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**************************************************************************************************************** The rolling ten year return on the S&P 500 index is the worst since the Great Depression—yielding a negative 10-year return. The average long term market return is 10% per year for that index (see chart above, credit: Bespoke Investment Group). ***** We take a look at the recent IEA study and the concerns for long term crude oil supplies: FSN article
Matthew Simmons discusses NAFTA and the energy sector: problems ahead? ***** The cost of living in the U.S. fell in November by the most in six decades, while slumps in manufacturing and homebuilding worsened, sending the economy deeper into a recession. Deflation is a concern for investors as we noted in the latest LSGI Report: Bloomberg survey
Last month two-thirds of the companies in the LSGI Fund reported third quarter earnings (twelve of our eighteen positions). The median year-over-year increase in corporate revenues was an impressive 45.2% for LSGI firms - with the median year-over-year increase in earnings per share was an incredible 84.1%. As a comparison the median firm in the S&P 500 index increased revenues 12.9% and earnings per share 14.5%. The trailing price earnings ratio for these LSGI reporting companies was 9.8 (the trailing price/earnings ratio for the S&P 500 index is 15.5) and the price to book ratio was 1.6 (versus 2.8 for the S&P 500 – near a two-decade low for that Index). (LSGI investors only)
Matthew Simmons reviews the recent IEA report on global oil production: Simmons—era of cheap oil over
Alternative energy problems and opportunities were discussed at the SMU Frank Pitts lecture series we attended last month in Dallas: presentation slides
The page sixteen story: Are conditions as dire as they appear? We examine historical data in an attempt to analyze the outlook for investors.
Is energy really a form of money? Chris Martenson has some interesting ideas in a short 10 minute presentation: Energy & the Economy
Investment banker Matthew Simmons discusses energy risks and crisis in a recent presentation: Simmons
One-half the LSGI portfolio is named to the Forbes 200 Best Small Companies list— (LSGI investors only) ******************** Investment banker Matthew Simmons discusses risk, the economy, and long term energy trends in a recent presentation: The Energy Crisis & RIsk
An interesting presentation on energy yield and alternative fuels discusses some of the issues alternative fuels face—in addition to the effect of a lack of credit and low energy prices on alternative fuel development: Alternative Fuels
The relationship of the energy sector and the global economy makes a compelling story for investors—and serves to affirm our bullish long term view on the sector (video presentation): Energy & Economy
We discuss our outlook for the energy sector in a report to our investors—is the recent weakness due to the ‘shoulder season’ or due to the economic slowdown: Shoulder season masks long term trends
And we look at the market going forward: is the market efficient?: The Market, Investments, and the ‘Efficient Market Theory’
The hurricane season might be one of the busiest ever according to our studies—and with around 20% of U.S. production in the Gulf of Mexico implications in the energy sector might be substantial: July ACE seasonal correlations
July 1st marked the 9th anniversary of the LSGI Venture Fund L.P. Since the structure of the LSGI investment portfolio is essentially identical to the investment partnerships Warren Buffett and Charlie Munger ran in the 1950’s and 1960’s an interesting academic question arises:
Using the Capital Asset Pricing Model (CAPM) to review the returns for the first nine years of each partnership portfolio, which active manager has generated more ‘alpha’ (excess returns over and above that expected by the market) in the first nine years of running their partnership—(1) Warren Buffett and the Buffett Partnerships? (2) Charlie Munger and the Munger Partnership?, or (3) LSGI and the LSGI Venture Partnership?
We report our findings in a report to our investors: CAPM Report.
Charles Munger, Berkshire Hathaway’s Co-chairman, discusses problem solving methods in a recent lecture at Cal Tech: video ************************************* Forty percent of our LSGI Fund portfolio was included in the Fortune Small Business 100 list featuring 100 of the fastest growing public firms in the U.S. We recently published a study on the impact of monetary policy on the performance of small cap stocks - a topic of both academic and practical interest to our investors: MTU white paper
We were interviewed on the impact of possible Gulf of Mexico hurricanes on energy prices. We think the impact of any hurricane could last for months—but the odds are only one in three a storm will impact production: article
Who would guess that oil and gas leases would be auctioned on e-Bay? We discuss the issue with Platts: article
We presented our research on the state of the energy markets to the 2008 SMU Institutional Oil & Gas conference last week. Our conclusion? The energy boom has just started: SMU white paper
Meanwhile developments in the energy markets remain positive for investors according to a recent report we prepared for our investors: Market Oracle
The Fortune Small Business 100 list was published in the July 7th issue—featuring 100 of the fastest growing public firms in the U.S. We own nine of these firms in our portfolio. And we discuss one of our favorite plays in the Fortune Small Business article: FSB 100: A Farm Equipment Maker Goes Far Afield
************************************* Gasoline prices may not decline much this summer as we discuss the energy sector with financial journalists at the Chicago Tribune— long term global trends in the energy markets will challenge consumers and investors going forward.
Historical statistics indicate that active portfolio managers have difficulty beating the major market indexes—adding ‘alpha’ or excess returns—for their investors. That being the case, how did Charles Munger and Warren Buffett generate excess returns when they managed their investment limited partnerships early in their career? And how did the 75 year old daughter of one of Buffett’s best known finance professors give away over $100 million to the high school she attended years ago? We address these issues, and more, in a white paper presented to applied finance students at Michigan Technological University - Excess returns: Can active managers generate ‘alpha’?
We were the featured dinner speaker at the 2008 SMU Oil & Gas Investing Institutional Conference—last year we toured a Quicksilver Resources Barnett shale well in Fort Worth: KWK well tour - Dallas/Fort Worth Area
For the third time in eight years the Michigan Tech Applied Portfolio Management team won the national championship in the value category in the University of Dayton investment symposium—and we award our 2008 LSGI scholarship to a MTU finance student.
‘The agricultural sector remains attractive as our research is referenced in a recent article, and we identify our “Best Idea for 2008” in the Dick Davis Digest.
We issue our projections—the three major market influencing events we expect in 2008, and discuss panic buying in the grain markets, all detailed with our portfolio in our monthly report to LSGI investors.
MSN Money interviews us for our best low cost investment idea: 5 Stocks at Big Mac Prices—and we discuss the outlook for the market in 2008 in a recent column: It Was a Very Good Year.
According to Ned Davis Research if an individual invested $1,000 in the S&P 500 index from November 1st to April 30th — the ‘winter season’ — every year from 1950 to 2006 their account would now be worth $38,799 before tax considerations. If, over the same 56 year period, an investor had invested the $1,000 in the S&P 500 index from May 1st to October 31st — the ‘summer season’ — they would have $916. During that 56 year period an investor using this seasonality strategy would have lost money. We examine the seasonality factor over a much shorter period than Ned Davis—the last eight years—to see if the excess returns have been arbitraged away in recent years or is still present to a degree that can be exploited by investors. The results of our study can be described as stunning: Seasonality study
*********************************** Volatility is a measure of risk according to modern portfolio theory, an interesting fact since we invest in what has been one of the most volatile sectors of the market historically (the stocks of small companies). Next month we will examine volatility, risk, return, and holding periods—and how these factors fit into our long term investment strategy.
The academic question we address in our July report is whether active portfolio managers can add value—or if passive investment in an index fund is a preferable investment strategy. To assist in reaching a conclusion on this issue we utilize the Capital Asset Pricing Model (CAPM) and other measures to review the performance of the Warren Buffett partnerships, the Charlie Munger partnership, and the LSGI partnership during the first eight years of operation of each. Although market data indicates most active portfolio managers add little if any excess value to a portfolio’s return, we find in some instances active managers generate substantial excess returns—and we attempt to explain why.
In the April 23rd issue of Barron’s we noted that “Global demand and supply issues should push crude oil prices well above $70 a barrel by the Fourth of July. Expect fireworks in the energy sector this summer, with a potentially explosive move to the upside” At the time oil was selling at $62 a barrel more or less. It is the Fourth of July - and crude futures are at $71.41 per barrel.
Admiral Rickover, the father of the nuclear powered Navy, discusses challenges of the Fossil Fuel Age—how energy powers our society and economy — in remarkable a presentation made in 1957.
The success of our quantitative stock selection methodology in finding small, young companies with growth potential, is mentioned in the Dallas Morning News Sunday Business Section. To use an analogy we are looking for a ’Michael Jordan in grade school’. We also establish a ‘Barron’s Challenge’ scholarship for a senior finance student in the Applied Portfolio Management Program at Michigan Tech next year.
We placed second in the Professor category of the 2006 Barron’s market challenge using our LSGI screens and research—outperforming the S&P 500 index by 78.5% in a six month period. In the 2007 contest just ended we also placed second and sixth overall—out of 1,976 portfolios, outperforming the S&P 500 index by 29.0%. For our efforts we were mentioned in an article in the Barron’s April 23rd issue. We are in the top 1% of portfolios performance wise both years —managing an active portfolio that mirrored the LSGI Fund portfolio. The odds of this happening by chance are similar to the odds of being stuck by lightning.
What makes someone as successful as Warren Buffett? A new study examines some characteristics of very talented individuals in a number of fields. What common characteristics do they share?
Can active portfolio managers beat the market? We present a white paper on this issue to finance students at Michigan Technological University—in spite of evidence otherwise, our thesis is that modern tools should allow an investor to generate substantial excess returns in an actively managed equity portfolio.
In theory our research should identify firms that have a high probability of outperforming the market—and using our LSGI research to construct a portfolio of attractive firms we placed second in the Professor category in the recent Barron’s Challenge.
We award scholarships to Michigan Tech finance students and initiate a work/study program for students at Upper Michigan’s Finlandia University starting next fall—and we become a supporter of Division I NCAA college hockey next season.
SMU Oil & Gas Environmental Law students can access the textbook at this link: SMU Spring 2007.
The “Kelly Formula” has been used successfully to allocate capital in the markets according to some academics. We review a new book on the issue—a mathematical system utilized for portfolio management—entitled Fortune’s Formula. ************************************ In a CBS MarketWatch interview we predict healthy gains one of the world's most volatile commodities—natural gas, while Wall $treet Week with Fortune magazine interviews us on our small-cap investment ideas. ************************************ Can the individual investor substantially outperform the major market indexes and the major public mutual funds? Applied financial theory predicts that they can - and historical market data supports this claim. We presented an outline last spring to recent finance graduates of Michigan Technological University's School of Business & Economics on how they can outperform the market—and maybe become the next Warren Buffett! ************************************ Can individual investors beat the market? A recent Federal Reserve System study using “extreme bounds” methodology normally reserved for examining complex economic systems examined 37 years of market data and found that a few factors were “robust” – statistically significant – indicators of above average stock market returns. Buying stocks with these characteristics should outperform the market – and are factors we utilize managing the LSGI portfolio. ************************************ Some of the best investments available in today’s lackluster markets exist among companies whose names you’ve likely never heard of. Micro-caps are an asset class that gets so little attention the experts can’t even agree on its definition, but there’s one point they all agree on: There are diamonds to be found in this very rocky region. We are interviewed by BuySide magazine on how investors can obtain a systematically exploitable advantage in this sector—and obtain excess returns. ************************************ We sponsor the Michigan Technological University School of Business & Economics Applied Portfolio Management (APMP) students in their annual quest to be named the best student money managers in the nation. The MTU students manage around a million dollars of their college’s endowment. ************************************ Long term investing still can be rewarding. Living quiet, unpretentious lives Mr. and Mrs. Othmer - a professor of chemical engineering and a former teacher - died a few years ago in their nineties. When the Othmer's died, friends were shocked to learn that their estate was worth $800 million! The Othmer story is not unique. They had one secret: they were early investors with Warren Buffett. ************************************ *****
LSGI Advisors, Inc. 1007 Beaver Creek Drive, Suite 105 Duncanville, Texas 75137 (972)-780-1805
Email contact: jdancy@lsgifund.com
*****
Educational Materials for the Investor Published online since 1994
Michigan Tech Applied Finance Center
* Please note:
The chart for the LSGI ‘model’ portfolio (‘LSGI portfolio’) represents estimated returns on a hypothetical investment made on April 1, 2001. LSGI portfolio gross returns represent performance after payment of the 1% annual administration fee and all related Fund costs and expenses, including accounting and legal expense, but does not reflect annual performance incentive fees. Net returns reflect returns to the investor after all fees, costs and expenses, including annual incentive fees. Returns of the LSGI portfolio will vary with market conditions, and past performance does not reflect potential future performance. The objective of the portfolio is aggressive growth. Data contained in this report is derived from sources believed to be reliable but we can make no guarantee as to the accuracy or completeness. The data contained herein has not been audited. The LSGI portfolio was established on July 1, 1999
Also please note that (1) past portfolio performance may not be predictive of future performance, (2) the LSGI portfolio exhibits above average volatility and therefore could be considered riskier than the major market indexes and more diversified portfolios, (3) the indexes and other portfolios we use to compare the LSGI Fund portfolio performance above are not similar in nature to our Fund since most of these portfolios contain larger capitalization firms and have many more positions in their portfolio, (4) the performance of the LSGI portfolio might be explained by certain sectors in which we are over-weighted (energy), and over-weight positions we have in certain companies, and (5) with our investment objective of aggressive growth investors could lose a substantial part or all of their investment.. LSGI Advisors Inc. may have positions in, and may from time to time buy or sell, securities mentioned herein without prior notice to investors or subscribers. |
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LSGI Portfolio Updates & Commentary: (LSGI investors only) - Week of December 29th |
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