get you started. When you’re ready to upgrade, get Jae’s spreadsheets as well.

Enjoy, but…

I’m sure I don’t have to tell you that the spreadsheets are for informational and educational purposes only, and that they should only be used as a starting point for your research, but I’ll say it anyways…

The spreadsheets are for informational and educational purposes, do not constitute advice, and should not be relied on to make investment decisions.

Spreadsheet Limitations

My web designers tried to take into account a number of scenarios; however, the spreadsheets are not without limitation. They do not work for financial companies (eg, WFC) and they don’t run analyses (or good ones, at least) on companies with a very limited financial history.

If you notice any problems, please post them here and I’ll try to have them fixed as soon as possible.

» Download the F Wall Street spreadsheet

Let me begin by thanking all of you for your kind support and involvement here on F Wall Street. And then…let me follow up with an even bigger thank you — F Wall Street just became Amazon’s #1 Business & Investing book in the Investing category, the #23 book in the overall Business & Investing category, and the #112 book overall on Amazon.com!

In my wildest dreams, I never expected the F Wall Streets — the book and this website — to become as popular as they are, so…thank you!

Latest Quarterly Letter

It has been a while since I’ve posted an investment-related article. As you can imagine, I’ve been busy. Still, I’d like to keep things going. Here is my latest quarterly letter to clients, which, if I had to give it a title, would be called, “But Not Without Pain.”

The theme is quite simple — volatility happens. Short-term result should be ignored, however, because short-term volatility is no indication of a long-term trend or potential performance. Enjoy!

» Download the Q2 2010 letter.

Have You Noticed?

If you’re an RSS or e-mail reader, you may not have noticed some of the article submitted by other writers. For example:

• Mariusz Skonieczny asked why value investing isn’t more popular, posted his thoughts on NASCAR, and analyzed a profitable business trading at depression levels.
• Joseph Carrozza picked apart two workouts, making money on Javelin and walking away from Emmis.
• asues has been looking at market-based strategies, such as the S&P Index Effect and unwanted stocks.
• Cale Smith believes the risk of a double-dip recession is overblown.

You won’t get these to your email or RSS feed, as each author has his/her own links to follow. (That way, you can pick and choose your favorites to follow.) If you want to receive all articles on F Wall Street, there’s a feed and email subscription for that too!

The Spreadsheets

Some of you have been experiencing data issues with the spreadsheet…again. Apparently, nobody wants to give away free fundamental stock data anymore. The designers are working on it, but it looks like we’re heading in one of two directions:

1. we’ll use Jae Jun’s spreadsheets, and/or
2. we’ll subscribe to data directly from Morningstar, Zacks, or some other service.

At about $10,000/yr, we’re probably leaning towards the former for now. I’ll keep you posted.

Once again, and I can’t say it enough…Thank you to the best value investing community around! I may be the one who pays for the site, but you should also take a bow — this only works because of you!

A few months back, I read an interview with legendary investor Jim Rogers. In the 1970s and together with partner George Soros, Rogers soared to fame and fortune with the Quantum Fund — a private investment fund that, in ten years, gained 4,200% (47% annualized). How did he do it?

Commodities and Leverage

In the 1970s, stocks moved up and down — sometimes violently (sound familiar?) — but essentially ended the decade flat. The Dow opened on January 1, 1970 at 800.36 and closed ten years later at 838.74, a mere 4.8% higher (0.47% annualized). Commodities, on the other hand, had an amazing run in that decade, and Rogers capitalized on it.

Take gold, for example. From January 1970 through December 1979, gold prices grew from $34.94 to $455.08 — 1,202%, or 29.3% a year (using monthly averages). And the commodities bull market wasn’t limited to gold — virtually all commodities soared, in large part due to a number of factors including high inflation, middle-east instability, a falling dollar, and large and growing US trade and budget deficits.

Rogers and Soros took advantage of this trend to make huge sums of money by placing strategic, and highly leveraged, bets on commodities and currencies around the world.

Exchange Rates and Commodities Prices

Before you decide if today’s deficits, instability, and monetary easing is reason enough to buy gold, it’s important to understand how commodities are priced and what would cause commodity prices to rise or fall in the future.

I’ve discussed commodities in the past, saying that some laws can’t be broken, discussing what affects commodities prices, and exploring how to value a commodity. The short-short version: the $1,413 price you would pay for an ounce of gold today isn’t pulled out of thin air, but is based on a number of factors that coalesce to set the market price on any given day.

Understanding that is critical not only to investing in commodities, but in any investment. After all, this knowledge is at the crux of value investing as well. How else could we purchase stocks at significant discounts to intrinsic value if the prices were based solely on fundamental data rather than on a number of factors including speculation, fear, greed, industry trends, etc?

The 1970s Gold Party Didn’t Last Forever

Like they did throughout the 1970s, gold prices continued to rise through the first three quarters of 1980. By September of 1980, the average price for gold hit $673.62, up 1,828% from just a decade earlier. Though many will tell you that gold is the investment to buy when facing economic turmoil and political uncertainty, the reality is that such “advice” is usually provided by economists, advisors, and theorists who have little understanding of intelligent investing and are often too afraid to buy stocks precisely when they offer the most attractive returns — that is, when they’re the cheapest!

Though the following is not the most scientific study, I’m sure you can appreciate the relevance. I love Google’s News Archive feature. Punch in a search term, set a date or range of dates, and find news articles from the past. It’s how I came up with all of the gems at the end of this article.

Type in “invest in gold” from 1970 through 1999, and you get the following chart showing how many relevant news articles Google’s archive has:

In the last thirty years of the last century, gold’s popularity peaked in 1980 — precisely as it bubbled over an all-time high. Interest rates were near an all-time high. Inflation was raging in the double digits. A recession was months away. It was the “perfect case for gold” according to many. And yet what followed was a slow-motion, two-decade long crash in gold. It wouldn’t see $675 an ounce again until 2005 — 25 years later.

Gold’s Recent Decade-Long Run

Odds are, you’ve seen and heard a ton of advertisements for and news articles about gold over the past few years. Starting in mid-2001, gold has grossly out-performed the broad stock market indices, increasing four-fold versus the S&P 500′s 0% return.

In fact, the case can be made for other commodities as well. The dollar’s decline, which started in the early 2000s, served to naturally increase the prices of commodities priced in dollars.

So is it too late to invest in gold and enjoy the ride?

This brings me back to the Jim Rogers interview I read. Rogers brought up an amazing point when making the case that gold isn’t in a bubble. I’m paraphrasing, but here’s the gist of what he said:

I don’t know how you can call it a bubble. A bubble is when everyone and his mother owns gold. Today, most people still don’t own gold.

Rogers is right. In the dot-com bubble, everyone was a trader, dancing in and out of stocks and options on a daily or hourly basis. In the real estate bubble, everyone was flipping condos and houses like they were short-order cooks at an IHOP.

This being true, a case can be made that it is not too late to invest in gold — that gold has not hit the top of its bubble because the hyper-greed that typically accompanies the top of a bubble is not yet present.

Then There’s Warren

On the flip side of the argument is Warren Buffett. Though he’s made billions at times on commodities and currencies, he’s always been more interested in owning stocks and workouts. In October, Buffett had this to say to Forbes when asked whether gold is in a classic bubble today:

Look, you could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

Like always, he’s got a point too. Long-term (meaning over the course of two or three decades), you have been and probably will be better off buying pieces of businesses (stocks) than investing in gold or other commodities, especially if you are paying a fair or bargain price for your businesses. That’s because, long-term, businesses will grow at the rate at which they can increase their intrinsic value and reinvest their excess cash / grow their assets. Commodities will grow at the rate of inflation, plus or minus long-term valuations in the currency and long-term changes in supply and demand.

Tread Carefully, Talk to Your Neighbors…and Watch Hollywood

If you’re a buyer of gold today, you probably shouldn’t expect a repeat, 400% return in the next 8 years as we’ve seen in the past eight. Though there’s probably some growth left in gold prices and it may very well hit $2,000 an ounce in the next few years, the best time to buy gold in this run is most likely behind us. (And if it takes three years, that’s an 11% annualized return — not quite the return offered over the past eight years.)

If you do buy gold today, I’d spend as little time as possible watching the gold market and as much time as possible talking to neighbors and watching movies. Gold probably isn’t at the top of a bubble yet. When it is, you’ll know it not because of the price, but because your neighbors and coworkers will be extolling gold’s benefits, and movies about dirty, hot-shot billionaires will be about commodities traders, not stock brokers.

Kind of like the last few bubbles:

A little over a year ago, I had discussed Jackson Hewitt Tax Services (JTX) and how an investor should ignore the price and focus solely on the business. In doing so, you can often (though not always) see problems arising at your companies before those problems appear in the stock price.

The second largest paid tax-preparer in the country, Jackson Hewitt thrived in an industry that was all but certain:

There are only two certainties in life – death and taxes.

I’ve heard the argument a million times:

Yeah, but it’s [insert company name here]. They own the world. They’re not going anywhere!

The same was said over and over again on the Yahoo! Forums about Jackson Hewitt. There was endless blathering about agreements with Walmart, Republic Bank, IRS regulations, the need to file taxes. On and on it went as speculators (we can’t call them “investors”) rationalized why they were buying or holding Jackson Hewitt…from $33.00 all the way to $0.70.

(The Yahoo! Forums are chok full of nonsense, but they’re an interesting place to go if you want to see what goes through speculators’ heads.)

Too often, people jump into stocks without a thesis and with little more than hope. And while we all agree that these are businesses, those same people will ignore the business entirely or give it little more than afterthought consideration, routinely get clobbered, and then insist that the stock market is nothing more than a crap shoot.

Guaranteed Customers + Guaranteed Industry + Guaranteed Pricing (More or Less) + Unmanageable Debt = Bankruptcy

It’s a simple formula, but one that is regularly ignored by many. A stock (or company or government, if we want to go there) is more than its daily operations or the utility or look of its products. We have to look at its obligations because, if those can’t be met, little else matters and an “investment” is nothing more than a gamble.

And you can’t rely on Wall Street to give you the heads up on things.

March 31, 2011: An investment banking firm says that odds are increasing that Jackson Hewitt will enter bankruptcy after the end of this year’s tax season.

By focusing on the business, you don’t have to wait for the stock to trade at $0.50 to make these determinations.

Benjamin Graham focused almost exclusively on balance sheets for much of his career. Though in his later years he began to appreciate cash flows and income statements (hat tip to Warren Buffett, the student teaching the teacher), Graham built his fortune and fame by analyzing debts, debt structures, and adjusted asset valuations.

Why the Focus on Balance Sheets Now?

The markets are more fairly valued today than they have been at any time in the past three years (or so). From fairly valued, the markets have one of three ways to go: up, down, or nowhere. By focusing on the balance sheets more, investors have historically been able to: (1) enjoy immense growth if markets rise, (2) protect themselves and be ready for recovery if markets fall, and (3) profit when Mr. Market realizes that the company — perhaps beat down because of industry weakness or a terrible quarter — has sufficient assets to survive the storm.

When the markets are flying high and money is freely available (as we’ve seen in years past), debt is considered a non-issue by many. After all, it can always be refinanced or kicked down the road, right?

Then again, I prefer to think of it this way (Warren Buffett via Monish Pabrai):

When you have debt, you have to wake up every morning and worry about what the world thinks of you.

That’s even more true today when lenders are slow to refinance and quick to call less-than-desirable debts. That’s what happened to Jackson Hewitt — they were able to kick the can down the road and refinance tomorrow’s obligations and losses today…for a while, at least. But eventually, reality caught up with them, as it does with every company at some point.

Are the Markets Fairly Valued Today?

We’re getting there. No single indicator will tell you exactly where the markets should be, but when the main ones start throwing up similar signals, it’s worth consideration. So…consider this:

• the earnings yield of the S&P 500 is around 5%-6% or so, a pretty normal value historically under normal conditions.
• Graham-style net-nets are virtually impossible to find (though they’re around every corner when stocks, in general, are cheap).
• the market value of US securities is roughly the same as the current Gross National Product (GNP).

It’s not enough to move it all to cash, buy bonds, and wait for the pullback; still, investors should remain cautious and allow for even less wiggle-room in the balance sheet than might otherwise be allowed under “cheaper” market conditions.

What are your thoughts? Are the markets fairly valued or are you on a buying spree right now?

Silly goose. F Wall Street ain’t dead, even if I’ve given that impression over the past few months. The truth is: I have been swamped with work — you know…that silly little thing I do from time to time when I’m not posting on F Wall Street!

Once again, I welcome you back to F Wall Street with a series of changes. Though I appreciate all of the hard work and effort our guest contributors put into this site, I’m reorganizing it back into my own, personal investment blog. You can still visit their blogs to read more of their articles, but F Wall Street is going back to the old format — a one-man show.

We’ve also implemented some new changes to the comments section. Old comments are now archived and we’re relying on Facebook to handle our comments and moderation going forward. Rather than burden you with having to create an account on F Wall Street (and remember yet another password), you now only need to have a Facebook account.

If you’re on Facebook, say hello. If not, what are you waiting for?

Now this is what I would call a bad day for the Dow – a 12,124.36 point loss. Hat tip to Google Finance for helping investors keep their cool: