Commentary (Page 447)

How many ways can I say, “Take the offer and run?”

I will admit that my analysis tools are not well refined for determining the price of a company that is as poorly managed as DELL [stckqut]DELL[/stckqut]. I have developed my tools to try and deduce an appropriate price for truly well-run companies. Since I never invest in poorly-run companies, I never wanted to spend much time in fine-tuning those rules.

I currently think that Dell Inc. is over-valued at its current price. I wouldn’t buy the stock at this level and I would accept Mr. Dell’s offer if I owned any of the stock (which I do not). I understand that there is hidden and untapped value in the company however that value is only going to be unlocked in a private setting. Trying to make Dell Inc. a well-run company after it has floundered for so long is virtually impossible. Mr. Dell and his partners are likely to change many facets of the company that would be very painful in the public market of quarterly announcements. This is very necessary as the stock would likely be hammered during all of the changes.

So while I understand various institutional investors wanting to get a bit higher return, the average individual investor should take the money and run. If the institutional investors get too greedy then Mr. Dell’s buy-out may not work and then the stock price will almost certainly drop.

There are better companies to invest in then Dell Inc. Even if the company was well-run (which it isn’t), I wouldn’t hold the stock above about $9.40. Mr. Dell is offering $13.65 for the stock. Somehow, Southeastern Asset Management says the company is worth $24 per share. I don’t see the company hitting that price as a public company any time soon. If they really think the company is worth that much then they should do the leveraged buyout and show how great they are at managing!

Since my tools for poorly-run companies are not well-defined, I may be undervaluing the stock. In that case, I could see $13.65 as a reasonable premium. I cannot see the price being justified too much above that.

For your enjoyment, here is a recent report on the company:

Dell Inc. ($DELL) Confident Investor Rating: Poor

MANAGEMENT EXECUTION

ANALYSIS

The following company description is from Google Finance: http://www.google.com/finance?q=dell

Dell, Inc. (Dell) is a global information technology company that offers its customers a range of solutions and services delivered directly by Dell and through other distribution channels. Dell is a holding company that conducts its business worldwide through its subsidiaries. The Company operates in four segments: Large Enterprise, Public, Small and Medium Business, and Consumer. Its Large Enterprise customers include global and national corporate businesses. Its Public customers, which include educational institutions, government, health care, and law enforcement agencies, operate in their own communities. Its SMB segment is focused on helping small and medium-sized businesses by offering products, services, and solutions. Its Consumer segment is focused on delivering technology experience of entertainment, mobility, gaming, and design. In April 2012, it acquired Clerity Solutions. In September 2012, it acquired Quest Software Inc. In December 2012, it acquired Credant Technologies.

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.

If you have read this site for long, read my book, The Confident Investor, or even followed me on Twitter then you have quickly learned that I don’t recommend mutual funds to most investors. I feel that an investor can do better by having 20-40% of the portfolio in Index Funds (or Index ETFs) and then the balance in high quality stocks such as the ones on my Watch List.  I further suggest that you build your net worth in those great stocks by using my GOPM methodology (Grow on Other People’s Money). It is the easiest and most effective way that I have found at increasing the size of your portfolio.

However, I frequently am asked by new investors about mutual funds and how they work. So I thought a short explanation was relevant. If you are an experienced investor then I am sorry if this article is too basic for you – please pass it along to a new investor that you may be mentoring.

A mutual fund is a professionally-managed pool of money that invests in some combination of stocks, bonds, or cash for the benefit of the mutual fund investors. In a mutual fund, you share the increases or decreases in the value of the fund. You do not officially own a share of the fund, such as in a company, but the distinction is irrelevant for an individual investor.

A mutual fund spreads your investment dollars around better than you might be able to do by yourself. This diversification tends to reduce your risk of losing money as well as making money. Diversification usually results in less sudden changes in value, as when some investments are doing poorly, others may be doing well. The reverse is true as well, when one mutual fund holding is doing well it will be tempered by other poor performers in the fund.

A mutual fund’s investment managers are trained to look for the best possible returns that are consistent with the fund’s strategies and goals. You can almost take it for granted that your mutual fund investment will provide you with the services of a professional money manager. You are in effect betting that the manager will make competent decisions for your investment dollar. In the majority of cases, he is hired or fired on the basis of the whims of the investment firm for which he works. He is rarely subject to customer reviews. It is very seldom the case that you can vote for him being fired, as you could potentially do with the CEO of one of your companies.

Combining your money with other investors creates collective buying power. As a group, mutual fund investors can buy a wide selection of investments. So, rather than just buy one car manufacturer or one bank, they have the funds to buy into ten companies that are similar. This allows you to take advantage of industry trends without relying of the success of one single company.

The size of a fund can be its downfall if it specializes in just one industry segment. If there are not enough excellent companies, then the manager may have to buy into lower quality companies. This strategy potentially invests in too many sub-par companies. The lowering of standards may lead to reduced returns.

You can learn more about the stock market and, more importantly, how to make money in the stock market by buying my book. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.

The Wall Street Journal Opinion page has an interesting article. The author, Rich Karlgaard of Forbes magazine, claims that our current rally of stocks is not a true rally. He does this by comparing the growth of various stock market “rallies” with the growth in price in high-value commodities. For instance:

• The current rally has the S&P 500 up 124% over the past four years but gold is up 88%, oil 106% and silver 167%.
• In the 1974-1980 rally, the S&P 500 was a gain of 103%. But over those six years gold rose in value by 182%, oil by 270% and silver by 340%.
• August 1982 to January 2000 boom, during which the S&P 500 soared 1,194% while gold dropped in value by 35%, oil by 23%, and silver by 17%. Stocks way up. Commodities down.

Mr. Karlgaard’s opinion is the boom of 1982-2000 was a true stock rally while the others were simply a market reaction to the politics and economics of the time. He opines that since commodities went up then the stock market had to go up. All of the investment categories rose together so therefore it wasn’t a true rally.

I will make a couple of points.

• A couple of data points do not make a trend.
• Investopedia and Wikipedia don’t define a rally as only being a rally when it is exclusive.
• It probably doesn’t matter. While I don’t comment on commodities trading on this site, I understand why some investors choose those markets and I wish them well. The performance of the commodities markets really doesn’t matter to me except as they effect the performance of my stock holdings due to the cost of raw goods.
• Regardless of the reason why a market becomes a bull market, it is the responsibility of investors to take advantage of the rally and maximize the return.

The system that I propose in my book, The Confident Investor, does great in a rally. Interestingly, the system has a higher increase in return in bad market times but that is simply because the standard of success (Buy-and-Hold) is so low during bad market times. To use a sports metaphor, it is easy to look like Michael Jordan on an 8 foot rim! Although perhaps I shouldn’t sell myself short – during a rally it is easy to make money (a blind squirrel can find nuts and get fat in a cashew factory) but making money in a turbulent market as I show in The Confident Investor is a real feat.

I have thousands of followers on Twitter. I value my conversations that I have with them. Many of my followers are fairly sophisticated investors but many followers are just getting started. I am open to anyone asking me questions on Twitter or here on this site and I will do my best to answer in a timely manner. Many of the questions that I am asked are fairly basic as the person is simply trying to get an understanding of how the market works.

This article is quite basic. If you are new to the stock market, it should offer some value to you.  If you are a more experienced investor you may want to simply pass it on to your less experienced friends.

In order to invest in the stock market, you should understand some basic concepts. The most fundamental of these is that someone must own any company. I will not get into the ethical or political discussion of whether the government or the private sector should own a company. For the purposes of this discussion, I assume that individuals are empowered to own the company.

Buying a company is similar to buying a lawnmower. If you would like to own a lawnmower for your yard, you would go to the stores in your community, evaluate the different mowers offered for sale, decide which features you need, and then buy the mower that best fits your needs and your budget. If you find two lawnmowers that were exactly the same, you would probably not pay double for one than you would for the other. You would purchase the lower-priced lawnmower, provided there was no difference in features and quality.

Similarly, if you decided to buy a company and you had an unlimited amount of money at your disposal, you would look at all of the companies on the market, figure out what features you wanted in the company, and then buy the most reasonably-priced company that had all of these features that you wanted.

When you buy a lawnmower, you go to a local store. To buy a company, you go to the stock market. If you look at the financial page of your newspaper, you will see rows and rows of listings for the stock prices of companies. These are all the companies that are for sale! The financial page is simply the “catalog” for companies that are for sale. When a company lists itself on the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation System (NASDAQ), it is simply saying that it is for sale.

The problem is that you probably cannot afford to buy an entire company. IBM, for example, is one of the most respected companies on the planet (although it is currently NOT on my Watch List) and currently on sale for well over 200 billion dollars! Even the richest person in the world today cannot write a check for that much money. So how do you own a company when you do not have nearly enough money to buy it all?

Each company is broken up into smaller pieces called shares. That name is essential to understand their purpose: you are going to share ownership of this company with others. These other owners, like yourself, are called shareholders.

Let’s use an example that may be close to your everyday situation. Let’s imagine that within easy driving distance from your home is a professional sports team named the Capitalists. You are a big fan of the Capitalists and think that their games are a lot of fun. You want to buy four season tickets to the games, for you, your spouse, and your kids. You discover that each season ticket is $1,000, which means that you would need to spend $4,000 for your family. You cannot afford $4,000, and were hoping to pay $1,000.

You could break the news to your family that they all cannot go together to the game and only buy the one seat that you can afford. This means that you go to one game out of four, your spouse to another one in four, and so on. This is not as much fun for everyone, so you decide not to buy the tickets.

You overhear a couple of your friends from work talking about the Capitalists. They wish they could see more games since they are so much fun to attend. You reach out to three of them and offer that each of you put up $1,000 each and share the four tickets. This way each family gets to see one game out of four.

Buying stock in a company is almost exactly the same as sharing the cost of sports seats. The difference is that you do not personally divide up the shares. Neither do you find the friends to go in with you on the purchase. That part is done for you when the company listed itself for sale on the stock exchange. All you have to do is figure out which company you want to buy and then you go to the store (NYSE or NASDAQ) and buy the number of shares (or percentage of the company) that you can personally afford.

You can learn more about the stock market and, more importantly, how to make money in the stock market by buying my book. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.