Saturday, September 30, 2006

American Education cashed out

My shares of American Education were cashed out this morning at 55¢ a share. Including the commision of my purchase, that's a 12.27% gain versus 0.33% if I had invested in the S&P 500. On an annualized basis, that's 78% which easily exceeds the 5% hurdle I use for these relatively safe going-private investments.

This sounds great, but I only made $30. Even if I were able to buy the 1999 shares I wanted to buy and didn't pay a commission, my grand total would have been $199.90, which isn't all that much. On the other hand, now that I've survived a few of these deals, I don't think it will take more than an hour or so to research new going-private situations. Mostly, I just need to read the proxy on the SEC's website and do a little math. If commissions continue to become a less important cost (because of inflation or my broker becomes more generous), these little investments could be even more profitable (though at no larger scale).

I've been reading Warren Buffett's Partnership letters, which provide an interesting "pre-history" to the Berkshire Hathaway letters. (Berkshire first appears in the January, 1966 letter, but Buffett has made purchases of its stock as far back as 1962.) One repeated theme in them is the categorization of investements into "general", "workout" and "control". General investments are purchased because they are cheap (either compared to their liquidation value or relative to similar companies) and tend to move in the same general direction as the market. Workout investments are purchased because some future event (not just rumored, but published in the paper) will unlock hidden value. Control investments are companies that the Partnership had influence over by reason of a large ownership stake. The last two investment types are largely uninfluenced by the general market.

Until this year, 100% of my investments have been in the general category (or cash), so my results ought to have followed the market. This year, I've been working in some special situation investments (workouts), so my results ought to be better in down markets and keep up (maybe) in up markets. (Joy and I do have "control" investments in a sense because of our careers and Joy's Pampered Chef business. It's difficult to assign a value to them, but they will provide far more earnings to us than our retirement accounts for a great many years.)

Here are my results since I opened my self-directed IRA:

Date       S&P 500   IRA    Difference   
12/31/02*  -11.37%  30.95%  42.32%
12/31/03    26.38%  24.89%  -1.49%
12/31/04     8.99%   6.84%  -2.16%
12/31/05     3.00%   6.23%   3.23%
09/29/06     7.01%  23.32%  16.30%
Total Gain  34.56% 128.88%  94.31%
Annualized   7.20%  21.39%  14.19%

* First reporting date is 06/23/02
The first "year" (actually closer to 6 months), was entirely the result of a single stock—Oracle. 2003 and 2004 were poor years as Oracle and Canon lost ground. In 2005, the addition of Select Comfort made up for the flat performance of the other two holdings. So far this year, the situation has reversed. In addition, I've purchased Berkshire, which has not done much so far, and some special situations, which have added to the account's returns. Beating the market by 14% a year isn't a realistic goal, but the wild swings are likely for a concentrated portfolio.

Friday, September 29, 2006

Canon innovations

One of the things that makes a consumer products company like Canon successful is finding ways to get the same consumers to buy new products over and over again. An example of how this can be done is found in a Fortune camera review:

Designed for serious amateur photographers but also friendly to the casual point-and-shooter, the Canon Rebel XTi also features a built-in cleaning system that reduces the chance that dust inside the camera will spoil a shot, a bugaboo that plagues most other cameras in its class. No matter how careful one is when changing lenses, dust can enter the camera body to ruin subsequent shots. The XTi literally shakes any dust off the sensor when the camera is turned on or off, using ultrasonic vibrations. The motes are then immobilized on a sticky trap. Also, the camera can "map" stubborn dust particles on the sensor and then erase them from images via software.

These seemingly minor innovations can add up to making older products completely obsolete every few years. The faster the innovation cycle, the more often consumers will want to get the latest thing and the more sales companies like Canon will make.

Friday, September 22, 2006


I just felt like crowing this morning, because my IRA has a market value over a half million dollars. Unfortunately, most of the balance is based on a single position, Advanced Neutraceuticals Inc. My 499 shares are trading at $1,025.000 for a grand total of $511,475.00. Sadly, my sell order online fails with the following message: "We are unable to process the order referenced above. This security is subject to a corporate action. Please call our Customer Service line if you need further assistance." In the crazy world of high finance, I'm bound to lose my first half million almost as quickly as I gained it.

P.S. There was a little bit of drama just before the shareholder vote. Fortunately, it seems to have worked out for me, though it wouldn't be the end of the world to have been left with a small, cash-flow positive company with manageable debt and insider-buying.

Monday, September 11, 2006

Why I bought Advanced Nutraceuticals

I've gotten a bit behind in my investment rationals, so before I forget, I better write this down. This is another going-private transaction that was initially priced at $3.20 a share for holders of fewer than 500 shares. On July 25, the offer was raised to $4 a share. Up to now, my rule has been to wait for a definative proxy before buying into these sorts of special situations, but I realized that raising the price of the offering is a similar signal that the transaction will happen. There's no particular reason a company should raise the offer unless the SEC thinks it is unfairly low, so once the offer is raised, there's a good chance the going-private transaction will be approved.