MSN Money Art|c|es

8y M|chae| 8urry 2000]2001

Strategy
My sLraLegy lsn'L very complex. l Lry Lo buy shares of unpopular companles when Lhey look llke road klll, and sell
Lhem when Lhey've been pollshed up a blL. ManagemenL of my porLfollo as a whole ls [usL as lmporLanL Lo me as
sLock plcklng, and lf l can do boLh well, l know l'll be successful.

Weapon of cholce: research
My weapon of cholce as a sLock plcker ls research, lL's crlLlcal for me Lo undersLand a company's value before laylng
down a dlme. l really had no cholce ln Lhls maLLer, for when l flrsL happened upon Lhe wrlLlngs of 8en[amln Craham,
l felL as lf l was born Lo play Lhe role of value lnvesLor. All my sLock plcklng ls 100 based on Lhe concepL of a margln
of safeLy, as lnLroduced Lo Lhe world ln Lhe book "SecurlLy Analysls," whlch Craham co-auLhored wlLh uavld uodd. 8y
now l have my own verslon of Lhelr Lechnlques, buL Lhe neL ls LhaL l wanL Lo proLecL my downslde Lo prevenL
permanenL loss of caplLal. Speclflc, known caLalysLs are noL necessary. Sheer, ouLrageous value ls enough.

l care llLLle abouL Lhe level of Lhe general markeL and puL few resLrlcLlons on poLenLlal lnvesLmenLs. 1hey can be
large-cap sLocks, small cap, mld cap, mlcro cap, Lech or non-Lech. lL doesn'L maLLer. lf l can flnd value ln lL, lL
becomes a candldaLe for Lhe porLfollo. lL sLrlkes me as rldlculous Lo puL llmlLs on my posslblllLles. l have found,
however, LhaL ln general Lhe markeL dellghLs ln Lhrowlng bables ouL wlLh Lhe baLhwaLer. So l flnd ouL-of-favor
lndusLrles a parLlcularly ferLlle ground for besL-of-breed shares aL sLeep dlscounLs. MSn MoneyCenLral's SLock
Screener ls a greaL Lool for uncoverlng such bargalns.

Pow do l deLermlne Lhe dlscounL? l usually focus on free cash flow and enLerprlse value (markeL caplLallzaLlon less
cash plus debL). l wlll screen Lhrough large numbers of companles by looklng aL Lhe enLerprlse value/L8l1uA raLlo,
Lhough Lhe raLlo l am wllllng Lo accepL Lends Lo vary wlLh Lhe lndusLry and lLs poslLlon ln Lhe economlc cycle. lf a
sLock passes Lhls loose screen, l'll Lhen look harder Lo deLermlne a more speclflc prlce and value for Lhe company.
When l do Lhls l Lake lnLo accounL off-balance sheeL lLems and Lrue free cash flow. l Lend Lo lgnore prlce-earnlngs
raLlos. 8eLurn on equlLy ls decepLlve and dangerous. l prefer mlnlmal debL, and am careful Lo ad[usL book value Lo a
reallsLlc number.

l also lnvesL ln rare blrds -- asseL plays and, Lo a lesser exLenL, arblLrage opporLunlLles and companles selllng aL less
Lhan Lwo-Lhlrds of neL value (neL worklng caplLal less llablllLles). l'll happlly mlx ln Lhe Lypes of companles favored by
Warren 8uffeLL -- Lhose wlLh a susLalnable compeLlLlve advanLage, as demonsLraLed by longsLandlng and sLable hlgh
reLurns on lnvesLed caplLal -- lf Lhey become avallable aL good prlces. 1hese can lnclude Lechnology companles, lf l
can undersLand Lhem. 8uL agaln, all of Lhese sorLs of lnvesLmenLs are rare blrds. When found, Lhey are deservlng of
longer holdlng perlods.

8eyond sLock plcklng
Successful porLfollo managemenL Lranscends sLock plcklng and requlres Lhe answer Lo several essenLlal quesLlons:
WhaL ls Lhe opLlmum number of sLocks Lo hold? When Lo buy? When Lo sell? Should one pay aLLenLlon Lo
dlverslflcaLlon among lndusLrles and cycllcals vs. non-cycllcals? Pow much should one leL Lax lmpllcaLlons affecL
lnvesLmenL declslon-maklng? ls low Lurnover a goal? ln large parL Lhls ls a sklll and personallLy lssue, so Lhere ls no
need Lo make excuses lf one's cholce dlffers from Lhe general vlew of whaL ls proper.

l llke Lo hold 12 Lo 18 sLocks dlverslfled among varlous depressed lndusLrles, and Lend Lo be fully lnvesLed. 1hls
number seems Lo provlde enough room for my besL ldeas whlle smooLhlng ouL volaLlllLy, noL LhaL l feel volaLlllLy ln
any way ls relaLed Lo rlsk. 8uL you see, l have Lhls hearLburn problem and don'L need Lhe exLra sLress.

1ax lmpllcaLlons are noL a prlmary concern of mlne. l know my porLfollo Lurnover wlll generally exceed 30 annually,
and way back aL 20 Lhe long-Lerm Lax beneflLs of low-Lurnover preLLy much dlsappear. WheLher l'm aL 30 or
100 or 200 maLLers llLLle. So l am noL afrald Lo sell when a sLock has a qulck 40 Lo 30 a pop.

As for when Lo buy, l mlx some barebones Lechnlcal analysls lnLo my sLraLegy -- a Lool held over from my days as a
commodlLles Lrader. noLhlng fancy. 8uL l prefer Lo buy wlLhln 10 Lo 13 of a 32-week low LhaL has shown lLself Lo
offer some prlce supporL. 1haL's Lhe conLrarlan parL of me. And lf a sLock -- oLher Lhan Lhe rare blrds dlscussed above
-- breaks Lo a new low, ln mosL cases l cuL Lhe loss. 1haL's Lhe pracLlcal parL. l balance Lhe facL LhaL l am
fundamenLally Lurnlng my back on poLenLlally greaLer value wlLh Lhe facL LhaL slnce lmplemenLlng Lhls rule l haven'L
had a slngle mlsforLune blow up my enLlre porLfollo.

l do noL vlew fundamenLal analysls as lnfalllble. 8aLher, l see lL as a way of puLLlng Lhe odds on my slde. l am a flrm
bellever LhaL lL ls a dog eaL dog world ouL Lhere. And whlle l do noL acknowledge markeL efflclency, l do noL belleve
Lhe markeL ls perfecLly lnefflclenL elLher. lnslders leak lnformaLlon. AnalysLs dlsLrlbuLe lllegal LldblLs Lo a selecL few.
And Lhe sLock prlce can someLlmes reflecL Lhe laLesL lnformaLlon before l, as a fundamenLal analysL, caLch on. l mlghL
even make an error. Pey, l admlL lL. 8uL l don'L leL lL klll my reLurns. l'm [usL noL LhaL sLubborn.
ln Lhe end, lnvesLlng ls nelLher sclence nor arL -- lL ls a sclenLlflc arL. Cver Llme, Lhe road of emplrlc dlscovery Loward
lnLeresLlng sLock ldeas wlll lead Lo rewards and proflLs LhaL go beyond mere money. l hope some of you wlll flnd
resonance wlLh my work -- and maybe make a few bucks from lL.

!

Iourna|: August 1, 2000
- 8uy 800 shares of Sen|or nous|ng ropert|es
(SNn, news, msgs) at the market.

Why Senlor Pouslng roperLles looks so sexy
Ck, Llme Lo geL Lhls Lhlng sLarLed. WhaL wlll a
value uoc porLfollo look llke? 1he answer won'L
come all aL once. uependlng on Lhe complexlLy of
Lhe plck, l'll share one Lo Lhree of Lhem wlLh each
[ournal enLry. l do expecL Lo be fully lnvesLed ln
13 or so sLocks wlLhln Lwo weeks.

My flrsL plck ls a blL complex. Sen|or nous|ng
ropert|es (SnP, news, msgs), a real esLaLe
lnvesLmenL LrusL, or 8Ll1, owns and leases four
Lypes of faclllLles: senlor aparLmenLs, congregaLe
communlLles, asslsLed llvlng cenLers and nurslng
homes. Senlor aparLmenLs and congregaLe
communlLles Lend Lo flnd prlvaLe revenue
sLreams, whlle asslsLed-llvlng cenLers and nurslng
homes Lend Loward governmenL payers, wlLh Lhe
assoclaLed lnLense regulaLlon.

As lL happens, runnlng lnLensely regulaLed
buslnesses ls Lough. WlLhln Lhe lasL year, Lwo
ma[or lessees accounLlng for 48 of Senlor
Pouslng's revenues flled for bankrupLcy. WlLh Lhls
news comlng on Lhe heels of Senlor Pouslng's
spln-off from Lroubled parenL nk1 ropert|es
1rust (P8, news, msgs), lL ls noL hard Lo
undersLand why Lhe sLock bounces along lLs
yearly lows.

8uL noL all ls bad. lrom here Lhe shares offers
poLenLlal caplLal appreclaLlon palred Lo a faL
dlvldend LhaL welghs ln aL $1.20 per share.

llrsL, Lhe bankrupLcles are noL as bad as Lhey
seem. Senlor Pouslng has reLalned mosL of Lhe
properLles for lLs own operaLlon, galned access Lo
$24 mllllon ln resLrlcLed cash, and wlll galn Lhree
nurslng home for lLs Lroubles. 1he key here ls LhaL
Lhe reason for Lhe bankrupLcles was noL LhaL Lhe
operaLlons lacked cash flow, buL raLher LhaL Lhe
now-bankrupL lessees had acqulred crushlng debL
as Lhey expanded Lhelr operaLlons.

ln facL, lf we assume LhaL renLs approxlmaLe
morLgage paymenLs - whlch ls noL Lrue buL ls
ulLra-conservaLlve, Lhen durlng Lhe flrsL quarLer
of 2000, Lhe bankrupL operaLors generaLed $80
mllllon ln accesslble cash flow before lnLeresL
expense, depreclaLlon and amorLlzaLlon. 1hls ls
slgnlflcanLly more Lhan Lhe renLs pald Lo Senlor
Pouslng. So whlle Lhe general percepLlon ls LhaL
Senlor Pouslng [usL Look over money-loslng
operaLlons, Lhls ls noL so. lL ls Lrue LhaL whlle Lhe
bankrupLcy proceedlngs go Lhrough approvals,
Senlor Pouslng wlll be lacklng lL usual level of
cash flow. 8uL Lhls ls Lemporary. Cnce resolved,
cash flows wlll bounce back, posslbly Lo new
hlghs. 1he bankrupLcy agreemenLs provlded for
operaLlng cash flows Lo replace renLs sLarLlng !uly
1, 2000.

Whlle we walL for Lhe beLLer operaLlng resulLs,
Lhe dlvldend appears covered. MarrloLL ls a rock-
solld lessee LhaL derlves lLs 94 of lLs revenue
from prlvaLe-pay sources and LhaL accounLs for
over $31 mllllon ln annual renL, whlch
approxlmaLes Lhe annual dlvldend. 1he leases are
good Lhrough 2013, and are of Lhe favored Lrlple
neL Lype. lncome from Lhe 8rookdale leases --
100 prlvaLe pay and slmllarly rock solld --
provlded anoLher $11.2 mllllon ln annual renLs. A
few oLher properLles klck ln an addlLlonal several
mllllon.

8eneflLs of Lhe 8rookdale sale
8ecenL evenLs provlde more poslLlve slgns. Senlor
Pouslng agreed Lo sell lLs 8rookdale properLles
for $123 mllllon. Whlle on Lhe surface Lhe
company ls selllng lLs besL properLles and leLLlng
lLs besL lessee off Lhe hook, lnvesLors should
reallze Lhe beneflLs.

Cne, Lhe company has sald lL wlll use Lhe
proceeds Lo pay off debL. 1hls wlll brlng Senlor
Pouslng's LoLal debL Lo under $60 mllllon.
8ecause of Lhls, Senlor Pouslng's cash funds from
operaLlons wlll dlp only $1.3 mllllon Lo $2 mllllon,
by my esLlmaLlon, Lhanks Lo lnLeresL expense
saved.

1wo, Senlor Pouslng sLock llves under a common
confllcL of lnLeresL problem LhaL affllcLs 8Ll1
shares. lLs managemenL geLs pald accordlng Lo a
percenLage of asseLs under managemenL. lL ls noL
generally ln managemenL's personal lnLeresLs Lo
sell asseLs and pay off debL. 8aLher, Lhey may be
lncenLlvlzed Lo Lake on debL and acqulre asseLs.
WlLh properLy asseLs more hlghly valued ln
prlvaLe markeLs Lhan publlc ones, LhaL Senlor
Pouslng ls selllng asseLs ls a very good Lhlng, and
Lells us LhaL managemenL ls qulLe posslbly
lncllned Lo acL accordlng Lo shareholder lnLeresLs.

1hree, Lhe 8rookdale properLles cosL Senlor
Pouslng $101 mllllon, and are belng sold for $123
mllllon. ?eL Lhe assumpLlon ln Lhe publlc
markeLplace ls LhaL Senlor Pouslng's properLles
are worLh less Lhan whaL was pald for Lhem. AfLer
all, Senlor Pouslng's cosLs for Lhe properLles, neL
of debL, sLands aL [usL over $300 mllllon whlle Lhe
sLock markeL caplLallzaLlon of Senlor Pouslng slLs
aL $220 mllllon. 1he 8rookdale sale seems Lo fly
ln Lhe face of Lhls loglc, as does a sale earller Lhls
year of low-quallLy properLles aL cosL. 1he
MarrloLL properLles approxlmaLe 8rookdale ln
quallLy and cosL over $323 mllllon alone.

Comblnlng Lhe lasL Lwo polnLs, lf managemenL
proves as shareholder-frlendly as Lhe mosL recenL
LransacLlon, Lhen Lhe dlsparlLy ln value beLween
Lhe sLock prlce and Lhe core asseL value may ln
facL be reallzed, provldlng caplLal appreclaLlon of
over 100 from recenL prlces. ln Lhe meanLlme,
Lhere ls a solld dlvldend yleld of over 14, an
expecLed reLurn of cash flows from Lhe nurslng
home operaLlons, anoLher $24 mllllon ln cash
becomlng unresLrlcLed, a masslve unburdenlng of
debL, and a very llmlLed downslde. When wlll Lhe
caLalysL come? l'm noL sure. 8uL Lhere are plenLy
of posslblllLles for Lhe form lL wlll Lake, and wlLh
LhaL dlvldend, plenLy of Llme Lo walL for lL.

WaLch relmbursemenLs
A rlsk, as always, ls reduced relmbursemenLs.
Whlle Lhe governmenL ls Lhe blg culprlL here, and
MarrloLL does noL rely on Lhe governmenL, Lhe
Lrend ln relmbursemenLs ls someLhlng Lo waLch.
A more lmmedlaLe rlsk ls Lhe share overhang
from former parenL P81 roperLles, whlch has
slgnaled -- no less publlcly Lhan ln 8arron's -- LhaL
lL wlll be looklng Lo dlspose of lLs 49.3 sLake ln
Senlor Pouslng. AnoLher pseudo-rlsk facLor ls Lhe
lack of slgnlflcanL lnslder ownershlp, Lhe lnslders
are apparenLly preferrlng Lo hold P81 sLock.

All Lold, l sLlll see a margln of safeLy. Whlle Lhe
share performance over Lhe nexL slx monLhs may
be ln doubL -- and we [usL mlssed Lhe dlvldend
daLe -- Lhe rlsk for permanenL loss of caplLal for
longer-Lerm holders appears exLremely low. lL's
an especlally good buy for Lax-shelLered
accounLs. l'm buylng 800 shares.

Iourna|: August 2, 2000
- 8uy 1S0 shares of accar (CAk, news, msgs)
at the market.

accar ls bullL for proflL
Pere's where lL sLarLs Lo become obvlous LhaL,
desplLe Lhe conLesL aLmosphere of SLraLegy Lab, l
do noL regard my lnvesLmenLs here or elsewhere
as a conLesL. Cver Lhe long run, l alm Lo beaL Lhe
S& 300, buL l wlll noL Lake exLraordlnary rlsks Lo
do lL. Cn a rlsk-ad[usLed basls, l'll obLaln Lhe besL
reLurns posslble. Whom or whaL l can beaL over
Lhe nexL slx monLhs ls less lmporLanL Lo me Lhan
provldlng some lnslghL lnLo how l go abouL
accompllshlng my prlmary long-Lerm goal.

WlLh LhaL sald, l presenL a company LhaL l've
boughL lower, buL sLlll feel ls a value. accar
(CA8, news, msgs) ls Lhe world's Lhlrd-largesL
maker of heavy Lrucks such as eLerbllL and
kenworLh. We're posslbly headed lnLo anoLher
recesslon, and lf accar ls anyLhlng, lL ls cycllcal.
So whaL on Lhls green earLh am l dolng buylng Lhe
sLock now? Slmple. 1here ls a huge
mlsundersLandlng of Lhe buslness and lLs
valuaLlon. And where Lhere ls mlsundersLandlng,
Lhere ls ofLen value.

llrsL, conslder LhaL Lhe sLock ls no slug. A member
of Lhe S& 300 lndex ($lnx), Lhe sLock has
dellvered a LoLal reLurn of abouL 140 over Lhe
lasL 3 years. And over Lhe lasL 14 years, Lhe sLock
has dellvered a 384 galn, ad[usLed for dlvldends
and spllLs. So lL ls a growLh cycllcal. Cne does noL
have Lo Lry Lo Llme Lhe sLock Lo reap beneflLs.

ln facL, desplLe Lhe hlgh flxed cosLs endemlc Lo lLs
lndusLry, accar has been proflLable for slxLy
years runnlng. WlLh 40 of lLs sales comlng from
overseas, Lhere ls some geographlc
dlverslflcaLlon. And Lhere ls a small, hlgh-margln
flnance operaLlon LhaL accounLs for abouL 10 of
operaLlng lncome and provldes for a huge
amounL of Lhe mlsundersLandlng. 1he meaL of
Lhe buslness ls Lruck producLlon.

1he compeLlLlve advanLage for accar ls LhaL Lhe
Lruck producLlon ls noL verLlcally lnLegraLed.
accar largely deslgns Lhe Lrucks, and Lhen
assembles Lhem from vendor-supplled parLs. As
WesLern ulglLal found ouL, Lhls model does noL
work Loo well ln an lndusLry of rapld
Lechnologlcal advancemenL. 8uL accar's lndusLry
ls abouL as sLable as can be wlLh respecL Lo Lhe
baslc Lechnology. So accar becomes a more
nlmble player wlLh an envlable sLrlng of decades
wlLh poslLlve cash flow. Nav|star (nAv, news,
msgs), Lhe more verLlcally lnLegraLed #2 Lruck
maker, sLruggles mlghLlly wlLh lLs cash flow.

LeL's look aL debL
Cver Lhe lasL 14 years, encompasslng Lwo ma[or
downLurns and one mlnor downLurn, accar has
averaged a 16.6 reLurn on equlLy. Larnlngs per
share have grown aL a 13.2 annuallzed cllp
durlng LhaL Llme, desplLe a dlvldend payouL raLlo
generally ranglng from 33 Lo 70. PlsLorlcally, lL
appears debL ls generally kepL aL lLs currenL range
of abouL 30 Lo 70 of equlLy.

8uL Lhe debL ls where a blg parL of Lhe
mlsundersLandlng occurs. ln facL, companles wlLh
large flnance companles lnslde Lhem Lend Lo be
mlsundersLood Lhe same way. LeL's examlne Lhe
lssue. ?ahoo!'s quoLe provlder Lells us Lhe
debL/equlLy raLlo ls abouL 1.8. Medla Ceneral
Lells us lL ls abouL 0.7. Wlll Lhe real debL/equlLy
raLlo please sLand up? WlLh a cycllcal, lL maLLers.

So we open up Lhe laLesL earnlngs release and
flnd LhaL accar neaLly separaLes Lhe balance
sheeL lnLo Lruck operaLlons and flnance
operaLlons. lL Lurns ouL LhaL Lhe Lruck operaLlons
really have only $203 mllllon ln long-Lerm debL.

1he flnance operaLlon ls where Lhe bllllons ln
debL lay. 8uL should such debL be lncluded when
evaluaLlng Lhe margln of safeLy? AfLer all,
llablllLles are a parL of a flnance company's
ongolng operaLlons. 1he approprlaLe raLlo for a
flnance operaLlon ls Lhe equlLy/asseL raLlo, noL
Lhe debL/equlLy raLlo. WlLh $933 mllllon ln
flnance operaLlons equlLy, Lhe flnance
equlLy/asseL raLlo ls 19.3. Plgher ls safer.
Savlngs and loans ofLen llve ln Lhe 3 range, and
commerclal banks llve ln Lhe 7-8 range. As far as
accar's flnance operaLlons go, Lhey are preLLy
darn conservaLlvely leveraged. And Lhey sLlll
aLLaln operaLlng marglns over 20. l do noL
lnclude Lhe flnance operaLlon llablllLles ln my
esLlmaLlon of accar's currenL enLerprlse value.

Why can l do Lhls? 1hlnk of lL anoLher way -- Lhe
lnLeresL pald on lLs debL (whlch funds lLs loans) ls
a cosL of sales for a flnance company. And yeL
anoLher -- Lhe operaLlng marglns of over 20 --
lndlcaLe LhaL Lhe company ls belng pald aL leasL
20 more Lo lend money Lhan lL cosLs Lo borrow
Lhe money.

1he leadlng daLa servlces Lherefore have lL rlghL,
buL wrong. !usL a good example of how
commonly avallable daLa can be very superflclal
and mlsleadlng as Lo underlylng value.!8eware
Lo Lhose who rely on screens for sLocks!

1here ls also $930 mllllon ln cash and equlvalenLs,
neL of Lhe flnance operaLlons cash. 1he cash
Lherefore offseLs Lhe $203 mllllon ln Lruck
company debL, leavlng neL cash and equlvalenLs
lefL over of $727 mllllon. SubLracL LhaL amounL
from Lhe markeL cap of $3.12 bllllon Lo glve
essenLlally a $2.4 bllllon enLerprlse value. So noL
only ls Lhere a whole loL less debL ln Lhls company
Lhan Lhe ma[or daLa servlces would have us
belleve, buL Lhe Lrue prlce of Lhe company -- Lhe
enLerprlse value -- ls less Lhan Lhe adverLlsed
markeL caplLallzaLlon.

Lxamlnlng cash flow
now come Lhe raLlos. CperaLlng cash flow lasL
year was $840 mllllon. WhaL ls Lhe free cash
flow? Well, you need Lo subLracL Lhe
malnLenance caplLal expendlLures. 1he company
does noL break Lhls down. Cne can assume,
however, LhaL, of Lhe annual properLy and caplLal
equlpmenL expendlLures, a porLlon ls golng Lo
malnLenance and a porLlon ls golng Lo growLh.
Lucklly, Lhere ls already a ballpark number for Lhe
amounL golng Lo malnLenance -- lL's called
depreclaLlon. lor accar depreclaLlon ran abouL
$140 mllllon ln 1999. So ln 1999, Lhere was
approxlmaLely $700 mllllon ln free cash flow.

Can lL be LhaL accar ls golng for less Lhan 4 Llmes
free cash flow? Well, lL ls a cycllcal, and accar ls
headed lnLo a down cycle. So reallze Lhls ls 4
Llmes peak free cash flow.

ln pasL downLurns, cash flow has fallen off Lo
varylng degrees. ln 1996, a mlnor cycllcal Lurn,
cash flow fell off only abouL 13. ln Lhe sLeep
downLurn of 1990-92, cash flow fell a sharp 70
from peak Lo Lrough. Cf course, lL has rebounded,
now up some 700 from LhaL Lrough. 1he sLock
sLumbled abouL 30 durlng Lhe mlnor Lurn, and
abouL 43 as lL anLlclpaLed Lhe 1990-91
dlfflculLles.

1he sLock ls some 33 off lLs hlghs and rumbllng
along a nlne-monLh base. PlsLorlcally, LhaL seems
llke a good spoL. 1he sLock Lends Lo boLLom early
ln anLlclpaLlon and rally sLrongly durlng a Lrough.
1he sLock acLually boLLomed ln 1990 and rallled
133 from 1990 Lo 1992, peaklng aL 474 ln
1998. now down slgnlflcanLly from Lhere and
wlLh slgns of a slowdown ln full bloom, Lhe sLock
pays a 7 dlvldend on Lhe purchase prlce.
ManagemenL pollcy ls Lo pay ouL half of earnlngs,
and makes up any deflclencles durlng Lhe flrsL
quarLer of Lhe year. 1he sLock ls slLLlng above Lhe
prlce supporL lL has held for abouL 2 years.

WhaL makes Lhe sLock come back so sLrongly
afLer downLurns? MarkeL share galns and solld
sLraLegy. ln facL, durlng Lhe currenL downLurn, lL
has already galned 200 basls polnLs of markeL
share. And lLs new medlum duLy Lruck was
ranked number one ln cusLomer saLlsfacLlon by
!.u. ower -- Lhls ln a brand new, poLenLlally huge
caLegory for accar.

And no, Lhere ls no caLalysL LhaL l foresee. lunny
Lhlng abouL caLalysLs -- Lhe mosL meanlngful ones
are hardly ever expecLed. l'm buylng 130 shares.

Iourna|: August 3, 2000
- 8uy 200 shares of Caterp|||ar (CA1, news,
msgs) at the open.

- 8uy 400 shares of nea|theon]WebMD (nL1n,
news, msgs) at the open.

1hls cool CaL ls one hoL sLock
1oday, leL's go wlLh Lwo ldeas, on Lhe surface
Lerrlbly dlvergenL ln characLer. 1he flrsL ls
Caterp|||ar (CA1, news, msgs), whlch ls bounclng
along lows. Whenever Lhe sLock of a company
Lhls slgnlflcanL sLarLs Lo reel, l Lake noLlce.
Lveryone knows LhaL domesLlc consLrucLlon ls
slowlng down. l don'L care.

Why? LeL me explaln. LeL's pose LhaL a
hypoLheLlcal company wlll grow 13 for 10 years
and 3 for Lhe remalnlng llfe of Lhe company. lf
Lhe cosL of caplLal for Lhe company ln Lhe long
Lerm ls hlgher Lhan 3, Lhen Lhe llfe of Lhe
company ls flnlLe and a presenL "lnLrlnslc value"
of Lhe company may be approxlmaLed. 8uL leL's
say Lhe cosL of caplLal averages 9 a year.
SLarLlng wlLh Lralllng one-year earnlngs of $273,
Lhe sum presenL value of earnlngs over 10 years
wlll be $3,731. lf Lhe cosL of caplLal durlng Lhe
remalnder of Lhe company's llfe sLays aL 9, Lhen
Lhe presenL value of Lhe resL of Lhe company's
earnlngs from 10 years unLll lLs demlse ls
$12,324.

WhaL should sLrlke Lhe lnLelllgenL lnvesLor ls LhaL
76.8 of Lhe Lrue lnLrlnslc value of Lhe company
Loday ls ln Lhe company's earnlngs after 10 years
from now. 1o look aL lL anoLher way, [usL 3.7 of
Lhe company's lnLrlnslc value ls represenLed by lLs
earnlngs over Lhe nexL Lhree years. 1hls of course
lmplles LhaL Lhe company musL conLlnue Lo
operaLe for a very long Llme, faclng many
obsLacles as lLs lndusLry maLures.

CaLerplllar can do Lhls. LeL's Lake a cue from Lhe
laLesL conference call. When people ln Lhe know
Lhlnk of quallLy elecLrlc power for Lhe lnLerneL,
Lhey Lhlnk of CaLerplllar. Puh? ?es, CaLerplllar
makes elecLrlclLy generaLors LhaL generaLe so-
called quallLy power. 1here are loLs of uses for
power LhaL's unlnLerrupLlble, conLlnuous, and
free of nolse, buL some of Lhe largesL and fasLesL-
growlng are ln LelecommunlcaLlons and Lhe
lnLerneL.

CaLerplllar ls Lhe no. 1 provlder of Lhls sorL of
power, and Lhe markeL ls growlng exploslvely. ln
facL, CaLerplllar's quallLy power generaLor sales
had been growlng aL 20 compounded over Lhe
lasL flve years, buL are up a whopplng 73 ln Lhe
flrsL slx monLhs of 2000 alone. CaLerplllar expecLs
revenue from Lhls aspecL of lLs buslness Lo Lrlple
Lo $6 bllllon, or 20 of sales, wlLhln 4 1/2 years.
"1hls ls our klnd of game," Lhe company says.

Ceneral senLlmenL around CaLerplllar ls heavlly
lnfluenced by Lhe sLaLus of Lhe domesLlc
consLrucLlon lndusLry. 8uL whlle domesLlc
homebulldlng ls lndeed sLumbllng, we're Lalklng
abouL less Lhan 10 of CaLerplllar's sales.
CaLerplllar ls qulLe dlverse, and many producL
llnes and geographlc areas are noL peaklng aL all.
ln parLlcular, Lhe ouLlook for oll, gas, and mlnlng
producLs ls brlghL. ln facL, CaLerplllar's buslness
peaked ln laLe 1997/early 1998 and now appears
Lo be on a road Lo recovery. 1he markeL has noL
dlgesLed Lhls yeL.

1he balance sheeL ls also sLronger Lhan lL
appears. CaLerplllar ls anoLher lndusLrlal cycllcal
wlLh an lnLernal flnance company. l don'L counL
Lhe flnanclal servlces debL, as l explalned ln my
Aug. 1 [ournal enLry. Pence, long-Lerm debL dlves
from $11 bllllon Lo $3 bllllon, and Lhe long-Lerm
debL/equlLy dlves from 200 Lo [usL 33.

1he enLerprlse Lherefore goes for a rough 11
Llmes free cash flow. Cash reLurn on caplLal
ad[usLed for Lhe lmpacL of Lhe flnanclal
operaLlons reaches above 13 over lLs pasL
cycles, wlLh reLurn on equlLy averaglng 27 over
Lhe lasL 10 years. Also, managemenL ls by naLure
conservaLlve. keep LhaL ln mlnd when evaluaLlng
lLs commenLs on Lhe poLenLlal of Lhe power
generaLlon buslness.

1he maln rlsk ls LhaL, ln Lhe shorL run, lnvesLors
may Lake Lhls CaL ouL back and shooL lL lf lnLeresL
raLes conLlnue up. l'm buylng 200 shares here
along Lhe lows.

PealLheon/WebMu
8emember when l sald LhaL my conLrarlan slde
leads me Lo Lhe Lechnology Lrough every once ln
a whlle? nea|theon]WebMD (PL1P, news, msgs)
has no earnlngs, yeL Lhere ls a margln of safeLy
wlLhln my framework. 1he premler player wlLhln
Lhe e-healLh care space, Lhe sLock has been
bashed due Lo lmpaLlence. So here slLs a besL-of-
breed company bounclng along yearly lows, some
83 off lLs hlghs.

PealLheon/WebMu has Lhe unenvlable Lask of
geLLlng Lechno-phoblc physlclans Lo change Lhelr
ways. Such Lhlngs do noL happen overnlghL. 1he
facL remalns LhaL some $230 bllllon ln
admlnlsLraLlve wasLe resldes wlLhln Lhe u.S.
healLh care sysLem, and paLlenLs and Laxpayers
suffer for lL. PealLheon/WebMu ls by far besL
poslLloned Lo provlde a soluLlon.

8ecenL acqulslLlons elLher compleLed or pendlng
lnclude CulnLlles' Lnvoy Lul unlL, CarelnslLe,
CnPealLh, MedL Amerlca, MedCasL, klneLra, and
Medlcal Manager.

Assumlng all Lhese go Lhrough, Lhere wlll be 170
mllllon more shares ouLsLandlng Lhan aL Lhe end
of lasL quarLer, brlnglng Lhe LoLal Lo 343 mllllon.
Medlcal Manager's cash wlll offseL Lhe $400
mllllon pald for Lnvoy, leavlng
PealLheon/WebMu wlLh more Lhan $1.1 bllllon ln
cash and no debL. CulLe a chunk, especlally
conslderlng LhaL many of Lhe company's
compeLlLors are faclng bankrupLcy.

Challenges -- less Lhan 40 of physlclans use Lhe
lnLerneL aL all beyond e-mall -- seem ouLwelghed
by brlghL slgns. WebMu racLlce has 100,000
physlclan subscrlbers, up 47 sequenLlally. lor
reference, Lhere are only roughly 300,000
pracLlclng physlclans ln Lhe unlLed SLaLes. 1he
company now offers onllne real-Llme lnformaLlon
on 40 healLh plans coverlng abouL 20 of Lhe u.S.
populaLlon. 1he sequenLlal growLh raLe ln
WebMu racLlce use runs abouL 41. Consumer
use ls rolllng ahead aL a 70 sequenLlal cllp. 1he
company ls noL all lnLerneL, elLher. 1he
breakdown: 44 back-end LransacLlons, growlng
41 sequenLlally, 30 adverLlslng, also seelng
growLh, 10 subscrlpLlons, growlng aL 47
sequenLlally, and 16 producLs and servlces. All
Lold revenue was up 68 sequenLlally. 1hls wlll
deceleraLe, buL lL does noL Lake a maLhemaLlcal
genlus Lo flgure ouL LhaL even slngle dlglLs can be
slgnlflcanL when we're Lalklng abouL sequenLlal
growLh.

1he acqulslLlons are puLLlng oLher sLraLeglc
revenue sLreams lnLo play. CnPealLh ls Lhe
leadlng e-healLh desLlnaLlon. CarelnslLe ls Lhe
company's only slgnlflcanL pure e-compeLlLor and
has Lhe ACL ln. Medlcal Manager wlll place
PealLheon/WebMu by defaulL lnLo physlclans'
offlces. A poLenLlal [uggernauL ln Lhe maklng, buL
don'L expecL PealLheon/WebMu Lo LouL Lhls --
several acqulslLlons sLlll need Lo pasL anLl-LrusL
musLer.

8ased on Lhe company's currenL burn raLe, lL has
abouL 4 1/2 years Lo sLralghLen Lhlngs ouL. 1here
ls no proven ablllLy Lo Lurn a proflL, and l am no
fan of co-CLCs, elLher. Moreover, one musL
always be wary of Lhe lnLegraLlon phase afLer a
serles of acqulslLlons -- Lhe seller always knows
Lhe buslness beLLer Lhan Lhe buyer. 8ecenL
lnslder buylng by venLure caplLal gurus !ohn
uoerr and !lm Clark ls also noL hearLenlng, as lL
appears Lo be slmply for show.

SLlll, Lhe company appears Lo have Lhe human
and flnanclal caplLal Lo bulld a successful
organlzaLlon ln an lndusLry Lhere for Lhe Laklng.
WlLh enough cash for 4 Lo 3 years, Lhe posL-
acqulslLlons company wlll sLarL wlLh $900 mllllon
ln annual revenues growlng aL a welghLed
compound average raLe over 200. 1he buslness
economlcs are noL Amazonlan, elLher, marglns
wlll lmprove wlLh hlgher sales. 1he prlce for Lhls
LlckeL? AbouL $4 bllllon all Lold, or abouL half
whaL Lhe LlckeL cosL Lo puL LogeLher. l'm buylng
400 shares, wlLh a menLal sell sLop lf lL breaks Lo
new lows.

Iourna|: August 4, 2000
- 8uy 800 shares of C|ayton nomes (CMn, news,
msgs) at the open.

CMP: 8esL of an unpopular breed
ClayLon Pomes, a ma[or player wlLhln Lhe
manufacLured houslng lndusLry, ls an excellenL
candldaLe for besL-of-breed lnvesLlng ln an ouL-
of-favor lndusLry. 8uL before lnvesLlng ln ClayLon,
one should make an efforL Lo undersLand Lhls
falrly complex lndusLry. LeL's Lake a look how
ClayLon makes money.

Speclflcally, money can be made -- or losL -- aL
several levels of operaLlon. A company can make
Lhe homes (producer), sell Lhe homes (reLall
sLore), lend money Lo home buyers (flnance
company), and/or renL ouL Lhe land on whlch Lhe
houses ulLlmaLely slL (landlord). ClayLon ls
verLlcally lnLegraLed and does all Lhese Lhlngs.

When ClayLon sells a home wholesale Lo a
reLaller, Lhe sale ls booked as manufacLurlng
revenue. ClayLon may or may noL also own Lhe
reLaller. 1he reLaller Lhen sells Lhe home Lo a
couple for a reLall prlce, Lhe sale ls booked as
reLall revenue lf ClayLon owns Lhe reLaller. ln
ClayLon's case, abouL half of lLs homes are sold
Lhrough wholly owned reLallers.

1he couple may borrow a large porLlon of Lhe
purchase prlce from ClayLon's flnance arm. lf so,
LhaL reLall revenue ls booked as equlvalenL Lo Lhe
down paymenL plus Lhe presenL value of all
fuLure cash flows Lo ClayLon resulLlng from loan
repaymenLs. 1he flrm can be elLher aggresslve
(almlng for hlgh currenL revenues) or
conservaLlve (mlnlmlzlng currenL revenues) ln
booklng Lhls revenue, also known as Lhe galn-on-
sale. Slnce lnherenLly Lhls galn-on-sale meLhod
causes cash flow Lo lag far behlnd lncome, a
conservaLlve approach would be prudenL.

now LhaL ClayLon has loaned Lhe money Lo Lhe
couple, Lhe flrm can slL on lL and recelve Lhe
sLeady sLream of lnLeresL paymenLs.
AlLernaLlvely, ClayLon can bundle, or securlLlze,
Lhe loans and re-sell Lhem Lhrough an lnvesLmenL
banker as morLgage-backed securlLles. 8ecause
Lhe dlverslfled securlLy ls less rlsky Lhan a slngle
loan, ClayLon can reallze a proflL on Lhe sale of
Lhe morLgage-backed securlLy, especlally lf Lhe
flrm was conservaLlve ln esLlmaLlng Lhe loan's
value ln Lhe flrsL place. Moreover, ClayLon's
flnance arm can acL as Lhe servlclng agenL for Lhe
securlLy and earn hlgh-margln servlce fees.

llnally, Lhrough ClayLon's ownershlp of land and
some 76 communlLles, Lhe company can sell or
renL land Lo Lhe couple for Lhe placemenL of Lhelr
new manufacLured home.

uurlng ClayLon's flscal 2000 Lhlrd quarLer, 23 of
neL lncome came from manufacLurlng, 20 came
from reLall, and 8 came from renLal/communlLy
lncome. 1he key Lo Lhe valuaLlon, however, ls
LhaL ClayLon has a large flnance and lnsurance
operaLlon - comlng ln aL 32 of operaLlng
lncome ln Lhe mosL recenL quarLer. All Lold, 44
of operaLlng lncome ls recurrlng -- communlLy
renLs, lnsurance, and loan paymenLs. ClayLon has
over 140,000 people maklng monLhly loan
paymenLs.

Clean record ln Lroubled lndusLry
Cbvlously, Lhere ls Lhe poLenLlal for abuse. Many
oLher companles ln Lhe manufacLured houslng
lndusLry, such as Cakwood nomes (CP, news,
msgs) and Champ|on Lnterpr|ses (CP8, news,
msgs), have lndeed explolLed LhaL poLenLlal. Cne
way was Lo orlglnaLe poor-quallLy loans ln Lhe
flrsL place. 1hls "lend Lo anyone" approach
goosed reLall sales ln Lhe shorL-run, buL led Lo
uncollecLlble recelvables. Worse, ln recenL years,
companles would borrow money Lhemselves Lo
pay up Lo 20 Llmes earnlngs for reLall operaLlons,
only Lo loan money much Loo freely Lo cusLomers.
1hey would Lhen aggresslvely book galns-on-sale
only Lo have Lo Lake charges laLer as Lhese loans
proved bad. 1hls slmply cannoL be done ln a
cycllcal lndusLry. lndeed, lL was Lhe aggresslve
over-expanslon by many players LhaL caused Lhe
recenL lnvenLory gluL and cycllcal downLurn.

ClayLon never parLlclpaLed ln Lhese excesses. ln
facL, desplLe Lhe sub-prlme caLegory lnLo whlch
Lhe lndusLry's loans fall, loans orlglnaLed by
ClayLon have a dellnquency raLe of only 1.63.
And whlle oLher manufacLurers sLruggle, ClayLon
sLlll runs every slngle one of lLs planLs proflLably.
1he lasL quarLerly reporL made 63 of 66 quarLers
as a publlc company LhaL ClayLon has recorded
record resulLs. now, amldsL bankrupLcles and
general lndusLry malalse, ClayLon can Lake lLs
efflclenL, lnLerneL-enabled operaLlons and sLrong
balance sheeL and go shopplng.

Shopplng? ClayLon has experLlse ln "scrubblng"
manufacLured home-loan porLfollos. 1he
company has shown lLself Lo be noL only a Lerrlbly
efflclenL manufacLurer (bulldlng planLs for 23 of
Lhe prlce oLhers pay Lo buy, and achlevlng
proflLablllLy wlLhln Lwo monLhs), buL also a keen
underwrlLer and evaluaLor of rlsk. lor lnsLance, ln
a recenL LransacLlon, ClayLon purchased $93
mllllon ln loans. lL wlll scrub Lhese loans,
sLraLlfylng Lhem for rlsk, shaklng Lhem down for
near-Lerm repossesslons, and re-lssulng Lhem aL a
proflL wlLhln a year. ClayLon wlll lnsure Lhe loans,
as well as servlce Lhe loans, for recurrlng lncome.

ConservaLlve company
ClayLon sLrlves Lo be conservaLlve ln lLs revenue
recognlLlon and acqulslLlon sLraLegy. lL lmposes
Lhe baresL of offlce spaces on lLs execuLlves, and
provldes all lLs employees dlrecL and lndlrecL
moLlvaLlon Lo lmprove company-wlde efflclency
and performance. lor lnsLance, lL maLches 401(k)
conLrlbuLlons only wlLh company sLock, and
planLs are rewarded on lndlvldual proflLablllLy
measures raLher Lhan volume of producLlon.

Cver Lhe lasL Lwo years, Lhe company has used
abouL 73 of lLs cash flow Lo buy back sLock. And
now, as managemenL says we are aL Lhe very
boLLom of an lndusLry downLurn, ClayLon sLands
as one of Lhe besL-poslLloned players, wlLh a
prlsLlne goodwlll-free balance sheeL and Lhe besL
managemenL ln Lhe lndusLry. CLhers are sLlll sLuck
ln Lhe mud of Lhelr own excesses. As lL happens,
Lhe lndusLry ls self-cleanlng -- ClayLon slmply
galns share durlng downLurns.

1he shares are aL rlsk for a near-Lerm caLharsls
wlLh Lhe poLenLlal bankrupLcy of Cakwood
Pomes. neverLheless, wlLh ClayLon's shares
Lradlng aL less Lhan 8 Llmes earnlngs desplLe an
unleveraged and conslsLenL reLurn on equlLy
greaLer Lhan 13, l'm buylng 800 shares.

Iourna|: August 7, 2000
- 8uy 3S0 shares of Carn|va| (CCL, news, msgs) at
the market.

?ou've goL more Llme Lhan you Lhlnk
8efore l geL Lo Loday's plck, leL me Lake a momenL
Lo respond Lo Lhe recenL suggesLlon LhaL as a 29-
year-old, l slmply possess long-Lerm lnvesLmenL
horlzons. Pmmm. Llvlng ln Slllcon valley proper, l
could wrlLe volumes ln response. Sufflce lL Lo say
LhaL Lhe LwenLysomeLhlngs l meeL are noL ofLen
lnLeresLed ln my 10-Lo-20-year analysls horlzons.
AlLhough you may Lrade frequenLly, Lhe wlnd
should be aL your back. lf all else falls, a long-
Lerm hold should pull you Lhrough. And Lhe only
conslsLenL, prevalllng wlnd ln Lhe lnvesLmenL
world ls LhaL of Lhe presenL value of fuLure cash
flows.

As a pracLlcal maLLer, professlonal lnvesLors are
absoluLely handcuffed by shorL-Lerm quarLerly
expecLaLlons. 1haL's why l don'L run a muLual
fund -- l need conLrol over whaL sorL of lnvesLor
becomes a cllenL. Cf course, flnanclal planners
ofLen lmpose Lhe same quarLerly bugaboo on
Lhelr prlvaLe money managers. l sLay away from
Lhose as well. locuslng on quarLerly LargeLs ls noL
a meLhod for removlng undue rlsk. Cn Lhe
conLrary, lL Lhrows Lhe porLfollo manager ln wlLh
Lhe caLLle call LhaL ls modern lnvesLmenL
markeLlng -- even Lhough lncreaslng flrm asseLs ls
of llLLle dlrecL beneflL Lo an lndlvldual cllenL -- and
by defaulL places Lhe porLfollo manager's
operaLlons ln Lhe "rlsk equals reward" paradlgm.
1he compeLlLlve advanLage Lherefore resLs wlLh
Lhose lnvesLors who can go where lnefflclency
relgns and rlsk ls uncoupled from reward --
beyond Lhe quarLerly and/or yearly performance
mandaLe.

PealLh care wlll conLlnue Lo lmprove, and many
people should llve a loL longer Lhan Lhey or Lhelr
flnanclal planners Lhlnk. As a resulL, lL hardly
seems lmprudenL for people older Lhan me Lo
conslder Lhe longer, safer road Lo lnvesLmenL
success. 1wenLysomeLhlngs and LhlrLysomeLhlngs
have no unlque clalm on Lhls paLh, and ofLen
lgnore lL anyway. lL ls a complex sub[ecL, buL
wlLhouL lssulng Loo broad a generallzaLlon, Lhere
ls ofLen Llme Lo accepL longer-Lerm rewards
regardless of age.

Crulslng wlLh Carnlval
now leL's geL back Lo plcklng a few good sLocks.
Clven Lhe space lefL, l'll go wlLh one -- Carn|va|
(CCL, news, msgs). As Lhe no. 1 crulse operaLor ln
Lhe world, Carnlval Corp. has flve crulse llnes -
Carnlval, Polland Amerlca, Cunard, Seabourn and
WlndsLar -- spannlng 36 wholly-owned shlps wlLh
capaclLy for more Lhan 43,000 passengers.
Carnlval also markeLs slghLseelng Lours and
Lhrough subsldlary Polland Amerlca, lL operaLes
14 hoLels, 280 moLor coaches, 13 prlvaLe domed
rall cars, and Lwo luxury "dayboaLs."

Carnlval also owns 26 of AlrLours, whlch
operaLes more Lhan 1,000 reLall Lravel shops, 46
resorLs, 42 alrcrafL and four crulse shlps. Carnlval
and AlrLours co-own a ma[orlLy lnLeresL ln lLallan
crulse operaLor CosLa Croclere, operaLor of slx
MedlLerranean luxury crulse shlps wlLh capaclLy
for 7,103 passengers.

uurlng Lhe 1990s, Lhe world was Carnlval's oysLer.
8eLurn on asseLs marched sLeadlly upward from
8.4 Lo 13.3, and reLurn on equlLy was slmllarly
sLable, ranglng beLween 20.1 and 22.3 over
Lhe 10-year perlod. And Lhls ls noL leveraged --
debL as a percenLage of caplLal fell from 31 Lo
under 13 over Lhe same perlod. 1hls, of course,
lmplles LhaL reLurn on lnvesLed caplLal sLeadlly
rose, and lndeed lL dld, from 9.8 Lo a blL over
13.

8ecenLly, however, fuel cosLs skyrockeLed and
lnLeresL raLes rose [usL as Lhe supply of shlps
caughL up wlLh sofLenlng demand, resulLlng ln
prlclng pressure. 8eLurn on equlLy sllpped under
19, and Lhe sLock fell 60 off lLs hlghs and now
Louches Lhe boLLom lL hlL durlng Lhe CcLober,
1998 currency crlsls. AfLer Lhe lnlLlal hlL, lL was hlL
some more wlLh news of a sofL second half of
2000 amld several crulse cancellaLlons.

Carnlval sLlll besL of breed
1he baslc demographlcs sLlll favor Lhe lndusLry --
affluenL baby boomers wlll llve longer and
become a more-slgnlflcanL parL of Lhe passenger
mlx. And Carnlval remalns Lhe besL of lLs breed,
wlLh Lhe hlghesL marglns and besL managemenL.
Moreover, lL has hlsLorlcally been dlfflculL Lo
predlcL Lhe demand flucLuaLlons ln Lhe crulse
lndusLry. SofL and sLrong perlods alLernaLe
wlLhouL a loL of reason aL Llmes. 1here are
reasons now for sofLer demand and Lhe prlclng
dlfflculLles, buL lL ls [usL as posslble LhaL wlLh Lhe
u.S. economy sLlll fundamenLally sLrong, demand
wlll flucLuaLe back Lo Lhe sLrong slde sooner Lhan
mosL Lhlnk.

ln Lhe meanLlme, here's a sLock Lradlng aL [usL 11
Llmes earnlngs desplLe a long record of 20
growLh. WlLh Lhe company maLurlng and growLh
slowlng a blL, momenLum players have
abandoned Lhe sLock compleLely, and few are
wllllng Lo be paLlenL for Lhe hlccups Lo sLop. 1he
recovery could Lake Lhe sLock up Lhree-fold ln Lhe
nexL Lhree Lo flve years. 1he company ls currenLly
a llLLle over 60 Lhrough a $1 bllllon sLock
buyback lL announced lasL lebruary. ln Lhe
process, abouL 10 of Lhe sLock has been reLlred.
1he company has also been worklng Lo broaden
lLs producL reach lnLo Lhe baby boomer segmenL.
A recenL alllance wlLh lalrfleld, a large Llmeshare
operaLor, ls Lhe mosL Langlble evldence of Lhls Lo
daLe, buL oLher dlsLrlbuLlon channel lnlLlaLlves are
forLhcomlng.

1he downslde rlsk ls low, as slmply replaclng Lhe
shlps and oLher crlLlcal operaLlng asseLs of
Carnlval would cosL more Lhan Lhe currenL
markeL caplLallzaLlon, whlch prlces Lhe brand
equlLy as a negaLlve number. And for Lhose
lnvesLors wanLlng Lo sLlck lL Lo Lhe l8S, here's a
chance Lo do lL. Whlle headquarLered ln Mlaml,
Carnlval ls a anama-charLered corporaLlon and
does noL pay u.S. lncome Laxes -- Lhe overall Lax
raLe ls less Lhan 1. lronlcally, Lhe blggesL real
LhreaL ls Lhls Lhumb ln Lhe eye of Lhe l8S. Wlll Lhe
l8S flnd a way Lo Lax Carnlval? lL ls an open
quesLlon, buL one LhaL Carnlval feels ls answered
ln lLs favor.

ercepLlons of Lhe company and Lhe lndusLry are
profoundly negaLlve on Wall SLreeL. AL an
enLerprlse value less Lhan 11 Llmes L8l1uA and
wlLh Lhe shares Lradlng aL replacemenL value, l'm
buylng 330 shares.

Iourna|: August 8, 2000
- 8uy 1,000 shares of nutt|g 8u||d|ng roducts
(n8, news, msgs) at the market.

Cff Lo a slow sLarL
8elaLlve Lo Lhe lndlces, lL appears LhaL l've goLLen
off Lo qulLe a slow sLarL ln Lhls SLraLegy Lab
sesslon. A mlnor reason mlghL be LhaL l, as wlLh
all SLraLegy Lab parLlclpanLs, was able Lo execuLe
my flrsL Lrade on Aug. 1, buL Lhe lndlces' Lally
sLarLed on !uly 28Lh. 1he markeL dld rally a blL
durlng LhaL Llme. lL's Lough Lo beaL Lhe S&, buL
especlally so when Lhere's a handlcap.

Lven accounLlng for Lhe handlcap, however, l am
sLlll lagglng Lhe S&. 1hls ls largely because, whlle
my general Lheory lnvolves belng fully lnvesLed,
l've been addlng only a sLock or Lwo per day as
Lhe markeLs rally. Why dld l noL [usL Lhrow a
baLch of sLocks ouL Lhere all aL once? 8ecause my
vlew of Lhe purpose of SLraLegy Lab ls Lo glve you
lnslghL lnLo how l operaLe. As lL ls, l'm edlLlng my
2,300+ word analyses down Lo 1,000 words Lo flL
ln Lhls medlum. 1o shorLen Lhem much more
would glve shorL shrlfL Lo Lhe LhrusL of SLraLegy
Lab.

AnoLher facLor Lo conslder ls LhaL l wrlLe here
abouL sLocks LhaL l personally would buy now. l
have plenLy of sLocks ln my porLfollos LhaL are
exLended 40 or more. 1hose are sLocks l would
noL necessarlly buy for Lhe flrsL Llme now. So Lhey
do noL geL lnLo my SLraLegy Lab [ournal. WlLhln a
slx-monLh Llme frame, sLarL-up cosLs and
unLlmely declslons seem magnlfled ln
lmporLance. neverLheless, l hope you're geLLlng
whaL you came for.

8ulldlng a porLfollo wlLh PuLLlg
1oday, l'm buylng an ugly sLock ln an
unglamorous buslness. Surprlse, rlghL? nutt|g
8u||d|ng roducts (P8, news, msgs), spun off
from Crane (C8, news, msgs) lasL year, ls a leadlng
dlsLrlbuLor of bulldlng producLs such as doors,
wlndows and Lrlm. 8evenues Lopplng $1.2 bllllon
are accompanled by razor-Lhln marglns LhaL
conLrlbuLe Lo mlsundersLandlng and Lo Lhe sub-
$100 mllllon markeL caplLallzaLlon. AcLually,
lncludlng debL, Lhe enLerprlse value aLLached Lo
PuLLlg ls abouL $218 mllllon.

l flrsL obLalned Lhls sLock durlng Lhe splnoff, as l
was a Crane shareholder. l soon rld myself of lL.
lrom Lhe 10k and Lhe proxy, l could noL flnd
much Lo love. 1hen l read Lhe annual reporL,
made avallable wlLhln Lhe lasL few monLhs. A call
Lo Lhe company conflrmed and enhanced Lhe
dlscovery, and now l'm a fan. LeL's look aL why.

SynerglsLlc savlngs
AL Lhe Llme of Lhe splnoff, PuLLlg acqulred 8ugby
uSA and lncreased revenues over 60 ln one
swoop. 8ugby uSA had been owned by Lhe 8ugby
Croup, a 8rlLlsh maker of cemenL and llme. 1he
u.S. buslness has been an lnefflclenL operaLor ln
much Lhe same lndusLry as PuLLlg, Lhe lndusLry's
mosL efflclenL operaLor. So efflclenL LhaL ln a Lhln
margln, cycllcal lndusLry llke dlsLrlbuLlng bulldlng
producLs, PuLLlg has been proflLable slnce Lhe
Clvll War.

PuLLlg conflrms LhaL Lhey are ahead of plan Lo
save $13 mllllon Lhrough synergles wlLh 8ugby.
1aklng lnLo accounL Lhese synerglsLlc savlngs,
8ugby's $13 mllllon ln L8l1uA (earnlngs before
lnLeresL, Laxes, depreclaLlon, and amorLlzaLlon),
and addlLlonal volume dlscounLs, PuLLlg should
reallze aL leasL $30 mllllon ln addlLlonal L8l1uA as
a resulL of Lhe acqulslLlon. Moreover, PuLLlg
expecLs Lo whlp 8ugby's subsLanLlal buL
lnefflclenL operaLlons lnLo PuLLlg-llke shape. 8y
dolng so, PuLLlg should squeeze anoLher one-
Llme galn of $20 mllllon ouL of worklng caplLal.
1hls $20 mllllon can be subLracLed from Lhe
purchase prlce. Ad[usLed, PuLLlg acqulred 8ugby
and $30 mllllon ln addlLlonal L8l1uA for only $40
mllllon. SmarL managemenL.

Colng forward, PuLLlg wlll have Lremendous free
cash flow. lree cash flow averaged $21 mllllon
per year for Lhe Lhree years before Lhe
acqulslLlon of 8ugby. now, L8l1uA [umps Lo aL
leasL $60 mllllon, and free cash flow [umps Lo aL
leasL $33 mllllon. lus, ln Lhe shorL Lerm, Lhe $20
mllllon or so LhaL comes ouL of 8ugby's worklng
caplLal. As a resulL of Lhls, durlng calendar 2000
PuLLlg ls well on Lrack Lo brlng lLs $122 mllllon ln
debL down Lo $82 mllllon. 8easons? 8educed
lnLeresL expense and expanded ablllLy Lo pursue
acqulslLlons ln Lhls fragmenLed lndusLry -- an
lndusLry where PuLLlg as Lhe leader only has an
8 share. So whaL we are looklng aL ls an
enLerprlse Lradlng aL [usL 3.1 Llmes L8l1uA, and
only abouL 3.1 Llmes free cash flow. keep LhaL ln
mlnd when you Lhlnk of Lhe 130 years of
proflLablllLy PuLLlg has achleved.

uesplLe Lhe sLaLed lnLenL Lo acqulre more flrms,
we do noL have Lo worry abouL a wllly-nllly
acqulslLlon pollcy. As Lhe 8ugby acqulslLlon
suggesLs, PuLLlg's execuLlves are shrewd and
allgned wlLh shareholder lnLeresLs. ln facL, whlle l
have a few problems wlLh LvA -- Lconomlc value-
Added -- Lheory, lL ls a useful and shareholder-
frlendly Lool for evaluaLlng execuLlve declslons.
PuLLlg ls a ploneer ln lLs lndusLry as far as uslng
Lhls Lheory Lo evaluaLe and reward execuLlves for
Lhelr cholces. PuLLlg ls also a fan of CL's "Slx
Slgma" quallLy-lmprovemenL program. 1hese
execuLlves appear Lo be commlLLed Lo dolng rlghL
by shareholders. 1haL's a rare and valuable flnd
Loday.

Cdds and ends
1here are some oLher odds and ends LhaL make
PuLLlg lnLeresLlng. SeLh klarman, known for hls
lnLellecLual and sLrlcL value dlsclpllne, has
accumulaLed a large chunk of Lhe floaL. Conslder
LhaL porLlon of Lhe floaL locked up. Also, recenLly,
a large dlsLrlbuLor of wholesale doors lefL Lhe
buslness. PuLLlg ls expandlng Lo meeL Lhe
demand. 8ecause of Lhls, sales may rlse over Lhe
nexL year or Lwo even lf, as seems probable, Lhe
homebulldlng markeL Lurns souLh.

1he blg prlce rlsk near-Lerm ls LhaL Lhe 8ugby
Croup -- Lhe company LhaL sold 8ugby uSA Lo
PuLLlg -- now holds some 32 of PuLLlg's shares.
1hls flrm may be a prlce-lnsenslLlve seller ln Lhe
open markeL, and has Lhe ablllLy Lo sell 20 of lLs
poslLlon wlLhouL resLrlcLlon. 1hls ls a prlce rlsk
and noL a buslness rlsk. As such, l am noL Lerrlbly
worrled abouL lL. nelLher are Lhe lnslders.

PuLLlg should be aLLracLlve Lo acqulrers. A flrm or
group of lnvesLors wlLh Lhe means and Lhe
lnLeresL would flnd PuLLlg a no-bralner, especlally
once Lhe savlngs and cash flow become apparenL
over Lhe nexL few quarLerly reporLs. WlLh a
shareholder advocaLe as chalrman, lL ls unllkely
LhaL a Lakeover would be unfrlendly Lo
shareholders. 8ecenL LransacLlons ln Lhe lndusLry
suggesL a prlvaLe markeL value aL leasL $10/share.
WlLh Lhe shares Lradlng aL less Lhan $3, l'm happy
Lo buy 1,000 shares.

Iourna|: August 9, 2000
- 8uy 200 shares of Axent 1echno|og|es (AkN1,
news, msgs) at the market.

My 'buy' rules
WlLh Lhe markeL rallylng slnce [usL prlor Lo Lhe
sLarL of Lhe SLraLegy Lab, l musL admlL LhaL many
of Lhe sLocks l wanLed Lo wrlLe abouL have
already appreclaLed some. 1hls ls problemaLlc
because even lf l llke a sLock fundamenLally, l am
rarely wllllng Lo buy more Lhan 13 above
Lechnlcal supporL.

l also generally use broken supporL as an exlL
polnL. "Sell on new lows" mlghL be anoLher way
Lo puL lL. lf l buy a sLock 30 above supporL, Lhen
l musL waLch a garganLuan loss develop before l
eaL lL. AL 13, l'm looklng aL only a 13 loss
before supporL ls broken. Comblnlng Lhese
guldellnes allows me Lo puL Lhe odds a blL more
on my slde. l look aL lL as an exLra klck Lo help ouL
my fundamenLal analysls. 1hls ls noL how mosL
value lnvesLors operaLe, buL lL ls someLhlng LhaL
has conLrlbuLed Lo my success. Cf course, my
rules are noL absoluLe, and l do make excepLlons.

A worLhy excepLlon
1oday l'm buylng an excepLlon. Axent
1echno|og|es (Axn1, news, msgs), a provlder of
e-securlLy soluLlons Lo buslnesses, wlll be
acqulred by Symantec (S?MC, news, msgs) for
one-half share of SymanLec sLock per share of
AxenL. 1here ls no collar, and AxenL now Lrades
way up off lLs lows, wlLh no lmmedlaLe supporL.
8uL SymanLec ls bounclng along aL abouL 8
monLhs of supporL ln Lhe hlgh $40s, and l'm
llsLenlng Lo Lhe arblLrageurs. now, ln general,
arblLrageurs are very shrewd. As ln opLlons and
fuLures, arblLrage ls a game played successfully
only by Lhe very smarL or very advanLaged.
lnformaLlon ls dlgesLed wlLh exLreme speed and
lmmedlaLely reflecLed ln Lhe arblLrage "spread,"
Lhe dlfference beLween Lhe prlce AxenL now
Lrades and Lhe prlce where lL wlll be Laken ouL.

AL Lhe Llme of Lhls wrlLlng, Lhe spread ls only
2.3. Cf laLe, spreads ln Lhe Lechnology secLor
have been much, much larger. So Lhls Llny spread
Lells me a few Lhlngs. When evaluaLlng Lhe spread
ln a sLock LransacLlon wlLhouL a collar, we are
really looklng aL, flrsL, Lhe chances Lhe deal wlll go
Lhrough, and second, Lhe value of Lhe acqulrlng
company's sLock afLer Lhe deal execuLes.

WlLh abouL flve monLhs unLll Lhe close of Lhe
deal, a 2.3 spread glves an annuallzed reLurn on
par wlLh 1reasury bllls. ln oLher words, Lhe
markeL has declded Lhls deal wlll go Lhrough. ueal
closure ls rarely a 100 safe assumpLlon, buL lL
can approach 100 lf Lhe deal seems Lo make
sense sLraLeglcally and ls sLrucLured ln a way LhaL
flnanclng and anLl-LrusL clearance are non-lssues.
1haL seems Lo be Lhe case wlLh SymanLec's
acqulslLlon of AxenL.

1he Llny spread also lndlcaLes LhaL Lhe new posL-
acqulslLlon SymanLec wlll be worLh aL leasL Lhe
currenL share prlce of SymanLec. l agree, buL feel
Lhls ls conservaLlve. SymanLec should be worLh
more. Assumlng Loday's prlces, Lhe markeL
caplLallzaLlon of Lhe new SymanLec wlll approach
$4.03 bllllon. 1hls, for $1 bllllon ln revenues
growlng 27 for aL leasL several years. AccreLlon
Lo cash flow should begln by Lhe end of flscal
2001. lnLulLlvely, Lhere's value here, buL leL's
explore lL some more.

1he real deal
1he deal glves SymanLec's Chlef LxecuLlve Cfflcer
!ohn 1hompson a poLenL arsenal ln hls quesL Lo
make SymanLec a one-sLop e-securlLy shop. A
former l8M execuLlve, he has lnfused an
awareness of Lhe company mlsslon LhroughouL
hls workforce and made cosL conLrols a prlorlLy.
1he new company wlll beneflL from 1hompson's
managemenL as lL offers producLs coverlng Lhe
gamuL of Lhe currenL e-securlLy fleld. AxenL
provldes a head sLarL as lL brlngs on a hosL of
gold-plaLed cusLomer wlns, lncludlng 43 of Lhe
lorLune 30 and a recenL long-Lerm conLracL -- Lhe
lndusLry's largesL ever ln Lerms of revenue -- Lo
provlde managed-securlLy soluLlons Lo xerox
Lurope.

ln response Lo Lhe deal, a Network Assoc|ates
(nL1A, news, msgs) represenLaLlve crlLlclzed
SymanLec's sLraLegy of "belng everyLhlng Lo
everyone." ?eL a vlsa e-securlLy experL Lells me
LhaL a one-sLop shop ls whaL everyone has been
walLlng for. l musL admlL LhaL Lhe same experL ls
Laklng a walL-and-see approach Lo SymanLec, as
he ls noL used Lo Lhlnklng of SymanLec as an
enLerprlse-level company. Pe also crlLlclzes
AxenL's producLs as a blL rough and lacklng ln
supporL, and noLes LhaL SymanLec sLlll wlll noL
offer a producL lmplemenLlng ubllc key
lnfrasLrucLure (kl) Lechnology. L-securlLy experLs
have LouLed Lhe beneflLs of kl, buL developlng a
kl producL ls a dlfflculL Lask lnvolvlng cross-
plaLform lncompaLlblllLles. lL ls uncerLaln wheLher
SymanLec needs one aL Lhls polnL. WlLh a solld
balance sheeL, lL ls llkely lL can acqulre lLs way
lnLo Lhe markeL lf Lhe need arlses. l am also
counLlng on SymanLec brlnglng some order Lo
AxenL's supporL operaLlons.

SymanLec's free cash flow runs hlgher Lhan lLs neL
lncome, as does AxenL's. 8oLh are accumulaLlng
cash on Lhe balance sheeL, comblned, Lhe
companles have nearly $630 mllllon ln cash and
no debL. AccounLlng for lower overall gross
marglns Lhanks Lo lncreased servlce revenue and
Laklng managemenL's guldance for operaLlng
expenses, we can expecL abouL $200 mllllon ln
free cash flow for Lhe year endlng March 31,
2001. Pence, Loday's sLock prlces lmply an
enLerprlse Lradlng aL abouL 17 Llmes free cash
flow. WlLh SymanLec upgradlng lLs revenue
guldance and boLh AxenL and SymanLec beaLlng
esLlmaLes slgnlflcanLly, SymanLec appears Lo
Lrade aL nearly a 30 dlscounL from where lLs
growlng lnLrlnslc value now slLs.

Cne may wonder wheLher SymanLec could have
developed producLs llke AxenL's for less Lhan Lhe
cosL of acqulrlng AxenL lLself. 1hls would have
been a poor cholce ln an explodlng lndusLry. ln
addlLlon Lo producLs, AxenL brlngs human caplLal,
whlch may as well be renamed "vlLal caplLal" ln
Lhe Lechnology space, and lL ls Lhe flrsL mover ln
provldlng comprehenslve lnLruslon-deLecLlon
soluLlons. 1he evldence ls ln Lhe cusLomer wlns.
SymanLec [usL boughL a fooL ln Lhe door of 43 of
Lhe lorLune 30. 1haL's a preLLy blg off-balance-
sheeL asseL ln 1hompson's hands. l am chooslng
Lo buy SymanLec Lhrough AxenL. l have
confldence Lhe deal wlll go Lhrough, and hence l'd
llke Lo clalm Lhe spread. l am buylng 200 shares of
AxenL aL Lhe markeL.
Iourna|: August 11, 2000
- 8uy S00 shares of nutt|g 8u||d|ng roducts
(n8, news, msgs) at a ||m|t of 4 S]8.

- 8uy 100 shares of nea|theon]WebMD (nL1n,
news, msgs) at a ||m|t of 11 S]8.

- 8uy S0 shares of Axent 1echno|og|es (AkN1,
news, msgs) at a ||m|t of 24.


Loadlng up on favorlLes
1oday's Lrades are a near repeaL of yesLerday. l'll
Lry Lo buy 300 shares of nutt|g 8u||d|ng roducts
(P8, news, msgs) aL a llmlL of 4 3/8, and l'll go
wlLh anoLher 30 shares of Axent 1echno|og|es
(Axn1, news, msgs) aL a llmlL of 24. Also, l'll add
anoLher 100 shares of nea|theon ] WebMD
(PL1P, news, msgs) aL a llmlL of 11 3/8. no new
plcks, buL leL's revlew Lhe evenLs of Lhe week.

uld you see whom Act|ve ower (ACW, news,
msgs), Lhe week's hlgh-flylng lC ln Lhe power
generaLlon secLor, LouLed as a Lechnology
parLner? Caterp|||ar (CA1, news, msgs). lL's a
preLLy good parLnershlp -- CaLerplllar ls Lhe brand
sLamped on Lhe parLnershlp's end producL. Who's
Lhe man here? CaLerplllar.

no bombs on Lhe earnlngs fronL
PealLheon/WebMu reporLed a greaL quarLer.
1here are a loL of meLrlcs Lo conslder, buL Lhe
boLLom llne ls losses are shrlnklng as revenues
grow -- LhaL's a very lmporLanL polnL, as lL goes Lo
Lhe vlablllLy of Lhe buslness model. WlLh $1 bllllon
ln cash and no debL, Lhls buslness ls noL [usL
vlable -- lL's a gorllla. new lnformaLlon for me
lncludes managemenL's clalm Lo have already
ldenLlfled $73 mllllon ln synerglsLlc cosL savlngs Lo
be had over Lhe nexL few quarLers. 1he 30
growLh ln physlclan reglsLranLs on WebMu
racLlce provldes a blL of an upslde surprlse as
well. 1haL's a dlfflculL markeL Lo crack, buL
WebMu racLlce already has 26 of lL. l'm
waLchlng Lhe new lows warlly.

C|ayton nomes (CMP, news, msgs) reporLed
numbers ln llne wlLh esLlmaLes, glvlng Lhe
company lLs second-besL resulLs ever as lLs
compeLlLors reporL losses. ClayLon wlll emerge
from Lhls downLurn ln flne condlLlon.

Sen|or nous|ng ropert|es (SnP, news, msgs)
also reporLed earnlngs, whlch should Lurn ouL Lo
be Lhe worsL-case quarLer for Lhe company, as
Lhe bankrupL lessees are no longer maklng
mlnlmal paymenLs. SLarLlng aL Lhe beglnnlng of
Lhe currenL quarLer, Senlor Pouslng began
reallzlng dlrecL operaLlng cash flows from Lhe
properLles vacaLed by Lhe bankrupL lessees. WhaL
Lhe laLesL resulLs do show ls LhaL funds from
operaLlons clearly cover Lhe dlvldend.

1hree earnlngs reporLs from companles under
sLress and no LoLal bombs. l'll Lake LhaL.
l'll have new plcks on Monday.

Iourna|: August 14, 2000
- 8uy 200 shares of |xar An|mat|on Stud|os
(Ikk, news, msgs) at a ||m|t of 33 3]4.

1o lnflnlLy and beyond wlLh lxar
|xar An|mat|on Stud|os (lx8, news, msgs) ls a
sLock slLLlng where no one can geL lL. Lven lf
analysLs or porLfollo managers llke Lhe long-Lerm
sLory, Lhe Wall SLreeL MarkeLlng Machlne wlll noL
allow Lhem Lo buy lL

1he problem? lxar's nexL feaLure fllm wlll noL be
released unLll november 2001 -- a full Lwo years
afLer Lhe lasL, "1oy SLory 2." no maLLer LhaL Lhe
flrsL Lhree releases -- "A 8ug's Llfe," "1oy SLory,"
and "1oy SLory 2" -- esLabllsh lxar as a 1.000
baLLer laLer ln Lhe season Lhan any oLher ma[or
sLudlo before lL. no maLLer LhaL lxar promlses aL
leasL one LheaLrlcal release per year from 2001
on, and has beefed up lLs LalenL pool wlLh Lhe
llkes of anlmaLlon guru 8rad 8lrd. lor Wall SLreeL,
Lhls ls a Llmellness lssue.

noL for me. As l dlscussed back ln my Aug. 3
enLry, even for a growLh company, only a Llny
fracLlon of Lhe lnLrlnslc value of a company
resulLs from Lhe nexL Lhree years. Peck only a
fracLlon of Loday's lnLrlnslc value depends on Lhe
nexL 10 years. 1he key ls longevlLy -- wlll lxar be
around and maklng money 10 years from now . . .
and beyond? CerLalnly.

ln parL, l geL Lhls confldence from ClC Ann
MaLher and CLC SLeve !obs, as well as Lhe LalenL
LhaL lxar seems Lo aLLracL. 1he Leams LhaL
creaLed Lhe flrsL Lhree hlLs are sLlll around for Lhe
nexL four LhaL are already ln producLlon. uurlng
Lhe mosL recenL conference call, SLeve !obs
prefaced hls remarks wlLh Lhe declaraLlon, "l am a
forward looklng sLaLemenL." no doubL, SLeve.

AnlmaLed cash flows
8uL l would never lnvesL ln Lhls company lf l
couldn'L see Lhe flnanclal klngdom behlnd Lhe
maglcal one. And l do. lxar ls generaLlng cash aL
such a raLe LhaL lL ls bulldlng lLs new Lmeryvllle
dlgs ouL of cash flow-- wlLh no flnanclng -- and
sLlll laylng down cash on Lhe balance sheeL. AL
presenL, cash on hand Lops $214 mllllon. !obs ls a
fan of cash flow and cash sLrengLh because he
Lhlnks lL helps hlm negoLlaLe wlLh ulsney. "Pey, lf
you don'L wanL a plece, we'll [usL flnance lL
ourselves..." WhaLever Lhe reason, l llke cash Loo.

1he nexL year and a half wlll lnclude Lhe drlesL
quarLers lxar wlll ever see. SLlll, lxar sees Lhe
comlng pay-per-vlew release of "A 8ug's Llfe"
generaLlng gross revenues of 13-20 of
worldwlde box offlce recelpLs before ulsney Lakes
a cuL. And "1oy SLory 2" wlll go lnLo home vldeo
release Lhls CcLober, generaLlng abouL 33 mllllon
ln unlL sales over lLs llfeLlme aL a hlgher average
selllng prlce Lhan orlglnally forecasL. Pelplng Lo
generaLe enLhuslasm for Lhls release -- and Lo
help cemenL Lhe evergreen naLure of Lhe "1oy
SLory" characLers -- wlll be a new "8uzz LlghLyear
of SLar Command" Lelevlslon show, whlch debuLs
Lhls fall as parL of ulsney's 1 SaLurday Mornlng
program.

1hese are addlLlonal revenue phases for
esLabllshed asseLs. 1o belleve ln lxar as an
lnvesLmenL, one has Lo belleve ln Lhe evergreen
naLure of lLs creaLlons. lxar's full producL llfe
cycle, managed correcLly, can be exLremely long.
And as lxar releases more fllms, more llfe cycles
are puL lnLo play, overlapplng and creaLlng
smooLher and larger earnlngs sLreams.

lxar ls guldlng us Lo earnlngs of $1.30 Lhls year,
buL lL ls llkely we'll see earnlngs exceedlng $1.33.
PlsLory Lells us lxar's free cash flow runs qulLe a
blL hlgher Lhan lLs neL lncome. 1haL's how cash on
Lhe balance sheeL [umps $17 mllllon ln one
quarLer desplLe neL lncome less Lhan half LhaL. As
an enLerprlse less lLs cash, Lhe prlce of lxar ls
currenLly Lradlng aL abouL 21 Llmes accounLlng
earnlngs, buL only abouL 14 Llmes free cash flow.
Larnlngs wlll fall nexL year, and Lhe sLock ls
heavlly shorLed ln anLlclpaLlon. lL's noL llke me Lo
say Lhls, buL geLLlng lnLo Lhe quarLerly accounLlng
mlnuLlae here ls a blL counLerproducLlve. 1he
buslness plan ls lnLacL and Lhere ls a worklng
program for creaLlng brand equlLy.

lor lnsLance, every one of Lhose 33 mllllon coples
of "1oy SLory 2" home vldeo producL wlll feaLure
a Lraller for nexL year's "MonsLers, lnc." klds wlll
be waLchlng Lhls over and over agaln. And when
"MonsLers, lnc." comes ouL on vldeo, wlll lL have
a Lraller for anoLher upcomlng release? Cf course.
And wlll Lhese producLs ulLlmaLely end up on pay-
per-vlew? Cf course. lxar's caLalogue lLself
creaLes lead-lns Lo new producL success.

Concesslons from ulsney?
ln 2004, lxar wlll release lLs flnal fllm under Lhe
dlsLrlbuLlon agreemenL wlLh ulsney. 1hls
agreemenL ls an onerous one LhaL lxar agreed Lo
when lL had much less success under lLs belL.
CurrenLly lxar only geLs 30 of Lhe gross
revenues of lLs producL afLer ulsney deducLs Lhe
cosLs of lLs dlsLrlbuLlon and markeLlng. ulsney's
clalm on dlsLrlbuLlon and markeLlng fees ls such
LhaL Lhe enLlre domesLlc box offlce for a fllm can
mean no proflLs for lxar. Already lxar ls of
sufflclenL sLrengLh Lo exLracL a much more
lucraLlve deal from ulsney. AfLer a few more
blockbusLers, lxar wlll be ln a poslLlon Lo
resLrucLure a new agreemenL wlLh Lremendous
lmpllcaLlons for lxar's boLLom llne.

1he key ls LhaL any addlLlonal concesslons from
ulsney should flow nearly unLouched Lo Lhe
boLLom llne. An addlLlonal concesslon of 20 of
proflLs afLer dlsLrlbuLlon cosLs should resulL ln
roughly a 40 boosL Lo lxar's operaLlng lncome
from a glven fllm. knowlng Lhls, we can esLlmaLe
LhaL ln 2003, we should see a blg boosL Lo lxar's
lncome and aL Lhe mlnlmum re[uvenaLlon of lLs
growLh raLe. lxar's cash earnlngs over Lhe nexL
10 years alone could approxlmaLe $30-$40/share
ln presenL value. And Lhe proflLs should noL flzzle
Loo much even afLer 10 years. Cf course, Lhls ls
very rough because we do noL know whaL Lhe
new ulsney conLracL wlll brlng. 8uL l llke lL when
my margln of safeLy does noL requlre a calculaLor.

1he rlsk ls LhaL Lhe fllms flop. lf Lhls were lox, l'd
worry. l'll Lry Lo buy 200 shares aL a llmlL of 33
3/4.

Iourna|: August 1S, 2000
- |ace order to buy 400 shares Deswe||
Industr|es (DSWL, news, msgs) at a ||m|t of
13.7S.

ueswell lndusLrles -- solld gold
Deswe|| Industr|es (uSWL, news, msgs) ls a
conLracL manufacLurer of meLal and plasLlc
producLs as well as elecLronlcs. 1raded on Lhe
nasdaq buL based ln Pong kong, ueswell runs an
efflclenL operaLlon LhaL employs such Lechnlques
as on-slLe dormlLorles for lLs workers -- LacLlcs
LhaL are proflLable buL noL generally pracLlcal ln
Lhe unlLed SLaLes. Cne mlghL conslder Lhls as a
compeLlLlve advanLage, buL as a small company
based ln Chlna, Lhe flrm's shares are meL wlLh
dlsLrusL and general avoldance. Whlle Lhe sLock
Lrades dally, Lhe volumes are mlnlscule

Common producLs made by ueswell lnclude
prlnLed clrculL boards, Lelephones, compuLer
perlpherals, and elecLronlc Loys whlch are sold Lo
orlglnal equlpmenL manufacLurers LhaL brand Lhe
end producL. Pence, ueswell ls behlnd Lhe scenes
-- Vtech no|d|ngs (v1kP?, news, msgs) and Lpson
are ma[or cusLomers. ueswell has a repuLaLlon
for Llmely, efflclenL operaLlons and has been
wlnnlng larger and more numerous conLracLs
over Lhe years. 8uslness wlLh Lpson ls expecLed
Lo Lrlple over Lhe nexL year, and buslness wlLh
vLech ls experlenclng solld growLh as well.

ueswell ls a growLh company buL pays a generous
dlvldend. lLs offlcers own Lhe ma[orlLy of Lhe
sLock, and rely on dlvldends as a parLlal salary
replacemenL. Why? ulvldends are noL Laxed
locally. WhaL Lhls means ls LhaL ln Lhe long Lerm,
ueswell shareholders recelve a qulLe generous
payouL every year -- ofLen approachlng double
dlglLs. And we can counL on Lhe dlvldend belng
preserved.

8uL excellenL worklng caplLal managemenL -- Lhe
laLesL quarLer's 47 lncrease ln sales came wlLh
less Lhan 20 lncreases ln lnvenLory and accounLs
recelvable -- keeps cash flow so sLrong as Lo
conLlnue fundlng qulLe slgnlflcanL growLh. 1hls ls
noL ofLen seen ln companles wlLh hlgh dlvldend
payouLs.

Show me Lhe buslness
?ou can see where Lhls ls headlng. CLC 8lchard
Lau pays llLLle aLLenLlon Lo Lhe sLock prlce,
preferrlng Lo focus on Lhe buslness. lnvesLor
relaLlons ls farmed ouL, and lnsLlLuLlons generally
lgnore Lhe company. WhaL all Lhls adds up Lo
afLer backlng ouL Lhe $3.33 per share ln cash ls a
sLock Lradlng aL abouL $8.30/share afLer earnlng
$2.01/share over Lhe Lralllng four quarLers -- and
qulLe a blL more Lhan LhaL ln free cash flow. 1hls
desplLe recenL revenue growLh ln Lhe 40 range
and addlLlonal growLh expecLed for Lhe
foreseeable fuLure. 8y Lhe way, Lhe cash on Lhe
balance sheeL ls held ln u.S. dollars.

1he malalse ln Lhe sLock over Lhe lasL few years
has been llnked Lo dlfflculLles ln lLs elecLronlcs
operaLlon, buL Lhe laLesL quarLer saw an 80
revenue [ump ln LhaL dlvlslon. Mr. Lau expecLs
conLlnued sLrengLh Lhere as Lhe markeL for
porLable communlcaLlons devlces heaLs up.
Moreover, ueswell ls aLLalnlng a crlLlcal mass ln
Lerms of capaclLy -- Lhe company ls lncreaslngly
seen as a reallsLlc opLlon as a conLracLor on even
very large [obs. 1he expecLed 230 growLh ln
ueswell's Lpson conLracL over Lhe nexL year ls
evldence of Lhls. Lxpanslon ls belng funded ouL of
cash flows.

AnoLher concern hoverlng over ueswell has been
Lhe effecL of Lhe rlse ln peLroleum prlces on lLs
plasLlcs buslness, whlch depends on resln as
ma[or lnpuL. 8uL managemenL hedged lLs supply
such LhaL Lhere was no maLerlal effecL on Lhe
buslness desplLe Lhe parabollc rlse ln oll prlces.
1hls ls a smarL move, lndlcaLlve of managemenL's
savvy ln lLs fleld.

ConLracL manufacLurers as sLocks are spllL lnLo
qulLe dlsparaLe valuaLlon caLegorles based on
slze. ueswell Lrades aL an enLerprlse
value/L8l1uA raLlo of 2.7. So|ectron (SL8, news,
msgs), wlLh sales 200 Llmes ueswell's, Lrades aL
an enLerprlse value/L8l1uA raLlo of 30. |exus
(LxS, news, msgs), wlLh sales Len Llmes
ueswell's, Lrades aL an enLerprlse value/L8l1uA
raLlo of 40. And ueswell's reLurn on caplLal and
equlLy are qulLe a blL beLLer Lhan Lhese oLher
flrms. 1he poLenLlal for mulLlple expanslon wlLh
growLh ln revenues ls hence qulLe slgnlflcanL.

l am looklng Lo buy 400 shares aL a llmlL prlce of
$13.73.

Iourna|: March 9, 2001
- 8uy S00 shares of D|amondC|uster
Internat|ona| (D1I, news, msgs) at 14 3]4 ||m|t,
order good unt|| cance||ed.

- 8uy 1,400 shares of G1SI Corp. (G1SI, news,
msgs) at 4 3]4 ||m|t, good unt|| cance||ed.

- 8uy 10,000 shares of Cr||m| Mae (CMM, news,
msgs) at a 7S-cents ||m|t, good unt|| cance||ed.

- 8uy 800 shares of Sen|or nous|ng ropert|es
1rust (SNn, news, msgs) at a 10 ||m|t, good unt||
cance||ed.

- 8uy 1,000 shares of London ac|f|c Group
(LD, news, msgs) at 56.6S ||m|t, good unt||
cance||ed.

A dlamond ln Lhe value rough
As a value lnvesLor, one of my favorlLe places Lo
look for value ls among Lhe mosL ouL-of-favor
secLors ln Lhe markeL. ln order Lo obLaln
maxlmum margln of safeLy, one musL buy when
lrraLlonal selllng ls aL a peak. ldeally, llllquldlLy
and dlsgusL wlll palr up ln Landem puglllsm. 8en
Craham suggesLed bear markeLs offer such an
opporLunlLy. 8lghL now, Lechnology ls ln a bear
markeL. Cne of Lhe key Lhemes ls LhaL buslness
cusLomers are puLLlng off purchase declslons
Loday ln order Lo mlnlmlze expense ln Lhe near
Lerm -- and hence proLecL near-Lerm earnlngs
guldance. ln Lhe long run, Lhls ls a bad
managemenL declslon, and ln Lhe long run Lhe
purchases LhaL need Lo be made wlll be made.

1he ma[or sofLware makers have been hlL, as has
nearly any company selllng hlgh-LlckeL lLems Lo
blg buslness. 1he markeL has vlslLed parLlcular
scorn on Lhe e-consulLlng companles, whlch have
been lumped lnLo one baskeL and slmply heaved
overboard. WlLhln Lhls secLor, Lhere are a varleLy
of companles, however, and Lhe sLronger ones
caLer nearly enLlrely Lo blue-chlp buslnesses. 1he
ones LhaL caLered Lo doL-coms ln parLlcular are
sufferlng qulLe severely, and rlghLly so. 1he
sLronger ones, however, have blg cash balances
and doL com exposure ln Lhe low slngle dlglLs --
Lhey have also demonsLraLed a capablllLy of
managlng a buslness for poslLlve reLurns on
lnvesLmenL, and hence come off more credlble l
Lo lnLelllgenL execuLlves of Lop corporaLlons.

8ased on an analysls of accounLs recelvable
quallLy as well as cash converslon cycles, Lwo e-
buslness lnLegraLors sLand ouL as among Lhe besL.
Cne ls rox|com (xCM, news, msgs), Lhe oLher ls
D|amondC|uster (u1l, news, msgs). 8oLh have
demonsLraLed Lhe ablllLy Lo produce poslLlve cash
flow whlle growlng slgnlflcanLly, buL more
lmporLanLly, boLh have exLremely mlnlmal
exposure Lo quesLlonable cllenLs such as doL-
coms. 1helr cllenLs -- lorLune 300 companles --
wlll lndeed evenLually reLurn Lo Lhe prudenL paLh
of spendlng on hlgh reLurn on lnvesLmenL
pro[ecLs.

Cf Lhese Lwo, my favorlLe ls ulamondClusLer.
ulamondClusLer has Lhe besL marglns and
worklng caplLal managemenL ln Lhe buslness,
desplLe worklng wlLh blue chlp cllenLs LhaL ofLen
demand favorable credlL Lerms. 1he managemenL
Leam ls qulLe sLrong, and ln Lhe comlng quarLers
nearly half Lhelr buslness wlll come from overseas
-- prlmarlly from Lurope and LaLln Amerlca and
away from Lhe norLh Amerlcan melLdown. uoL-
com exposure ls less Lhan 2. Moreover, Lhelr
developlng experLlse ln wlreless, from worklng
wlLh Lr|csson (L8lC?, news, msgs) ln Lurope, wlll
prove qulLe handy when wlreless evenLually Lakes
off here ln Lhe unlLed SLaLes.

Wlreless ls one area of Lelecom LhaL conLlnues Lo
hold promlse. Many of Lhe blggesL carrlers
worldwlde have already spenL bllllons on llcenses
LhaL have noL been developed. 1hese carrlers wlll
noL be able Lo delay long purchaslng Lhe
consulLlng servlces needed Lo reallze a reLurn on
such a large lnvesLmenL. ulamondClusLer ls very
well-poslLloned ln LhaL area.

1he balance sheeL ls prlsLlne, wlLh more Lhan
$130 mllllon cash (over $3/share) and no debL. ln
facL, Lhe sLock has some hlsLory, havlng been
punlshed severely durlng Lhe CcLober 1998
melLdown, only Lo rebound LwenLy-fold before
crashlng once agaln. 1hls ls a sLock LhaL ls
fundamenLally llllquld and Lends Lo provlde
opporLunlLles wlLhln lLs Lremendous prlce ranges.

ManagemenL conLlnues Lo malnLaln a no-layoffs
pollcy, and Lends Lo promoLe from wlLhln. 1hese
feaLures are unlque ln Lhe lndusLry and fosLer
sLablllLy wlLhln Lhe company LhaL can only beneflL
lL ln relaLlon Lo lLs peers. 1he compeLlLlve
landscape lncludes I8M (l8M, news, msgs), a
formldable e-servlces compeLlLor. Powever,
ulamondClusLer has demonsLraLed an ablllLy Lo
wln many of Lhe blggesL cllenLs and ls ln Lhe
process of developlng a branded repuLaLlon as
well. Success wlLh blg cllenLs ls Lhe blggesL selllng
polnL when speaklng wlLh oLher blg cllenLs. 1he
human-relaLlons culLure fosLered aL
ulamondClusLer (lndusLry-low Lurnover ls [usL
11), Lhe blue-chlp cllenL base, and Lhe
fundamenLal cash reLurn on lnvesLmenL mlndseL
LhaL managemenL consLanLly evokes all seL lL far
aparL from many of lLs weaker, sLruggllng
compeLlLors. unllke commodlLy sLafflng, hlgh-
level buslness consulLlng ls very suscepLlble Lo
brandlng, and ulamondClusLer has been maklng
Lhe rlghL moves Lo creaLe an effecLlve brand.

ln any consulLancy, human resources
managemenL ls key. 8y noL laylng off consulLanLs,
managemenL ls slgnallng Lo Lhe hlghesL quallLy
candldaLes ouL Lhere LhaL ulamondClusLer offers
sLablllLy and flnanclal sLrengLh. 1hls lowers
Lurnover as well as cosLs, and helps
ulamondClusLer Lo Lhe besL marglns ln Lhe
lndusLry. 1hls also allows ulamondClusLer Lo be
mosL ready when Lhe economy revs up once
agaln and compeLlLors are once agaln scrambllng
for LalenL.

8acklng ouL Lhe excess cash, ulamondClusLer
Lrades for around 10-Llmes newly lowered
esLlmaLes. lL reached cash proflLablllLy aL a lower
revenue Lhreshold Lhan any of lLs compeLlLors,
and lL wlll remaln solldly proflLable desplLe Lhe
currenL downLurn. As a value lnvesLor, l am qulLe
used Lo buylng cycllcals as Lhe downLurn looks
mosL dlre -- buL before Lhe acLual boLLom ls hlL.
1radlLlonally, cycllcal sLocks begln Lhelr bull rally
well ln advance of Lhe acLual buslness boLLom. l
belleve LhaL ulamondClusLer ls polsed for such a
rally.

1here ls some prlce rlsk here. CLher hlgh-Lech
consulLancy sLocks have plummeLed Lo levels
approxlmaLlng Lhelr cash holdlngs, and
ulamondClusLer may ln facL do LhaL Loo. 1o daLe,
Lhe quallLy of Lhe buslness has acLually provlded
ulamondClusLer sLock some prlce proLecLlon
relaLlve Lo lLs lesser peers. 8uL whaL l belleve we
are seelng ls a shorL-Lerm caLharsls from Lhe lack
of vlslblllLy for recovery. 1he llllquldlLy of Lhe
sLock as well as Lhe momenLum shareholder base
slmply aggravaLes Lhe fall. MosL value lnvesLors
would noL Louch someLhlng called
ulamondClusLer, and hence prlce supporL ls
vanlshlng. l have seen Lhe sLock fall as much as
3 on a few hundred shares, only Lo see oLhers
follow and dump Lhousands of shares because
Lhe sLock fell 3.

1he sLock ls hence someLhlng of a falllng knlfe
rapldly acceleraLlng lLs descenL. 1echnlcally
speaklng, Lhe only supporL flows from Lhe boLLom
of a channel upLrend exLendlng back Lo early
1997 and a recenL bounce off $14 1/2.

lundamenLally, Lhe meLrlcs look good. 1he
company has been able Lo malnLaln revenues per
blllable of abouL $330,000 -- over 30 hlgher
Lhan several promlnenL comparables. LxpecL a
cycllcal lull ln Lhls flgure as Lhe company refuses
Lo cuL headcounL durlng Lhe downLurn, buL as
menLloned before long-Lerm lnvesLors should
welcome Lhls aLLlLude.

Powever, Lhe lnLrlnslc value of Lhls company ls
double currenL levels even uslng conservaLlve
long-Lerm growLh esLlmaLes well below Lhose
provlded by Lhe company. A key facLor ln Lhese
sorLs of companles ls managemenL, and ln Lhls
case managemenL ls reacLlng exacLly how l would
llke Lhem Lo -- as owners lnLeresLed ln Lhe long-
Lerm prosperlLy of Lhe buslness. 1he sLock ls now
prlced as lf earnlngs wlll grow only 10 annually
for Lhe nexL 10 years, before falllng Lo abouL 6
growLh. A share buyback ls underway, as lL should
be. Whenever a company has an opporLunlLy Lo
purchase $1 dollar of lnLrlnslc value for 30 cenLs,
lL should do so. 1he company has ample cash Lo
ampllfy Lhe buyback, and oughL Lo do so when
Lhe currenL alloLmenL ls compleLed.

lor Lhe record, managemenL conLlnues Lo LargeL
annual 30 revenue growLh long-Lerm, and
earnlngs per share growLh approxlmaLlng 23.
1hey are looklng across Lhe valley. lnLelllgenL
lnvesLors would never Lake Lhese growLh raLes,
exLrapolaLe a value from Lhem, and call ouL
"margln of safeLy." 8uL lnLelllgenL lnvesLors
should be able Lo also look across Lhe valley and
see an opporLunlLy for caplLal appreclaLlon ln a
long-Lerm hold from Lhese levels.

1he lndusLry may see some consolldaLlon.
AnecdoLal reporLs are LhaL forelgn flrms looklng
Lo snap up Amerlcan Lechnology experLlse are
already scouLlng ouL varlous LargeLs among Lhe e-
buslness consulLlng walklng dead and wounded.
roxlcom seems parLlcularly suscepLlble here. l
am noL expecLlng ulamondClusLer Lo sell ouL, buL
depressed shares composed 1/3 of cash are
generally aLLracLlve LargeLs. 8uy 300 shares aL 14
3/4 llmlL, good unLll cancelled.

CLher buys
Also, buy 1,400 shares of G1SI (C1Sl, news, msgs)
aL 4 3/4 llmlL, good unLll cancelled. 1hls sLock ls a
holdover from lasL round. A suppller of
Lechnology equlpmenL Lo Lhe governmenL, lL
remalns a neL neL (selllng aL a dlscounL Lo neL
worklng caplLal less all llablllLles) desplLe a
Lremendous change ln Lhe buslness for Lhe
beLLer, wlLh expecLed earnlngs ln excess of $1 per
share.

8uy 800 shares of Sen|or nous|ng ropert|es
1rust (SnP, news, msgs) aL 10 llmlL, good unLll
cancelled. 1hls ls anoLher holdover from lasL
round. A hlgh dlvldend payouL on Lhls healLh-care
8Ll1 and an lmprovlng regulaLory and flnanclal
cllmaLe due Lo recenL budgeL changes conLlnue Lo
make Lhe sLock aLLracLlve. Warren 8uffeLL boughL
sLock ln nk1 ropert|es (P8, news, msgs),
whlch has Lhe same managemenL as Senlor
Pouslng and whlch ls also Senlor Pouslng's largesL
shareholder.

8uy 10,000 shares of Cr||m| Mae (CMM, news,
msgs) aL a 73-cenLs llmlL, good unLll cancelled.
1hls ls a sLock of a flnance company comlng ouL
of bankrupLcy soon and worLh aL leasL
$1.23/share and wlLh only sllghLly dlfferenL
assumpLlons a llLLle over $2/share. 1hls ls one of
Lhe sllghLly lnnocenL bysLanders forced lnLo
bankrupLcy by Lhe Long 1erm CaplLal
ManagemenL crlsls of 1998. 1hls one's
compllcaLed and has recenLly been under selllng
pressure from a converLlble preferred lssue LhaL
has been converLlng. enny sLock ls a pe[oraLlve
Lerm LhaL happlly makes people noL wanL Lo look
deeper, buL Lhe markeL cap ls greaLer Lhan C1Sl,
whlch Lrades above $3 regularly, and Lhe
enLerprlse value ls much greaLer sLlll.

8uy 1,000 shares of London ac|f|c Group (Lu,
news, msgs) aL $6.63 llmlL, good unLll cancelled.
1hls ls an Au8 represenLlng an ownershlp sLake ln
a London lnsurance company and asseL manager
LhaL uses lLs floaL ln parL for venLure caplLal
acLlvlLles. 1he company has had a Lremendous
Lrack record, and many of lLs companles noL
Laken publlc have been acqulred, resulLlng ln
large sLakes ln companles llke S|ebe| Systems
(SL8L, news, msgs). 1he exLenslve llsL of
companles lL has helped fund lnclude LSI Log|c
(LSl, news, msgs), Atme| (A1ML, news, msgs),
L|near 1echno|ogy (LL1C, news, msgs), Crac|e
(C8CL, news, msgs), ACL 1|me Warner (ACL,
news, msgs) and A|tera (AL18, news, msgs),
among oLhers. CurrenLly Lradlng aL a subsLanLlal
dlscounL Lo Lhe neL asseL value, Lhe sLock should
ln facL mlrror Lhe value of lLs publlc and prlvaLe
holdlngs plus Lhe value of lLs $3 bllllon asseL
managemenL operaLlons. lL ls also lmporLanL Lo
reallze LhaL a sofL lC markeL does noL resulL ln
losses -- Lhe company slmply musL keep lLs
prlvaLe companles prlvaLe a llLLle longer.
Slmllarly, mark-Lo-markeL losses on publlc
securlLles are slmply paper losses unLll reallzed.

Iourna|: March 16, 2001
- Change the outstand|ng ||m|t order on G1SI
Corp. (G1SI, news, msgs) to buy 1,S00 at 4 7]8
||m|t, good unt|| cance|ed.

- Change the outstand|ng ||m|t order on Cr||m|
Mae (CMM, news, msgs) to buy 10,000 at an 80-
cent ||m|t, good unt|| cance|ed.

- Change the outstand|ng ||m|t order on Sen|or
nous|ng ropert|es 1rust (SNn, news, msgs) to
buy 700 shares at 510.10 ||m|t, good unt||
cance|ed.

- 8uy 1,S00 shares of Grubb & L|||s (G8L, news,
msgs) at S ||m|t, good unt|| cance|ed.

- 8uy 2,000 shares of nutt|g 8u||d|ng roducts
(n8, news, msgs) at 54.10 ||m|t, good unt||
cance|ed.

- 8uy 2,000 shares of Va|ueC||ck (VCLk, news,
msgs) at 3 S]8 ||m|t, good unt|| cance|ed.

1wo ouL-of-favor cholces
llrsL, leL's ad[usL a few unexecuLed Lrades.
Change Lhe ouLsLandlng llmlL order on G1SI Corp.
(C1Sl, news, msgs) Lo buy 1300 aL 4 7/8 llmlL,
good unLll canceled. Change Lhe ouLsLandlng llmlL
order on Cr||m| Mae (CMM, news, msgs) Lo buy
10,000 aL an 80-cenL llmlL, good unLll canceled.
Change Lhe ouLsLandlng llmlL order on Sen|or
nous|ng ropert|es 1rust (SnP, news, msgs) Lo
buy 700 shares aL $10.10 llmlL, good unLll
canceled.

now, Loday's new names:

l'll buy 1,300 shares of Grubb & L|||s (C8L, news,
msgs) aL 3 llmlL, good unLll canceled. A real-esLaLe
servlces flrm, one would lmaglne LhaL Lhls
company would be ouL of favor rlghL now. lL sure
ls. C8 k|chard L|||s (C8C, news, msgs), a
compeLlLor, ls belng Laken prlvaLe by
managemenL aL an enLerprlse value/ L8l1uA
mulLlple of 6.2. CurrenLly, Crubb & Lllls Lrades aL
a mulLlple of abouL 3. Warburg lncus and
Go|dman Sachs Group (CS, news, msgs) are Lhe
ma[orlLy owners of Lhe flrm. 1he sLock has been
langulshlng, and Warburg ls looklng for a way ouL.
1hey've been shopplng Lhe flrm around, buL
found no Lakers for uncerLaln reasons - posslbly
Lhe prlce was Loo hlgh. CL CaplLal and lnslgnla
llnanclal Croup have Laken a peek.

1he flrm recenLly compleLed a fully subscrlbed
self-Lender for abouL 33 of Lhe ouLsLandlng
shares aL a prlce of $7 -- undoubLedly a way for
Warburg and Coldman Lo llquldaLe a porLlon of
Lhelr poslLlon ln llghL of Lhe facL LhaL Lhere ls no
ready buyer. 1he company released Lhe CLC lasL
May and neglecLed Lo search for a new one. 1hls
company ls, qulLe slmply, on Lhe block and as yeL
Lhere are no Lakers.

ln Lhe meanLlme, lL ls very cheap. Cash on hand aL
Lhe end of Lhe year ls lnflaLed by deferred
commlsslon expense, and Lhls ls a cycllcal
lndusLry headed lnLo a downLurn. 8uL lf C8
8lchard Lllls ls worLh a 6 mulLlple on peak
L8l1uA, surely Lhe Crubb & Lllls share prlce ls
awfully low. CLher comparables Lrade aL a 6
mulLlple on L8l1uA as well.

l'll add ln a buy 2,000 shares of nutt|g 8u||d|ng
roducts (P8, news, msgs) aL $4.10 llmlL, good
unLll canceled. A holdover from lasL round, Lhls
bulldlng-producLs dlsLrlbuLor wlLh a nlfLy value-
added door manufacLurlng operaLlon Lrades aL
low valuaLlon and has been ouL of favor slnce lLs
spln-off from Crane (C8, news, msgs) ln laLe 1999.
lL recenLly pre-announced Lhls quarLer, seasonally
lLs mosL dlfflculL. Cver Lhe decades, however, Lhls
flrm has managed Lo sLay proflLable Lhrough Lhlck
and Lhln. lL ls execuLlng a plan Lo de-leverage lLs
balance sheeL and has found cosL synergles ln a
ma[or acqulslLlon lasL year LhaL wlll bloom Lhls
year. A comparable company, Cameron Ashley,
was Laken prlvaLe by managemenL lasL year aL a
valuaLlon mulLlple LhaL lmplles PuLLlg deserves a
share prlce ln Lhe $10-$13 range. 1he largesL
ouLslde shareholder wanLs ouL and may flnd Lhe
easlesL way ls Lo lnsLlgaLe for a buyouL. 1he
second largesL shareholder ls Lhe Crane lund, an
afflllaLe of Crane, and Crane's CLC ls PuLLlg's
Chalrman. WlLhouL a LakeouL, Lhe company
Lrades aL low mulLlple of free cash flow, has
managemenL focused on reLurn on caplLal
hurdles, and makes a good hold.

8uy 2,000 shares of Va|ueC||ck (vCLk, news,
msgs) aL 3 3/8 llmlL, good unLll canceled.
valueCllck ls a pay-for-performance (or cosL-per-
cllck) lnLerneL adverLlser. Agaln, Lremendously
ouL of favor rlghL now. WhaL Lhls company has
golng for lL ls a hefLy cash load as well as shares ln
an overseas subsldlary, valueCllck !apan, LhaL
LogeLher are worLh slgnlflcanLly more Lhan Lhe
currenL share prlce. CperaLlons have been
roughly cash-flow neuLral, and cerLalnly Lhlngs
are noL geLLlng worse. 8ecause of poollng
LransacLlons rules, valueCllck's managemenL
clalms lL cannoL lnsLlLuLe a share buyback of any
slze.

lnLulLlvely, one would expecL LhaL Lhe cosL-per-
cllck or pay-per-converslon model would sLarL Lo
make sense Lo more and more adverLlsers as
LradlLlonal revenue models requlrlng paymenL
slmply for Lhe presenLaLlon of a banner prove
fuLlle. llnanclal companles such as credlL card
vendors are sLarLlng Lo see Lhe llghL here. !apan
remalns a sLronger markeL for valueCllck, whlch
goL lnLo Lhe markeL earller and hence ls
parLlclpaLlng more fully ln Lhe de facLo
adverLlslng sLandards LhaL developed Lhere.
valueCllck has also acqulred asseLs ln areas such
as opL-ln e-mall campalgns and sofLware
measurlng reLurn on lnvesLmenL.

Doub|eC||ck (uCLk, news, msgs) owns a sLake ln
valueCllck and has represenLaLlon on Lhe board.
lf noLhlng else, Lhls company seems a LakeouL
walLlng Lo happen. MosL downslde ls prlced ln aL
Lhls polnL - afLer all, Lhe buslness has a negaLlve
valuaLlon - and Lhere ls a decenL upslde.

Iourna|: March 28, 2001
- |ace order to buy 1,000 shares of Spher|on
(SIN, news, msgs) at 7.8S ||m|t, day order on|y.

- |ace order to short 300 shares of Standard
ac|f|c (SI, news, msgs) at 22 or h|gher, good
unt|| cance|ed.

- |ace order to short 100 shares of Adobe
(AD8L, news, msgs) at 36.S0 or h|gher, day order
on|y.

1he recovery mlrage
A promlnenL newspaper recenLly publlshed one
of Lhe leasL lnformed arLlcles l've ever seen. l
belleve lL speaks volumes abouL where Lhe sLock
markeL mlghL be headed. 1he LlLle was Why Plgh
1ech Can WeaLher Lhe Slowdown." 1he
newspaper, unforLunaLely, was Lhe San !ose
Mercury news. PomeLown shame.

Pere's some cholce wlsdom:

- (capLlon for phoLo of ?ahoo's new
headquarLers): ?ahoo's new
headquarLers ln MoffeLL ark ls an lronlc
lesson ln Lhe new Lconomy: Slllcon valley
can avold a recesslon llke Lhe one 10 years
ago because lL has dlverslfled beyond
defense conLracLs, chlps, and hardware."
My commenL: lnLerneL adverLlslng ls a
Lool for dlverslflcaLlon agalnsL an
economlc slowdown? Culck, someone Lell
1he Wash|ngton ost (WC, news,
msgs)...
- A broad specLrum of Lech companles hedges
agalnsL slumps ln any parLlcular secLor aL a
glven momenL. AlLhough all Lhe Lech
companles are llnked ln a food chaln,
some wlll probably suffer less durlng Lhe
l1 spendlng slowdown, Lhe economlsLs
say. "1hey're holdlng hands, buL Lhey're
carLoon characLers, and Lhelr arms can
sLreLch," sald Mlke alma, prlnclpal l1
analysL aL CarLner uaLaquesL." My
commenL: Ch, Lhey're carLoon characLers
all rlghL ...
- "l don'L Lhlnk Lhere's anyLhlng ouL Lhere LhaL
would lead us Lo anyLhlng even
approachlng Lhe early-1990's experlence,"
sald 1ed Clbson, chlef economlsL aL Lhe
sLaLe ueparLmenL of llnance. Slllcon
valley economlcs guru SLephen Levy, co-
founder of Lhe CenLer for Lhe ConLlnulng
SLudy of Lhe Callfornla Lconomy agreed.
"Lveryone knows LhaL lL's Lemporary," he
sald of Lhe Lech slump. My commenL:
1he Sllly uLLy guru levled a Lemporary
sLudy of Lhe conLlnulng"... WalL, no... "1he
[olnL economy of a conLlnulng cenLer of
Slll. valley gurus and governmenL
lnLelllgence"... walL, no... "We're from Lhe
governmenL-and he's an economlsL-and
we are all known for belng very very rlghL
mosL of Lhe Llme"... ah, much beLLer ...
- 1hls Llme lL wlll be dlfferenL because "Callfornla
ls slowlng from an exLraordlnarlly red-hoL
economy" and "ln 1990, Callfornla was
comlng off a bulldlng blnge" and
"MoneLary pollcy ls dlfferenL" and, walL,
Lhls ls greaL-"venLure caplLal has maLured
as an lndusLry, fuellng buslness
lnnovaLlons ln a broader way Lhan
before." My commenL: ?eah, Lhose vC's
really reflned LhaL "dump lL on Lhe gulllble
publlc" sLraLegy. 1hank Cod Lhe vC's wlll
be Lhere wlLh Lhelr newfound experLlse Lo
help us pull Lhrough Lhese rough Llmes.
8uL Lhe markeL has already fallen so far. Could lL
really fall furLher? Sure. As long as everyone ls
asklng, ls Lhls Lhe boLLom?", l doubL LhaL lL ls.
When people Lruly caplLulaLe, no one wlll be
asklng lf Lhere's caplLulaLlon. CaplLulaLlon wlll be
deflned by a loss of lnLeresL ln caplLulaLlon.

l'm noL Lrylng Lo dlvlne markeL dlrecLlon from
popular behavlors. ln facL, l really am noL
proclalmlng anyLhlng abouL markeL dlrecLlon. 8uL
Lhe valuaLlons [usLlfy a boLLom abouL as much as
Lhe behavloral lndlcaLors do, whlch ls Lo say noL
aL all. So here goes my essay, LlLled Why Plgh
1ech SLocks CannoL WeaLher Lhe Slowdown."

1he sLock-opLlons shell game
l'm golng Lo ouLllne a problem LhaL a loL of Lech
companles face -- and LhaL makes Lhelr sLocks ln
general overvalued. unllke nearly every oLher
lndusLry, Lech companles compensaLe Lhelr
employees ln a manner LhaL hldes much of Lhe
expense of Lhe compensaLlon from Lhe lncome
sLaLemenL. Cf course, l'm Lalklng abouL opLlons.

WlLh Lhe mosL prevalenL Lype of opLlon -- called
nonquallfled sLock opLlons" -- Lhe dlfference
beLween Lhe prlce of Lhe sLock and Lhe prlce of
Lhe opLlons when exerclsed accrues Lo Lhe
employee as lncome LhaL musL be Laxed because
lL ls consldered compensaLlon. noL accordlng Lo
Cenerally AccepLed AccounLlng rlnclples (CAA),
buL accordlng Lo Lhe l8S. So Lhe l8S glves
companles a break and allows Lhem, for Lax
purposes, Lo deducL Lhls opLlons expense LhaL
employees recelve as lncome. 1he neL resulL ls an
lncome-Lax beneflL Lo Lhe company of roughly
33 of Lhe sum LoLal dlfference beLween Lhe
exerclse prlce of Lhe company's nonquallfled
opLlons durlng a glven year and Lhe markeL prlce
of Lhe sLock aL Lhe Llme of exerclse.

Slnce CAA does noL recognlze Lhls ln Lhe lncome
sLaLemenL -- for whaLever reason, l'm noL sure --
Lhe cash flow sLaLemenLs record Lhls neL lncome
Lax beneflL from employee sLock compensaLlon"
ln operaLlng cash flow as a poslLlve ad[usLmenL Lo
neL lncome. AfLer all, Lhe company lncluded
nelLher Lhe cosL of Lhe opLlons nor Lhe lncome Lax
beneflL on Lhe lncome sLaLemenL. Pence, Lhe
correcLlon Lo cash flow.

CreaL, rlghL? So neL lncome ls undersLaLed, rlghL?
Wrong. When evaluaLlng u.S. companles,
lnvesLors oughL Lo assume LhaL lf Lhe l8S can Lax
someLhlng, Lhen lL ls a real proflL. And lf Lhey
allow one Lo deducL someLhlng, Lhen lL ls a real
cosL. lor lnsLance, goodwlll amorLlzaLlon cannoL
be deducLed for Laxes, buL LhaL's anoLher Loplc
for anoLher day.

lor many Lech companles, opLlons compensaLlon
ls a blg lssue. ln a rlslng markeL, Lhe neL lncome
Lax beneflL can be qulLe large -- buL lL only
reflecLs 33 of Lhe acLual cosL of paylng
employees wlLh opLlons. Pow does lL cosL Lhe
company? 8ecause Lhe company musL elLher
lssue new sLock or buy back sLock for lssuance Lo
employees ln order for Lhe employees Lo obLaln
Lhls sLock aL a dlscounL. 1he cosL ls borne by
shareholders. 1he per share numbers worsen,
whlle Lhe absoluLe numbers lmprove (afLer all,
lssulng sLock aL any prlce ls a poslLlve evenL for
cash flow lf noL shareholders).

Adobe (Au8L, news, msgs), for lnsLance, ls wldely
regarded as a good company wlLh a franchlse. A
blL cycllcal maybe, buL a member of Lhe nasdaq
100 ($CLx) and Lhe S& 300 ($lnx). lL's been
around Lhe block. And lLs shareholders have been
Laken for a rlde.

Looklng aL lLs recenLly flled form 10k for 2000,
one sees LhaL Lhe lncome-Lax beneflL for opLlons
supplled $123 mllllon, or roughly 28 of
operaLlng cash flow. lalr enough. LeL's move Lo
Lhe lncome sLaLemenL. 8ased on a corporaLe Lax
raLe of around 33, LhaL $123 mllllon represenLs
$337 mllllon ln employee compensaLlon LhaL Lhe
l8S recognlzes Adobe pald, buL LhaL does noL
appear on Lhe lncome sLaLemenL.

lugglng lL lnLo Lhe lncome sLaLemenL drops Lhe
operaLlng lncome -- less lnvesLmenL galns and
lnLeresL -- from $408 mllllon Lo $31 mllllon. 1ax
LhaL and you geL neL lncome somewhere around
$33 mllllon -- and an abnormally small Lax
paymenL Lo Lhe l8S. 1haL $33 mllllon ls roughly
Lhe amounL of neL lncome LhaL publlc
shareholders geL afLer Lhe company's senlor
managemenL and employees feed aL Lhe Lrough.
lor Lhls $33 mllllon - roughly a LenLh of Lhe
reporLed LS-shareholders are paylng $8.7
bllllon. Ad[usLlng Lhe prlce/earnlngs raLlo (L) for
whaL l [usL descrlbed [umps Lhe L well lnLo Lhe
Lrlple dlglLs.

1hls ls why l call a loL of Lechnology companles
prlvaLe companles ln Lhe publlc domaln -- exlsLlng
for Lhemselves, noL for Lhelr shareholder owners.
Cf course, lL ls a shell game. A prolonged
depressed sLock prlce -- for whaLever reason,
lncludlng a bear markeL -- would cause a loL of
opLlons Lo become worLhless, and would llkely
requlre Lhe company Lo elLher sLarL paylng more
ln salary or ofLen worse, Lo sLarL reprlclng opLlons
aL lower prlces.

ln a coldly calculaLlng markeL raLher Lhan a
speculaLlve one, Lhe sLocks of companles LhaL
have been dolng Lhls Lo shareholders wlll suffer.
lL ls noL llmlLed Lo Adobe. C|sco (CSCC, news,
msgs), Inte| (ln1C, news, msgs), M|crosoft (MSl1,
news, msgs) and many of Lhe greaLesL Lech
wealLh creaLors" of Lhe lasL decade are ln Lhe
same boaL. When shares are boughL back ln
masslve amounLs and Lhe share counL keeps
rlslng, LhaL's a clue. And ln a Lrue bear markeL,
even cold calculaLlons are barely worLh Lhe
screens Lhey're punched up on. As much as Lhls
markeL overshoL Lo Lhe upslde, expecL an
overshooL Lo Lhe downslde.

And now for Lhe Lrades
We're ln Lhe mldsL of a bear markeL rally, so l'm
noL anxlous Lo buy much yeL -- l llke Lo buy when
Lhlngs are more gloomy. l wlll resurrecL a shorL
from lasL round, Lhough. ShorL 300 shares of
Standard ac|f|c (Sl, news, msgs) aL 22 or
hlgher, good unLll canceled. A homebullder
heavlly exposed Lo Callfornla's dlfflculLles, wlLh
lnslder selllng. SenLlmenL surroundlng Lhe
homebullders remalns wrong-headedly perky. l
wroLe abouL Lhls lasL round and wlll updaLe my
analysls soon.

Pere goes one buy now because a caLalysL ls ln
Lhe offerlng: Spher|on (Sln, news, msgs) ls a
human resources/Lemporary servlces flrm now
floaLlng a subsldlary on Lhe London exchange for
more cash Lhan Lhe enLlre markeL caplLallzaLlon
of Spherlon. 1he proceeds wlll be used Lo pay off
debL and buy back shares. 1he upslde could be
varlable, especlally ln Lhe near-Lerm, buL uslng
very conservaLlve assumpLlons, lL appears Lhe
downslde Lo Lhe valuaLlon ls sLlll abouL 18
above Lhe currenL prlce. And Lo Lhe exLenL Lhe
share prlce remalns depressed as Spherlon sLarLs
buylng back sLock, lnLrlnslc value per share wlll
rlse. 8uy 1,000 shares aL 7.83 llmlL, day order
only.

Iourna|: March 29, 2001
- |ace order to se|| pos|t|on |n London ac|f|c
Group (LD, news, msgs) at the market.

- |ace order to se|| pos|t|on |n Spher|on (SIN,
news, msgs) at the market.

- |ace order to buy S00 shares of G1SI Corp.
(G1SI, news, msgs) at 4 7]8 ||m|t, good unt||
cance|ed.

8eal sLocks, real proflL, real value
My shorL of Adobe (Au8L, news, msgs) was noL
Lrlggered. 8uL l do recommend rereadlng my
argumenL for dolng so. l am noL shorL Adobe ln
real llfe elLher, buL Lhe same loglc applles Lo
many, many of Lhe Lech sLocks ouL Lhere. l do noL
belleve we are near a boLLom yeL because ln Lhe
cold llghL of a bear markeL Lhese Lypes of Lhlngs --
such as dlluLlve opLlons compensaLlon and hldlng
mlsLakes wlLh charge-offs --maLLer. 1he greaLer
fool Lheory no longer rules. WhaL a rellef

now, maybe, flnally, we have a Llme for raLlonal
sLock plcklng. lf Lhe markeL beglns Lhe flrsL mulLl-
decade sldeways run of Lhe new cenLury (Lhere
were Lwo such runs lasL cenLury - boLh Llmes
afLer exLreme valuaLlon bubbles), Lhen Lhe suresL
way Lo proflL wlll be Lo buy sLocks of
lnconLroverLlble value. SLocks of proflLable
companles LhaL can be boughL for Lhelr level of
earnlngs per share flve Lo 10 years ouL meeL Lhls
crlLerlon. ln Lhls veln, buy 300 more shares of
G1SI Corp. (C1Sl, news, msgs). 1hls ls one of Lhe
cheapesL sLocks ln my unlverse, wlLh Lhe besL
sLory. 1hey dlsLrlbuLe Lechnology producLs Lo Lhe
mlllLary, Lhe l8S and oLhers. Cver $630 mllllon ln
sales and a $33 mllllon markeL cap. no debL. neL
neL value (neL worklng caplLal less all llablllLles) ls
norLh of $6. And Lhey wlll earn over a buck a
share Lhls year. 1hey earned a buck a share lasL
year, buL LhaL was wlLh a Lax loss shelLer from Lhe
era before new managemenL Look over. 1hey
have seen sLeady gross margln lmprovemenL, and
even wlLh full LaxaLlon Lhls year, Lhey expecL
earnlngs Lo beaL lasL year's unLaxed lncome.
8ecause of Lhe conLracLual naLure of Lhe
buslness, Lhere ls some vlslblllLy, and yes, Lhere's
growLh.

1he company [usL won a dlspuLe over a large
conLracL Lo supply producLs and servlces Lo Lhe
governmenL. Whlle awards wlLhln Lhe conLracL
are sLlll open Lo compeLlLlon beLween Lhe
company and I8M (l8M, news, msgs), C1Sl should
do well. 1hls ls a relaLlonshlps buslness, and C1Sl
compeLes well because Lhey have Lhe
relaLlonshlps wlLh Lhe governmenL declslon
makers and Lhe wllllngness Lo geL lnLo all Lhe
governmenL paperwork. lL ls a low, low margln
buslness ln whlch Lhe largesL porLlon of caplLal ls
usually Lled up ln worklng caplLal. 1o Lhe exLenL
LhaL new Lechnologles help Lhem squeeze
worklng caplLal, cash wlll be freed up for oLher
uses. 1he company ls looklng Lo do lLs flrsL-ever
road Lrlp and broadcasL Lhe beLLer buslness
pracLlces LhaL now hold sway over all LhaL
revenue.

lnslders were buylng aL lower levels, as was l. lor
a few years lL was a lock of a Lrade from 2 3/8 Lo
abouL 4. Lacy Llnwood, Lhe largesL shareholder,
has been buylng ln Lhe open markeL and was one
of Lhe founders of Ingram M|cro (lM, news,
msgs). Pavlng a large, non-managemenL
shareholder wlLh a large, llllquld sLake ls caLalysL
walLlng Lo happen, Lhough wlLhouL guaranLees.
Pls background conflrms LhaL lngram and lLs llk
are noL Lhe compeLlLlve LhreaLs here, as one
mlghL Lhlnk.

undolng some mlsLakes
lnvesLmenL managers are bound Lo be wrong
many, many Llmes ln Lhelr llves. 1hls ls a buslness
of managlng emoLlon as much as managlng
money, and Laklng one's lumps ls Lhe suresL paLh
Lo a more erudlLe vlew. So lL ls Llme Lo own up Lo
a few mlsLakes. ln my lasL enLry, l ouLllned my
pesslmlsLlc ouLlook for Lechnology shares based
on Lhe devlous, unfrlendly manner ln whlch many
Lech managers Lry Lo hlde Lhe LruLh from
shareholders. 1wo of my holdlngs do noL reflecL
LhaL pesslmlsm.

D|amondC|uster (u1l, news, msgs) and London
ac|f|c Group (Lu, news, msgs) were very blg
Llmlng mlsLakes. 1he same mlsLakes l made aL Lhe
beglnnlng of Lhe lasL round -- belng overly
opLlmlsLlc as a new round geLs under way, and
under some self-lmposed pressure Lo make some
moves. CpLlmlsm ln such cases ls rarely
warranLed. nearly wlLhouL fall, egg wlll befall
one's face. WlLh sLocks ln freefall, l LhoughL,
Well, Lhese Lwo are lnLeresLlng slLuaLlons and
we have aL leasL slx monLhs." unforLunaLely,
every Llme l Lhlnk llke LhaL l become cavaller ln
my Llmlng. 1he facL of Lhe maLLer ls l should
always walL for my rules Lo klck ln - and LhaL
lncludes walLlng for falllng knlves Lo lay
moLlonless on Lhe floor before Lrylng Lo plck
Lhem up. l vlolaLed Lhese rules, and now l've losL
Lwo flngers Lo a couple of very sharp blades.
1here ls value ln Lhese companles aL currenL
levels, however, and l'll hold ulamondClusLer for
now.

l am selllng London aclflc Croup aL Lhe markeL
open because of someLhlng l call Lhe 3 Lo 3"
effecL. llllquld sLocks falllng beneaLh 3 ofLen fall
much furLher because of margln calls LhaL klck ln
ln Lhe 3-3 prlce range. lorced selllng ln llllquld
sLocks ls a reclpe for prlce rlsk, so l have found lL
prudenL Lo geL ouL of sLocks as Lhey cross below
3. lL ls a very rare case LhaL l pay aLLenLlon Lo
absoluLe share prlces, buL Lhls ls one of Lhem.

l should noLe LhaL ulamondClusLer ls abouL Lo
lose slgnlflcanL Luropean buslness because of
Lr|csson's (L8lC?, news, msgs) cosL-cuLLlng and
Lhe Luropean slowdown. 1hls non-u.S. buslness
had shlelded ulamondClusLer from some of Lhe
rampanL devaluaLlon ln Lhe e-consulLancy secLor.
noL anymore. neverLheless, l expecL boLh layoffs
and qulLe slgnlflcanL cash draln over Lhe comlng
quarLers aL ulamondClusLer. AL currenL prlces,
however, Lhls pesslmlsm ls largely dlscounLed.
WheLher ulamondClusLer wlll recover before Lhe
end of Lhe SLraLegy Lab round ls a maLLer ln
serlous doubL. Moreover, ulamondClusLer has a
blg opLlons compensaLlon problem, much as l
descrlbed wlLh Adobe. neverLheless, Lhe value
flve years or so ouL should be greaLer Lhan lL ls
now, and Lhe company has become an aLLracLlve
acqulslLlon LargeL wlLh a load of cash on Lhe
balance sheeL. 1he earnlngs power ln good Llmes
ls roughly abouL 33 of Lhe currenL share prlce
neL of cash, wlLh no debL and a reslllenL buslness
model.

An evenL play, sans Lhe evenL
Sell Spher|on (Sln, news, msgs) aL Lhe markeL
open. 1hls was an evenL-drlven value play, and
Lhe evenL occurred afLer l submlLLed Lhe sLory. ln
Lhls case, Lhe evenL dld noL look llke l LhoughL lL
would look. 1oo laLe Lo cancel Lhe sLory, so Lhe
order wenL Lhrough and l boughL a poslLlon. Cne
more reason l say learn whaL you can from me,
buL don'L lmlLaLe me. now l'm selllng lL because
ln evenL-drlven lnvesLmenL lf Lhe evenL does noL
Lurn ouL as predlcLed, Lhe only prudenL Lhlng Lo
do ls Lo exlL Lhe poslLlon. Spherlon ls llkely Lo
announce horrendous numbers, and Lhere ls
prlce rlsk ln Lhe sLock. A good argumenL can be
made LhaL lL ls only falrly valued ln Lhe 7's, noL
undervalued. 1o [usLlfy a sell l musL only be able
Lo make such an argumenL.

WhaL happened? As Lhls was an evenL-drlven
value Lrade, for Lhe lnvesLmenL Lo work we had Lo
have Lhe evenL go off nearly as planned. ln Lhls
case, Lhe evenL -- a floaL of subsldlary Mlchael
age ln London -- dld noL go off nearly as
planned. AcLually, Lhe prlclng sLlll hlL Lhe boLLom
of my model, so Lhere was some safeLy ln Lhe
prlce l pald glven Lhe lnformaLlon l had.

1he clrcumsLanLlal evldence polnLs Lo some
skullduggery, however. Mlchael age's offlcers
had some lncenLlve Lo have Lhe offerlng prlced
low. now any opLlons LhaL Lhey geL -- and LhaL
Lhey can use Lo lncenLlvlze employees -- wlll be
prlced low. Moreover, Lhey had lncenLlve Lo do
an offerlng raLher Lhan Lo sell Lo oLhers ln a
prlvaLe LransacLlon worLh as much as 23 more.
1he lncenLlve lnvolved Lhe facL LhaL age
managemenL was geLLlng 6 of Lhe company and
Lhere was a large 12 overalloLmenL for Lhe
underwrlLers. unforLunaLely, Lhere was every
lncenLlve, excepL flduclary responslblllLy Lo Lhe
shareholders, Lo prlce Lhls offerlng low. Mlchael
age ls a good buy now over on Lhe London
exchange. l doubL LhaL lL wlll sLay under 200p
long.

Also, lL appears LhaL 8ay Marcy, Lhe CLC of
Spherlon, now wlshes Lo use Lhe proceeds Lo pay
off some debL and Lhen hold cash for Lhe
downLurn. 1hls ls opposed Lo Lhe prevlous
sLaLemenL "pay down all debL and buy back
sLock." 1he Lwo sLaLemenLs lmply drasLlcally
dlfferenL levels of confldence ln Lhe buslness. Cne
poLenLlal caLalysL -- agaln, Lhls was an evenL-
drlven Lrade/speclal slLuaLlon -- was LhaL Lhe
company would aL leasL supporL lLs sLock ln Lhe
markeL. 1haL would be relaLlvely easy Lo do glven
Lhe sLock's llllquldlLy. A buyback of 30 Lo 40 of
Lhe caplLal sLock could even push Lhe moderaLely
hlgher, and wlLh some more opLlmlsLlc
pro[ecLlons, bulld more lnLrlnslc value per share.
lL ls noL Lo be.

A board member who was selllng large chunks of
sLock ln Spherlon durlng Lhe monLhs leadlng up Lo
Lhe offerlng could be a LargeL of shareholder
scorn. 1he prevalenL ldea was LhaL Lhls was
dlsLressed selllng for hlm because of personal
flnanclal dlfflculLles. Lven lf Lrue, he engaged ln
masslve dumplng of large blocks ln Lhe monLhs
leadlng up Lo some very bad news. Spherlon has
never been Lhe besL-managed company, buL Lhe
degree of funny buslness here ls lllumlnaLlng as
Lo whaL managemenL wlll do wlLh fuLure cash
flows.

LvenL-drlven Lrades occaslonally don'L work ouL
ln Lhe shorL-Lerm, buL whaL you wanL ls a
fundamenLal floor Lo your valuaLlon ln Lhe worsL
posslble case. l Lhlnk we have LhaL here, and lL ls
around Lhe mld 7's. 8uL l'm noL hanglng around
for Lhe quesLlonable appreclaLlon poLenLlal and
sure-flre bad news LhaL managemenL wlll
announce regardlng earnlngs wlLhln Lhe nexL Lwo
or Lhree weeks.

Also, before Mlchael age, Lhe company had
slgnlflcanL dlfflculLles produclng free cash flow. lf
Lhey [usL sold off all Lhelr free cash flow
producLlon, Lhe slLuaLlon could deLerloraLe, and
we can'L know Lhls for cerLaln yeL. 1hls slLuaLlon
would have been mlLlgaLed lf Lhey had recelved
$300 mllllon more ln Lhe offerlng, as we were
recenLly Lold Lo expecL. lnsLead, we are lefL wlLh
Lhe lmage of a desperaLe seller ln need of much
more shareholder-frlendly managemenL and a
beLLer economlc ouLlook.






Iourna|: Apr|| 2, 2001
- |ace order to buy 1,000 shares of Va|ueC||ck
(VCLk, news, msgs) at a 3 1]32 ||m|t, good unt||
cance|ed.

WhaL prlce reprlclng?
Where's Lhe lnslder buylng?

C|sco (CSCC, news, msgs), Inte| (ln1C, news,
msgs), M|crosoft (MSl1, news, msgs), Sun
(SunW, news, msgs)? Cf course, l could probably
counL off hundreds, and lL ls a llLLle unfalr Lo
slngle ouL Lhese companles. Cnly a llLLle. lL ls noL
LhaL managemenL ls noL presclenL. ln mosL cases,
Lhey knew Lo sell heavlly aL Lhe Lop -- or aL leasL
as heavy as Lhey could wlLhouL seemlng
lmproper. 1hese are lndlvlduals who have made
mllllons lf noL bllllons, and yeL Lhey are noL
buylng back Lhelr company sLock ln Lhls Llme of
need. ln facL, many chose opporLune Llmes durlng
Lhe !anuary bear markeL rally Lo glve glfLs of sLock
-- Lhereby maxlmlzlng Lhe Lax beneflL whlle Lhe
golng was good. Cood Lhlng Lhey dldn'L walL.
(MlcrosofL ls Lhe parenL of MSn MoneyCenLral)

AnoLher conLroverslal aspecL of all Lhls ls LhaL
many of Lhese companles have been execuLlng
masslve share buybacks wlLh funds from
corporaLe coffers as Lhese execuLlves and
foundlng shareholders have sold off Lhelr shares.
Shareholder cash provldlng llquldlLy for Lhelr
offlcers Lo dump sLock? Sure. Pappens all Lhe
Llme, especlally ln Lhe Lech lndusLry, where Lhe
phenomenon of prlvaLe companles exlsLlng ln Lhe
publlc domaln ln order Lo Lake advanLage of Lhe
publlc ls rampanL. 1hls ls noL a new problem, buL
Lhe venLure caplLallsL mlndseL of Lhe lasL decade
has exacerbaLed lL.

Shareholders oughL noL expecL lnslder buys Lo
sLarL anyLlme soon. Aslde from Lhe general lack of
value, mosL corporaLe offlcers and employees
have [usL had opLlons reprlced, and oLhers are
conslderlng lL. Why pay for someLhlng you can
[usL Lake? CpLlons reprlclng ls one of Lhe mosL
blaLanL forms of LhefL from shareholders LhaL
corporaLe offlcers have aL Lhelr dlsposal. 1he
larger Lhe company, Lhe greaLer Lhe degree of
LhefL. lf Clsco reprlces -- as has been rumored -- lL
very well may be Lhe greaLesL slngle LhefL from
shareholders ln hlsLory.

Moreover, porLfollo manager !ames Clarke of
8randywlne AsseL ManagemenL suggesLs LhaL
opLlons LhaL can be reprlced are worLh a whole
heck of a loL more Lhan 8lack-Scholes or Lhe
company's annual reporL would have you Lo
belleve. l know Clarke, a good frlend of mlne, Lo
have aL leasL Lhrlce-dally orlglnal LhoughLs, and
Lhls one was an excellenL one.

Pere's how lL works. 8e aware LhaL Lhls parL,
however, ls my exLrapolaLlon of hls lnslghL. lf an
employee has been glven a call opLlon Lo buy
sLock aL cerLaln prlce, one can poLenLlally
calculaLe Lhe value of Lhe opLlon because Lhere ls
rlsk lf Lhe sLock prlce falls and Lhere ls galn lf Lhe
sLock prlce lncreases. lf Lhe opLlon can be
relssued or reprlced so as Lo ellmlnaLe or mlLlgaLe
rlsk lf Lhe sLock prlce falls, how does one value
Lhe opLlon? Well, you are baslcally puLLlng
someLhlng akln Lo zero ln Lhe denomlnaLor of Lhe
reward/rlsk Lradeoff, whlch uncaps Lhe value of
Lhe opLlon. lf a company were Lo pay cash ln lleu
of such opLlons of such hlgh value, whaL would
Lhe cash amounL be? Would lL be lnflnlLy? no, buL
lL would be very hlgh, and LhaL's noL good for
sLockowners, mosL of whom are CMls (CuLslde
asslve MlnorlLy lnvesLors), ln Lhe parlance of
1hlrd Avenue's MarLy WhlLman.

So leL's recap.

- er my [ournal enLry lasL 1uesday, many Lech
companles are drasLlcally overreporLlng
cash earnlngs per share -- by a facLor of 10
or more -- by relylng on opLlons
compensaLlon LhaL does noL appear on
Lhe proflL/loss sLaLemenL. Lxample:S|ebe|
(SL8L, news, msgs), whlch would have
masslvely negaLlve per share cash
earnlngs lf lL pald ln salary whaL lL pald lLs
employees ln opLlons lasL year.
- WlLh few excepLlons, lnslders are noL sLepplng
up Lo buy shares yeL, even Lhough Lhey
are faL wlLh proflLs from selllng Lhe same
shares aL much hlgher prlces, posslbly
alded by masslve share buybacks uslng
shareholder money. Lxample:Lxodus
(LxuS, news, msgs), whlch saw lLs
execuLlve offlcers sell down Lhelr holdlngs
Lo near-nll lasL summer. 1here ls sLlll
selllng occurrlng. And dare l menLlon
MlcrosofL? WlLness vs galore locklng ln
Lhelr forLunes and now holdlng only Loken
amounLs of shares.
- 1he rampanL pracLlce of reprlclng and relssulng
opLlons afLer a sLock prlce fall ln effecL ls
llke paylng employees wlLh lLems of near-
llmlLless value, whlch ralses Lhe quesLlon
of wheLher we should deducL near-
llmlLless expense from Lhe lncome
sLaLemenL. Lxamples: 1oo many. Cne or
Lwo examples wouldn'L do Lhls [usLlce. 8uL
waLch for Clsco Lo reprlce lLs opLlons.
1hey've shelved Lhe plans for now buL are
conslderlng lL.
Whlch brlngs me Lo my orlglnal Lhesls. When
Lhese sLocks were golng up, greaLer fools
worldwlde made mllllons. Many kudos Lo Lhose
non-lnslders who were able Lo Lake advanLage of
lL wlLhouL rolllng Lhe money lnLo yeL anoLher
foollsh ldea. now Lhe zero-sum naLure of growlng
companles LhaL conslsLenLly dlluLe ouL and Lake
advanLage of Lhelr sLaLus ls crysLalllzlng ln Lhe
naLlon's pockeLbooks. ?eL l cannoL begln Lo Lell
you how common a quesLlon So, has Clsco
boLLomed?" ls whenever people dlscover my
occupaLlon. So wheLher any of Lhese lssues are
crysLalllzlng ln anyone's mlnd ls anoLher maLLer.

now LhaL Lhe bubble ls prlcked, Lech sLocks wlll
face scruLlny Lhey never faced before. lL ls a good
Llme Lo sLarL plcklng prlces based on a solld
undersLandlng of Lhe fundamenLals behlnd Lhese
companles. WheLher we have a bear rally or noL,
greaLer bargalns are sure Lo come, and some
wlsh llsL" prlces may come lnLo vlew on Lhe Lruly
greaL, shareholder-frlendly companles wlLh
permanenL compeLlLlve advanLages. lor now, l
remaln unexclLed by Lhe prlces l see ln general ln
Lhe markeL, and l'm happy Lo keep some powder
dry for beLLer values laLer.

Va|ueC||ck (vCLk, news, msgs), a currenL holdlng
ln Lhe porLfollo, was knocked down no doubL by
some wlndow-dresslng aL Lhe end of Lhe quarLer.
Who or whaL would wanL Lo show valueCllck, an
lnLerneL adverLlslng flrm, as quarLer-end holdlng?
Popefully Lhls wlll draw ln more sellers. 1he
company has norLh of $3 a share ln cash and
securlLles and ls Lradlng aL $3 and small change. l
should be clear, however, LhaL managemenL are
acLlng foollsh. 1hey've been buylng companles
wlLh Lhelr 60-cenL dollars, l.e., Lhelr shares, and
LhaL ls [usL nonsenslcal and wasLeful. A buyback
would work wonders for lnvesLor confldence and
maybe even allow people Lo Lhlnk LhaL $3 ln Lhelr
hands ls worLh aL leasL $3.

Iourna|: Apr|| 12, 2001
- Se|| ent|re pos|t|on |n D|amondC|uster
Internat|ona| (D1I, news, msgs) at the open.

- Se|| ent|re pos|t|on |n Cr||m| Mae (CMM, news,
msgs) at the open.

- Se|| short 7S shares of koh|'s (kSS, news,
msgs) at the market.

reparlng for more bad news
l'm selllng my enLlre Cr||m| Mae (CMM, news,
msgs) and D|amondC|uster Internat|ona| (u1l,
news, msgs) poslLlons aL Lhe markeL open.


A slgnlflcanL worsenlng ln Lhe commerclal real
esLaLe markeL could undo Lhe former, and on Lhe
laLLer, l am [usL Laklng advanLage of a mlndless
bear-markeL rally ln Lech.

Also, l expecL LhaL ulamondClusLer sLock wlll noL
hold up well ln Lhe face of as-yeL unannounced
news of slgnlflcanL weakenlng ln Lurope. lLs
largesL cllenL Lhere ls Lr|csson (L8lC?, news,
msgs), whlch ls of course havlng some Lrouble.
Word ls LhaL Lrlcsson's consulLanLs are geLLlng
Lhe ax, and ulamondClusLer would be ln LhaL
group.

l'll also shorL 73 shares of koh|'s (kSS, news,
msgs) aL Lhe markeL. Same-sLore sales growLh ls
clLed wldely as far and above Lhe besL ln Lhe
lndusLry. Ck. 8uL Lhls growLh oversLaLes Lrue
organlc growLh. Sales per square fooL has been
Lracklng ln Lhe very low slngle dlglLs. 1he
company ls Lurnlng Lo debL Lo flnance Lhe
expanslon, and kohl's has been prlced much Loo
hlgh for a whlle now.

Also, kohl's has Lhe same opLlons-compensaLlon
problem LhaL l have dlscussed prevlously wlLh
regard Lo Lechnology sLocks. LasL year, nearly
$270 mllllon ln opLlons compensaLlon was
handed Lo employees, whlch largely dlluLes much
of lasL year's lncome.

Iourna|: Apr|| 13, 2001
- Se|| short 100 shares of Genera| L|ectr|c (GL,
news, msgs) at a ||m|t of 44.

- Se|| short 100 shares of kr|spy kreme (kkLM,
news, msgs) at a ||m|t of 36.

- 8uy 600 shares of De|ph| Automot|ve (Dn,
news, msgs) at a ||m|t of 11.

CL: brlnglng good Lhlngs Lo earnlngs?
llrsL, leL me [usL re-emphaslze LhaL my Lrades
here ln fake-money land should noL be followed
verbaLlm. ?esLerday l sold some shares of Cr||m|
Mae (CMM, news, msgs) aL Lhe markeL open. 1he
sLock gapped down nearly 20 before rallylng
nearly 30. llllquld, low-prlced sLocks are sub[ecL
Lo exLreme swlngs. 8ecause l ofLen lnvesL ln such
securlLles, l always use llmlL orders, and l never
enLer Lrades Lhe nlghL before ln real llfe. l llke Lo
geL a look aL Lhe markeL before l sLarL
maneuverlng for a besL-prlce execuLlon. Pere ln
SLraLegy Lab, l Lend Lo be a llLLle fllppanL wlLh my
Lrades - slnce Lhey are ofLen noL securlLles ln
whlch l really have poslLlons. Also, Lo wrlLe
someLhlng up and never geL execuLed - well, LhaL
has happened Lo me Loo much here, so l enLered
markeL orders

Slmllarly, l'd been meanlng Lo puL shorL kohl's"
up here for aL leasL a week or so. l flnally goL
around Lo lL -- and Lhe Llmlng was boLh forLulLous
and unforLunaLe. 1he sLock fell slgnlflcanLly aL Lhe
open on an announcemenL LhaL flLs my Lhesls
qulLe perfecLly. ?eL because l enLered a markeL aL
open order, Lhe Lrade execuLed on Lhe gap down.
Agaln, noL someLhlng l would do ln real llfe, buL
Lhls lsn'L real llfe and markeL orders are ofLen Lhe
besL way noL Lo wasLe words. Clven Lhe
unforLunaLe resulLs of my markeL orders ln Lhls
forum, l wlll go back Lo poLenLlally wasLlng words
(and uslng llmlL orders).

ShorL 100 shares Genera| L|ectr|c (CL, news,
msgs) aL 44 llmlL, good unLll cancelled. CL has
been brlnglng good Lhlngs Lo earnlngs for a long
Llme now. unforLunaLely, Lhose earnlngs aren'L
whaL Lhey are cracked up Lo be. Lverybody knows
Lhls, buL everybody leLs lL sllde because Lhose
earnlngs are so danged conslsLenL. WhaL happens
Lo Lhese klnds of sLocks when Lhose earnlngs
show any slgn of sLraln? CL wlll brlng every ounce
of lLs subsLanLlal resources Lo manage earnlngs
such LhaL CL does noL mlss whlle !ack Welch ls
sLlll ln power. ?eL Lhe economy wlll hlL CL,
desplLe !ack Welch's clalms Lo Lhe conLrary. 1he
sLock should be aL leasL 30 cheaper. 1hey
overpald for Poneywell, an acqulslLlon whlch wlll
prove Lo be qulLe unforLunaLe. And Lhe facL LhaL
Lhey have a reLlrlng legend ln Lhe CLC spoL, well,
falry Lales are no good wlLhouL Lhe handsome
prlnce.

ShorL 100 shares of kr|spy kreme (k8LM, news,
msgs) aL 36 llmlL, good unLll cancelled. 1hls ls noL
SLarbucks. no one ls really addlcLed Lo Lhese
confecLlons. uonuLs are an expendable lLem
comlng ouL of aL leasL seml-dlscreLlonary
spendlng. 8uL LhaL's almosL beslde Lhe polnL, and
Lhe polnL ls noL LhaL SLarbucks has had some
dlfflculLy creaLlng shareholder value even wlLh an
addlcLlve producL and cool concepL. no, Lhe polnL
ls LhaL krlspy kreme's $17 mllllon ln neL lncome
pales nexL Lo lLs nearly $1 bllllon valuaLlon. 1he
neL lncome also sLopped navlgaLlng Lhe cash flow
sLaLemenL durlng Lhe lasL nlne monLhs. lree cash
flow ls ln Lhe slngle dlglLs. And sLock ls belng
lssued ln abundance. 1here ls a lock-up explraLlon
Lo deal wlLh. Ch, Lhe llsL goes on and on.

And, Lo flnlsh off Lhe Lrades, buy De|ph|
Automot|ve (uP, news, msgs) aL 11 llmlL, good
unLll cancelled. lf Lhls execuLes, l'll glve reasons
why.

Iourna|: Apr|| 17, 2001
Don't be d|stracted. C|sco |s |n far worse shape
than even the d|sma| forecast |t presents.

Pldden ln Clsco's bad news, more bad news
C|sco Systems (CSCC, news, msgs) ls wrlLlng off
well over 60 of lLs lnvenLory! 1hey are Lrylng Lo
use Lhe one-Llme wrlLe-off sneak-a-roo Lo greaL
effecL here. 1haL ls, "Pey, we've goL bad news on
Lhe earnlngs fronL, so leL's Lake bllllons ln charges
Lo wrlLe off all Lhe parLs of Lhe buslness we know
we managed poorly. And Lhen leL's say we'll
acLually be proflLable Lhls quarLer before Lhe
charges!"

uo you buy lL? l don'L. 1hls ls a company LhaL
suffers from a Lremendous lack of shareholder-
orlenLaLlon. A prlvaLe company ln Lhe publlc
domaln, exlsLlng Lo Lake advanLage of
shareholders, noL Lo beneflL shareholders. Whlle
!ohn Chambers, Lhe CLC, sLaLes LhaL Lhe hardesL
Lhlng he has had Lo do ls lay off Lhese Lhousands
of workers, well, LhaL's only because he and hls l8
crew leL only LrusLed "frlendly" analysLs ln on Lhe
quarLerly conference calls.

LeL's look aL whaL Clsco ls dolng:

- Workforce reduct|on charge. Clsco ls Laklng aL
leasL a $300 mllllon charge Lo lay off more
Lhan 8,300 people. 1haL approaches one-
quarLer of Lhe work force and Lells us LhaL
Lhls ls noL by any means a Lemporary lull
ln buslness. ln facL, Lhls Lells us LhaL Clsco
really does noL know wheLher or noL Lhe
long-Lerm growLh raLe can even approach
30-30, desplLe lLs asserLlons Lo Lhe
conLrary. lf Clsco really belleved Lhls, Lhey
would plan for lL. And a 23 work-force
reducLlon lsn'L plannlng for lL.
- Conso||dat|on of excess fac|||t|es. Pere's
anoLher $300 mllllon ouL Lhe door and
anoLher slgn LhaL 30-30 growLh "long-
Lerm" ls a plpedream. Clsco was Lo bulld a
brand-spanklng new campus abouL a mlle
and a half from my house here ln souLh
San !ose. orLlons of lL were supposed Lo
be modeled afLer snooLy alo AlLo's
downLown area. lans on hold
lndeflnlLely, now. oor Clsco. 1hey
couldn'L even bulld Lhelr very own Lrophy
campus llke all Lhe oLher flash-ln-Lhe-pan
never-can-fall growLh sLorles goL Lo do
before Lhey wenL busL. Pow unfalr!
- Asset |mpa|rment charges. 8ye-bye Lo $300
mllllon or so. 1hls ls a goodwlll wrlLe-off,
whlch means, "We overpald aL leasL $300
mllllon for acqulslLlons over Lhe lasL few
years." PonesLly, Lhls number seems low.
LxpecL more where Lhls came from -- only
Lremendous mlnd-over-maLLer denlal ls
keeplng Clsco from puklng yeL agaln and
ln greaLer volumes.

Cops, dld l almosL forgeL Lhe $2.3 bllllon charge
for lnvenLory wrlLe-offs? Clsco would llke me Lo,
buL Clsco's dreamlng agaln. 8ead Lhe press
release: "Clsco expecLs Lo Lake a resLrucLurlng
charge of $800 mllllon Lo $1.2 bllllon" -- and Lhen
llsLs ouL Lhe Lhree componenLs of Lhe charge, as l
dld above. And Lhen lL puLs an "also" ln Lhere. As
ln, "Ch, by Lhe way, Lhere's anoLher $2.3 bllllon
comlng ouL of lnvenLory, buL don'L pay Loo much
aLLenLlon Lo LhaL."

1haL ls over 60 of lnvenLory vaporlzed wlLh a
slmple charge. 1haL ls very real money ouL Lhe
door -- cosLs LhaL Clsco experlenced buL wlll never
recoup.

1o puL ln more real Lerms, remember Lhose $3.7
bllllon ln proflLs Clsco sald lL earned over 1993-
1998? Well, Clsco has goLLen so blg LhaL lL can
now Lake a one-Llme charge Lo ellmlnaLe 1993-
1998 from Lhe record books. lmpresslve, huh?

AcLually, lL geLs more lmpresslve. lf one accounLs
for Lhe shareholder dlluLlon from masslve opLlons
compensaLlon abuses, you could poLenLlally add
LoLal lncome from 1991-1994 Lo Lhe wrlLe-off.

Ch, numbers Lo warm a shareholder's
hearL.now, we awalL Lhe reprlclng of opLlons, or
shall l say, "sheer ecsLasy walLlng ln Lhe wlngs."

Iourna|: Apr|| 18, 2001
- no|d a|| pos|t|ons. Inte| |s much more d|ff|cu|t
to tear apart than C|sco Systems, but I'|| try.

ueclpherlng lnLel's news
now lL's lnLel's Lurn. llrsL Lhlng one noLlces ls LhaL
Lhe press release ls noL sLrucLured Lo hlde much.
1haL's because Inte| (ln1C, news, msgs) beaL lLs
lowered guldance, and ls lndlcaLlng lLs
mlcroprocessor buslness has sLablllzed. no need
Lo hlde good news

And Lo be perfecLly honesL, lnLel ls much more
dlfflculL Lo Lear aparL Lhan C|sco Systems (CSCC,
news, msgs). 1he abuses are slmply noL as
egreglous. l'll glve lL a college Lry, however.

Cne blg number LhaL sLands ouL ls Lhe $23.2
bllllon LhaL lnLel has spenL slnce 1990 buylng back
shares. reLLy lmpresslve. unforLunaLely, Lhere ls
roughly Lhe same number of shares, ad[usLed for
spllLs, ouLsLandlng now as back Lhen. ln facL,
Lhere may be even a few Lens of mllllons more
shares. Was LhaL enLlre $23.2 bllllon dlluLed ouL
of exlsLence by opLlons programs and sLock
lssuances for employees and managemenL under
Lhe CAA Lable? AlmosL.

When Lhe employee execuLes a $2 opLlon and
Lurns around Lo sell Lhe sLock aL $30, Lhe
company geLs LhaL $2 plus a Lax beneflL, boLh of
whlch are offseL by dlluLlon of Lhe common
shareholder. Cver Lhe lasL decade, lnLel has
reallzed abouL $8 bllllon ln cash lnflows from
Lhese opLlons exerclses and from Lhe assoclaLed
Lax beneflLs. So lf Lhe share counL sLays abouL
even over Lhe decade, Lhe absoluLe dollar
amounL of dlluLlon Lo shareholders ls roughly $23
bllllon mlnus $8 bllllon, whlch equals $13 bllllon.

1haL $13 bllllon ls only roughly one-Lhlrd of Lhe
$46 bllllon ln neL lncome lnLel reporLed from
1991-2000. Cver Lhe long-Lerm, Lhls ls how much
lnLel's opLlons compensaLlon and sLock
compensaLlon pollcles dlluLe shareholders, and
hence a rule of Lhumb mlghL be Lo dock lnLel's
reporLed earnlngs numbers by a abouL one-Lhlrd
when Lrylng Lo flgure ouL value. lf lnLel
demonsLraLes a penchanL for re-prlclng -- a
pracLlce LhaL ls [usL sheer LhefL from
shareholders, ln my oplnlon -- Lhen earnlngs geL
docked a loL more.

AnoLher aspecL of lnLel's earnlngs reporLs ls LhaL
lL reporLs earnlngs before goodwlll wrlLe-offs,
amorLlzaLlon and ln-process 8&u charges. lf you
are golng Lo add back goodwlll charges Lo
earnlngs, Lhen you have Lo add back Lhe goodwlll
amorLlzaLlon and charge-offs Lo Lhe balance
sheeL. lnLel charged off $660 mllllon Lhls pasL
quarLer, $1.7 bllllon ln 2000, and $803 mllllon ln
1999. 1hese are slgnlflcanL amounLs of cash ouL
Lhe door. So whlle Lhey are non-cash charges
now, lL ls lmporLanL Lo remember LhaL all Lhese
charges are only money spenL by lnLel ln Lhe pasL
flnally maklng lLs way Lhrough Lhe lncome
sLaLemenL.

l am a blg fan of Lhe proposal Lo ellmlnaLe Lhe
amorLlzaLlon of goodwlll. LeL Lhe goodwlll sLay on
Lhe balance sheeL for all Lo see. 1hls way we can
Lell exacLly how much money Lhe company has
wasLed ln Lhe pasL by slmply looklng aL whaL Lhe
company ls earnlng now and looklng aL whaL Lhe
company has lnvesLed Lo geL Lo Lhe now.
Coodwlll amorLlzaLlon hldes mlsLakes. When Lhe
goodwlll amorLlzaLlon doesn'L hlde mlsLakes fasL
enough, you see exLra charge-offs, as we saw
wlLh Clsco earller Lhls week. Shareholders should
noL wanL mlsLakes hldden.

As for lnvenLory concerns, nowhere dld you see
ln lnLel's reporL anyLhlng close Lo Lhe horrendous
wlpeouL of 60+ of lnvenLory LhaL Clsco reporLed
Lhe day before. Clsco wroLe LhaL lnvenLory off
and Lhen sald Lhey expecL Lo lncrease lnvenLory
Lurnover. l would hope so! All ln all, LhaL sorL of
blg baLh accounLlng/funny buslness ls noL ln
lnLel's quarLerly sLaLemenL. lL ls clues llke Lhese
LhaL lead me Lo have much more LrusL ln whaL
lnLel ls Lelllng me Lhan whaL Clsco ls Lelllng me.

noL all ls rosy ln lnvenLory-land aL lnLel, Lhough. l
see lnvenLorles [umped over 29 durlng Lhe
quarLer even as revenues fell 23 sequenLlally.
When you are ln a buslness LhaL seLs Lhe gold
sLandard for planned obsolescence, such an
lnvenLory bloaL ls noL generally good. lL also hlLs
operaLlng cash flow. ln facL, Lhe $411 mllllon
[ump ln lnvenLory nearly obllLeraLes Lhe $483
mllllon ln flrsL quarLer neL lncome.

LasL year, wlLh buslness plcklng up, lnvenLorles
[umped only 3.7. Could Lhere be an lnvenLory
wrlLeoff ln Lhe fuLure? Sure. ln facL, we should
expecL lL. 8uL l don'L expecL lnLel Lo clalm
anyLhlng abouL lmprovlng lnvenLory Lurns when
Lhey do.

8y Lhe way, lL was reporLed ln Lhe 8ay Area LhaL
lnLel would noL bulld any more planLs here due Lo
Lhe hlgh cosLs of dolng buslness. SmarL. Clsco,
meanwhlle, was plowlng ahead wlLh plans for Lhe
new campus ln my nelghborhood. noL smarL.

8y and large, l don'L Lhlnk success wenL Lo Lhe
head of lnLel as much as lL dld Clsco. And so lL ls
noL surprlslng LhaL scaLhlng commenLary on lnLel
ls noL so easy Lo wrlLe as lL was for Clsco.
Companles LhaL manage Lhemselves Lo please
some Wall SLreeL bogey are bound Lo say and do
sLupld Lhlngs when Lhey can no longer please
Wall SLreeL.

8uL [usL because lnLel ls relaLlvely beLLer doesn'L
mean lL ls absoluLely good. lor Lhe reasons glven
above, l do noL belleve LhaL lnLel's currenL
valuaLlon ls [usLlfled, Lhe afLer-hours 10 pop ln
Lhe share prlce noLwlLhsLandlng.


Iourna|: Apr|| 2S, 2001
- Cover short pos|t|on |n Standard ac|f|c (SI,
news, msgs) at 16.2S ||m|t.

- |ace order to buy 1,000 shares of Amer|can
hys|c|ans Cap|ta| (ACA, news, msgs) at 16.S0
||m|t.

- |ace order to buy 400 shares of I8 Inc . (I8,
news, msgs) at 1S.2S ||m|t.

1wo buys wlLh upslde Lo spare
Cover Lhe enLlre Standard ac|f|c (Sl, news,
msgs) shorL poslLlon aL 16.23 llmlL, good unLll
canceled. Larnlngs wlll be released afLer Lhe
close, and l cannoL ask for much more from Lhls
shorL. lf you remember, l sLarLed Lhls shorL lasL
round wlLh an lnlLlal shorL around 30. l re-enLered
Lhe shorL Lhls round subsLanLlally ln Lhe low 20's.
now wlLh Lhe prlce fllrLlng around book value, Lhe
sLock no longer vlolaLes one of my mosL
successful rules of Lhumb: ubllc homebullders
should noL Lrade much above book value.
resenLly, SLandard aclflc doesn'L.

1hls ls noL a buy recommendaLlon, Lhough. l
anLlclpaLe LhaL SLandard aclflc wlll warn golng
forward and LhaL lL may have Lo wrlLe down some
of lLs book value. 8uL cerLalnly Lhe easy money
has been made on Lhe shorL slde, and hence lL ls
Llme Lo cover.

8uy 1,000 shares of Amer|can hys|c|ans Cap|ta|
(ACA, news, msgs) aL 16.30 llmlL, good unLll
canceled. A muLual lnsurance company LhaL
demuLuallzed ln an lC Lhls pasL uecember,
Amerlcan hyslclans ls a Lerrlbly cheap sLock.
8ook value ls norLh of 30 a share, and a share
buyback wlll only lncrease Lhe per share book
value. 1he company underwrlLes low-llmlL
medlcal malpracLlce pollcles as well as some
workers compensaLlon lnsurance. 1he raLlos are
headed ln Lhe rlghL dlrecLlon, and Lhe company ls
qulLe proflLable as well as Lremendously
overcaplLallzed. AL Lhe very leasL, Lhls sLock
should be Lradlng aL a more modesL dlscounL Lo
book value.

8uy 400 shares of I8 Inc. (l8, news, msgs) aL
Lhe 13.23 llmlL, good unLll canceled. l8 ls Lhe
garganLuan $17 bllllon sales beef and pork
processor. AfLer a blddlng war LhaL lnvolved a
managemenL group and Sm|thf|e|d Ioods (Slu,
news, msgs), 1yson won Lhe rlghL Lo buy l8 for
30 a share. 1yson loods goL heaL from lLs
shareholders over sLraylng so drasLlcally from
chlcken. AfLer all, many porLfollo managers had
boughL 1yson as one Lo beneflL from Lhe mad
cow scare, noL as one Lo suffer from lL. ln any
case 1yson found a reason Lo back ouL and dld. So
l8 has fallen all Lhe way down Lo 13 -- half Lhe
wlnnlng buyouL offer and aL abouL 63 of Lhe
lnlLlal buyouL offer from Lhe managemenL group.
l8 ls no greaL shakes ln Lerms of lLs buslness
economlcs, buL lL ls worLh subsLanLlally more
Lhan 13 a share. ln Llme, l expecL SmlLhfleld Lo
make a subsLanLlally reduced offer aL a
subsLanLlal premlum Lo Lhe currenL prlce. 1he
downslde here ls falrly llmlLed.


Iourna|: Apr|| 27, 2001
- |ace a buy stop on prev|ous pos|t|on |n kr|spy
kreme (kkLM, news, msgs) at 46, good unt||
cance|ed.

- |ace a buy stop on prev|ous pos|t|on |n
Standard ac|f|c (SI, news, msgs) at 22, good
unt|| cance|ed.

- |ace a buy stop on prev|ous pos|t|on |n koh|'s
(kSS, news, msgs) at 62, good unt|| cance|ed.

- |ace a buy stop on the prev|ous pos|t|on |n
Genera| L|ectr|c (GL, news, msgs) at S1, good
unt|| cance|ed.

- |ace order to se|| 1,S00 shares of Va|ueC||ck
(VCLk, news, msgs) at 4 ||m|t, good unt||
cance|ed.

When Lhlngs go wrong
Conslderlng l've had four shorLs go Lhe wrong
way laLely, l can'L be Loo upseL wlLh my poslLlon
ln Lhe SLraLegy Lab. ShorLlng Lhlngs llke GL (CL,
news, msgs), kr|spy kreme (k8LM, news, msgs)
and koh|'s (kSS, news, msgs) ln Lhe face of one of
Lhe flercesL bear markeL rallles ln hlsLory could
have lefL me ln much worse shape

As lL ls, l Lrled Lo geL ouL of my Standard ac|f|c
(Sl, news, msgs) shorL before Lhey released
resulLs. l anLlclpaLed a Lyplcally promoLlonal press
release, and goL lL. Larnlngs, revenue, backlog all
up. unforLunaLely, so are lnvenLorles -- well ln
excess of sales -- and debL, and cash ls way down.
no cash flow sLaLemenL provlded. And [usL as
unforLunaLely, no sooner dld l enLer my order
Lhan lL rallled 21 ln Lwo days on shorL coverlng -
gapplng lLs way ouL of reach of my llmlL order. An
example of a llmlL order worklng ouL Lhe wrong
way. l would much raLher have covered earller,
buL wlLh no opporLunlLy Lo alLer Lhe order ln Lhe
wake of Lhe new houslng numbers -- we're on a
24 hour delay here -- lL wasn'L posslble. l'll puL ln
a buy sLop aL 22, good unLll canceled.

1he kohl's shorL, a poslLlon l enLered on a markeL
order LhaL wenL off qulLe badly, has been
slmllarly unforLunaLe. My Lhesls remalns lnLacL
Lhere. l wlll puL a buy sLop aL 62, good unLll
canceled, however. no need Lo lose my shlrL lf
Lhe markeL goes haywlre Lo Lhe upslde. kohl's ls a
greaL shorL aL 62, buL lL's also a beLLer shorL aL 70.
no need Lo lose 8 on Lhe way Lo Lhe beLLer shorL.

Ceneral LlecLrlc ls a sLock l am convlnced wlll
Lrade subsLanLlally lower ln Lhe wake of !ack
Welch's reLlremenL and Lhe Poneywell
acqulslLlon. lLs collecLlve powers Lo manage
earnlngs are conslderable, buL a slowlng economy
wlll showcase CL's weaknesses. noLably, absenL
Lhe 110 surge ln proflL aL CL ower, CL would
have shown a 23 decllne ln operaLlng proflL Lhls
pasL quarLer. 1hose klnds of surges wlll noL be an
ongolng evenL aL CL ower. AL Lhls polnL, glven
lLs recenL sLrengLh and Lendency Lo rally hard
wlLh Lhe markeL, l wlll place a buy sLop on Lhe
poslLlon aL 31, good unLll canceled.

krlspy kreme Lrades ln a manner decoupled from
any reasonable fundamenLal valuaLlon, much llke
Lhe lnLerneL sLocks of 1999-2000. ln such cases,
Lhe sLock floaLs on senLlmenL alone. My Lhesls
remalns lnLacL -- Lhe sLock ls worLh aL besL 1/3
currenL levels, and evenLually senLlmenL wlll
correcL lLs error. AcLually, l'm belng generous -
1/3 currenL levels approxlmaLes Lhe lC prlce,
whlch was surely a blL hlgh. ln Lhe lnLerlm, Lhere
can cerLalnly be wlld swlngs Lo Lhe upslde as
shorLs rush Lo cover on any change ln general
markeL senLlmenL, as has happened recenLly.
Pence Lhe sLock has Lremendous shorL-Lerm
upslde rlsk. Clven LhaL SLraLegy Lab ls a shorL-
Lerm acLlvlLy and Lhe currenL Lrend seems Lo be
hlgher, l'll place a buy sLop aL 46, good unLll
canceled.

ln real llfe, l never enLer markeL orders, nor do l
enLer llmlL orders wlLh good unLll canceled
feaLures. l look aL sLocks l wanL Lo buy and shorL,
seL LargeL prlces, and waLch Lhe markeL acLlon --
along wlLh my Lrader -- for Lhe besL prlce ln llghL
of markeL condlLlons and recenL news. When l
aLLack, l aLLack wlLh lnLraday llmlL orders. 8uL
such orders are noL pracLlcal here. l've had a few
flLs and sLarLs here ln SLraLegy Lab Lrylng Lo flnd
Lhe opLlmum mlx of markeL orders and llmlL
orders, and l'm noL sure l've found a saLlsfacLory
meLhod yeL ln llghL of Lhe delay. As a pracLlcal
maLLer, Lhe amounL of conLrol l have ln real llfe
wlll never be aLLalnable here ln SLraLegy Lab, so l
musL make do. ALLempLlng Lo cover a houslng
shorL wlLh a llmlL order Lhe nlghL before naLlonal
new homes daLa ls released ls noL a good way Lo
go abouL Lhlngs. noLed.

valueCllck ls a good example. 1oday Va|ueC||ck
(vCLk, news, msgs) releases earnlngs, and a good
parL of my declslon on whaL Lo do wlLh LhaL
poslLlon wlll depend on whaL Lhe earnlngs release
reveals - and especlally how Lhe balance sheeL
looks, slnce Lhls ls Lo a large degree an asseL play.
l flgure Lhe sLock ls worLh aL leasL 4.30 as a sLand-
alone enLlLy accounLlng for recenL share dlluLlon.
1o a sLraLeglc buyer llke Doub|eC||ck (uCLk, news,
msgs), valueCllck could be worLh much more. 8uL
wlLhouL knowlng whaL Loday's news wlll reveal,
l'll make a conservaLlve move LhaL wlll llkely
resulL ln a non-evenL. Sell 1,300 shares of
valueCllck aL 4 llmlL, good unLll canceled.

l had prevlously boughL sLock ln D|amondC|uster
(u1l, news, msgs) Lhls round aL 14 per share or
so (and subsequenLly offloaded lL aL 10 or so,
Lhlnklng l could buy lL back cheaper laLer). My
Lhesls was LhaL ulamondClusLer was worLh abouL
Lwlce Lhe prlce l pald and would make a nlce
acqulslLlon. ln LhaL same enLry, l broughL up
rox|com (xCM, news, msgs) as an alLernaLlve
Lo ulamondClusLer. ?esLerday, Compaq
Computer (CC, news, msgs) announced lL was
buylng roxlcom for 3.73 per share cash.
normallzlng varlous mulLlples over Lo
ulamondClusLer based on Lhls new sLandard for
valulng e-buslness consulLanLs, and ad[usLlng for
Lhe hlgher marglns and beLLer cash producLlon aL
ulamondClusLer, one flnds ulamondClusLer Lo be
worLh abouL 21.30.

1hls ls a blL lower Lhan my orlglnal esLlmaLe of
value, and no doubL reflecLs Lhe dlsLressed fuLure
faclng many of Lhese flrms as sLand-alone
enLlLles. ulamondClusLer had Lhe besL shoL, ln my
oplnlon, of remalnlng proflLably lndependenL,
and because of Lhls lL mlghL deserve a hlgher
valuaLlon. As for Lhe opporLunlLy Lo buy
ulamondClusLer back cheaper laLer, l doubL LhaL
opporLunlLy wlll occur now. no lnvesLor has a
1.000 baLLlng average, buL every mlsLake
deserves scruLlny and Lhls one wlll geL lL.

l wlll noLe LhaL lL seems llkely LhaL Lhere was a
leak ln Lhe roxlcom deal wlLh Compaq. roxlcom
sLock has been leaplng ln a manner ouL of
proporLlon Lo lLs breLhren ln Lhe lndusLry-over
Lwo days laLe lasL week Lhe sLock [umped 138.
1haL was abouL Lhe Llme Lhls deal was probably
sLarLlng Lo come LogeLher. Pence, someone knew
someLhlng -- and many people Lraded on LhaL
knowledge, slnce volume was up Lo flve Llmes
hlgher Lhan normal. SecurlLy regulaLors wlll
probably never lnvesLlgaLe, buL lnvesLors should
be ouLraged aL Lhls Lransfer of wealLh based on
whaL looks on Lhe surface Lo be lnslde
lnformaLlon.

Iourna|: May 23, 2001
- |ace order to buy 700 shares of We||sford
kea| ropert|es (Wk, news, msgs) at 16.40
||m|t, order good unt|| cance|ed.

A cheap plece of real esLaLe
l walLed a few days Lo posL Lhls here, and so Lhls
sLock has run up a blL. 1he phrase "cheapesL
plece of real esLaLe on Lhe sLock exchange" ls
bandled abouL qulLe frequenLly, so l won'L use
LhaL hyperbole here. neverLheless, l can make a
good case for neL real asseL value here over
$30/share, and lL has been baslng around $16 for
Lhe lasL four years

WhaL has changed ls LhaL We||sford kea|
ropert|es (W8, news, msgs) ls llquldaLlng lLs
mosL vlslble lnvesLmenL -- a [olnL venLure wlLh
Coldman Sachs. 1hls [olnL venLure speclallzed ln
rehablllLaLlng offlce bulldlngs -- Lurnarounds. So
Lhe book value underesLlmaLes Lrue asseL value.
A recenL sale wenL for a 23 premlum Lo book
value.

1he chalrman of Lhls new ?ork real esLaLe
lnvesLmenL LrusL ls dedlcaLed Lo buylng back
sLock, and Lhe company has reLlred 20 of lLs
shares ln Lhe pasL Lwo years. Wellsford lnvesLs ln
commerclal real esLaLe mosLly around Lhe
norLheasL.

8uL aL Lhls polnL, l've leL oLhers do Lhe walLlng for
me long enough. 1lme Lo Lake a poslLlon.


Iourna|: May 30, 2001
- Se|| the ent|re Va|ueC||ck (VCLk, news, msgs)
pos|t|on at a ||m|t of 3.20.

- Increase the ||m|t buy pr|ce on We||sford kea|
ropert|es (Wk, news, msgs) to 16.4S.

WaLch for reLurn Lo Aprll lows and lower
1he lasL few Lradlng days noLwlLhsLandlng,
chances are LhaL you feel as lf every sLock you
look aL has moved up recenLly. ?ou would be
correcL ln LhaL feellng. 1he recenL rally has been
lncredlbly broad, wlLh over 80 of n?SL sLocks
parLlclpaLlng almosL regardless of markeL cap or
secLor. 1he problem ls, very few people acLually
boughL Lhe Aprll lows. Pence, chances are you
have also waLched several of your favorlLe or
mosL wanLed sLocks creep (or leap) sLeadlly
upward wlLhouL you. lL's a faLeful and frusLraLlng
experlence, no doubL. 8uL lL does glve some
lnslghL lnLo whaL professlonal managers are
feellng

?es, Lhe phenomenon ls no dlfferenL for
professlonal lnvesLors -- Lhey mlssed Lhe early
Aprll lows en masse and have had Lo deal wlLh
Lremendous lags ln performance ever slnce. 1he
dlfference? rofesslonals by and large were noL
fully lnvesLed when Lhe Lurn came, whlle Lhe
lndlces by deflnlLlon were. ?ou have seen Lhe
resulLs of Lhls phenomenon here ln Lhe SLraLegy
Lab, where all Lhe players recelved $100,000 as
Lhe markeL enLered one of Lhe sLeepesL four-
week dlves ln hlsLory only Lo rebound wlLhln Lwo
and a half weeks of hlLLlng lLs lows.

Cf course, wlLh each passlng day of Lhe rally, a
few (hundred) more lnsLlLuLlonal holdouLs
crossed Lhe llne and sLarLed buylng. AfLer all,
muLual fund lnvesLors never dld pull money ouL of
muLual funds alLogeLher. lL wenL Lo Lhe money
markeL funds, noL Lo Lhe maLLresses. 1haL money
came rushlng back wlLh Lhe ease of a cllck or a
phone call, compoundlng Lhe cash-on-hand
problem. Pence, we goL a "can'L mlss" rally, as ln
"can'L mlss Lhe nexL bull markeL." ?eL, Lhe lndlces
lnched achlngly ahead of Lhe lnsLlLuLlons'
performance noneLheless. Whlch of course
begeLs even flercer buylng. 1he aggresslve ones
are uslng leverage, lf Lhey are able, Lo caLch up.

l can only conclude LhaL lL ls qulLe posslble we
have noL yeL seen Lhe boLLom. SpeculaLlve booms
llke Lhe 1920s and Lhe 1960s were followed noL
only by sLeep sLock decllnes, buL also by sLocks
falllng Lo absurd values. 1he afLermaLh of Lhe
speculaLlve boom of Lhe 1990s has seen
osLenslbly severe sLock decllnes, buL never durlng
Lhe Aprll lows dld l flnd sLocks, generally speaklng,
go on sale. 1here was no sale ln Lech, buL nelLher
was Lhere a sale ln Lhe flnanclals, consumer
producLs companles, cycllcals, eLc. CllL-edged
brand names llke Coca-Co|a (kC, news, msgs) and
G|||ette (C, news, msgs) have seen Lhelr
valuaLlons reduced sllghLly, buL Lhey remaln qulLe
hlghly prlced.

lndeed, by my calculaLlons -- Laklng lnLo accounL
Lhe masslve corporaLe governance abuses borne
of Lhe bull markeL -- many of Lhe blggesL Lech
names and some of Lhe blggesL non-Lech names
LhaL dld fall fell only Lo falr value aL worsL. no flre
sale ln a fundamenLal sense aL all. WhaL ls falr
value? l use an annual 10 reLurn Lo shareholders
afLer dlluLlon, sllngs and arrows.

ConvenLlonal wlsdom says LhaL elLher we've seen
Lhe boLLom, or LhaL Lhere wlll be one more leg
down, creaLlng a W-shaped boLLom. lL ls posslble,
even llkely, LhaL convenLlonal wlsdom wlll be
proven wrong, and LhaL Lhe only alLernaLlve Lo
Lhese Lwo opLlons wlll lnsLead occur. 1haL ls, Lhe
Aprll lows wlll noL only be LesLed, buL plerced.

8ull markeLs: glfLs LhaL keep on glvlng
1hls ls noL a common vlewpolnL, buL you
shouldn'L expecL lL Lo be. Such a vlewpolnL would
lmply we don'L know where or when Lhe boLLom
wlll be hlL. 8uL surely, "l don'L know" does noL
sell. lL doesn'L sell adverLlslng, generaLe
commlsslons, generaLe deals or aLLracL lnvesLors.

1hus, everyone from Cn8C Lo any broker, sell-slde
analysL, markeL maven or personal flnance
magazlne has a vesLed lnLeresL ln advanclng
confldenL-soundlng markeL prognosLlcaLlon. And
Lhe blas, of course, ls for a bull markeL, noL a bear.
8ull markeLs are slmply Lhe glfLs LhaL keep on
glvlng.

Meanwhlle, several lf noL mosL CLCs of our
greaLesL corporaLlons are by and large blowlng
Lhe proverblal sunshlne.well, you geL Lhe ldea.
1o Lhe degree Lhey can aLLempL Lo Lalk consumer
confldence and caplLal spendlng up, Lhey wlll all
do Lhelr darndesL. AfLer all, when !ack Welch
speaks, people llsLen. no maLLer LhaL he's slmply
cheerleadlng hls own exlL. 1hlnk of managemenL
as a car salesman desperaLe Lo please. lL's an
overreachlng meLaphor, buL lL puLs one ln Lhe
correcL defenslve mlnd frame when llsLenlng Lo
such charlsmaLlc characLers. lL ls qulLe llkely LhaL
Lhe gllmmers of hope we are hearlng from such
sources are slmply [usL LhaL -- gllmmers, easlly
explalned away ln Lhe fuLure as never havlng
been cerLaln ln Lhe pasL.

So, l wlll go on record rlghL now as saylng LhaL Lhls
ls a Llme of Lremendous uncerLalnLy abouL markeL
dlrecLlon -- buL no more so Lhan aL any Llme ln Lhe
pasL. l conLlnue Lo belleve Lhe prudenL vlew ls no
markeL vlew. 8aLher, l wlll remaln conLenL ln Lhe
cerLalnLy LhaL popular predlcLlons are less llkely Lo
come Lo pass Lhan ls belleved and LhaL absurd
lndlvldual sLock values wlll come along every once
ln a whlle regardless of whaL Lhe markeL does.

1rade updaLes
l'm movlng Lhe llmlL prlce on my ouLsLandlng
order Lo sell Lhe Va|ueC||ck (vCLk, news, msgs)
poslLlon down Lo 3.20. 1hls sLock was a case of
good asseLs, bad buslness, bad managemenL. 1he
resulL was cerLalnly predlcLable, and hence Lhls
was a mlsLake on my parL. 8y and large l was
looklng for a flucLuaLlon upward Lo neL asseL
value. Looklng aL Lhls conservaLlvely, LhaL's where
we are now. 1he LargeL came down Lo meeL us,
and hence lL ls Llme Lo mlnlmlze Lhe lmpacL of Lhls
Lrade Lo a small loss.

l wlll also ralse Lhe llmlL a nlckel on Lhe We||sford
kea| ropert|es (W8, news, msgs) buy. 1he llmlL
buy prlce should now be 16.43.

Iourna|: Iune 13, 2001
- |ace order to se|| S00 shares of Amer|can
hys|c|ans Cap|ta| (ACA, news, msgs) at a ||m|t
of 20.40.

- |ace order to buy 900 shares of Cascade Corp.
(CAL, news, msgs) at 9.00 ||m|t.

- Increase the ||m|t buy pr|ce on We||sford kea|
ropert|es (Wk, news, msgs) to 16.4S, change
order to 600 shares.

A nlckel beLween me and break-even
SLlll pushlng Lo geL back Lo break-even. l'd have
achleved LhaL goal by now lf l had been a nlckel
more generous wlLh my llmlL buy on We||sford
kea| ropert|es (W8, news, msgs). Wellsford [usL
boughL back 24 of lLs shares aL a huge dlscounL
Lo lnLrlnslc value. Pence, lnLrlnslc value per share
[usL [umped aL leasL $3 per share. 1he shares
moved up Lo reflecL Lhls accreLlve acLlon by
managemenL, buL now Lhey're sofL agaln. lL's noL
ofLen LhaL l'll ralse my lnlLlal buy prlce on a sLock
(usually, l leL mlssed opporLunlLles be), buL ln Lhls
case 18.30 now ls cheaper Lhan 16.43 was back
before Lhe buyback. lncrease Lhe llmlL buy prlce
on Wellsford Lo 18.30, buL reduce Lhe number of
shares Lo 600.

Also, sell 300 shares of Lhe Amer|can hys|c|ans
Cap|ta| (ACA, news, msgs) poslLlon aL 20.40 llmlL,
good unLll canceled. l Look advanLage of a no-
bralner prlce when l Look such a large poslLlon,
buL aL Lhls prlce l'll scale lL back Lo a sLlll large buL
more average-slzed poslLlon. l conLlnue Lo be
qulLe bulllsh on Amerlcan hyslclans, wlLh Lhe
blggesL rlsk belng a dumb acqulslLlon by
managemenL.

8ack Lo baslcs
WlLh only a couple of monLhs unLll Lhe end of
SLraLegy Lab, l have Lo say l'm qulLe dlsappolnLed
wlLh my performance Lhus far. As l dld durlng my
flrsL SLraLegy Lab lasL round, l klcked off Lhe round
buylng several sLocks LhaL possessed a loL of
shorL-Lerm prlce rlsk. CpLlmlsm (assoclaLed wlLh
Lhe beglnnlng of a new round) and a wad of cash
(fake, granLed by MSn MoneyCenLral) make for
Loxlc Lwlns ln Lhe world of lnvesLlng. l should have
been smarLer, even lf lL ls only fake money. And
once havlng boughL such securlLles wlLh near-
Lerm prlce rlsk, l should never have sold Lhem
slmply because Lhey fell ln Lhe near Lerm. Pad l
slmply held all Lhe sLocks l boughL Lhls round
raLher Lhan selllng some of Lhem, l'd be much
beLLer off. 1hls was largely Lrue lasL round as well.
Ck, Lwo sLrlkes. Wlll MoneyCenLral glve me a Lhlrd
chance?

lL ls noL ln my naLure Lo scramble for excess shorL-
Lerm reLurn by Laklng on exLra rlsk. Pence, you
wlll noL see me Lake masslve sLock poslLlons or
leveraged opLlons poslLlons slmply Lo Lry Lo shooL
Lhe llghLs ouL ln Lhese lasL few monLhs. As l dld
lasL round, l'll Lry Lo recover by golng back Lo
baslcs.

SLarL off wlLh a new order Lo buy 900 shares of
Cascade Corp. (CAL, news, msgs) aL 9.00 llmlL,
good unLll canceled. Cascade, a maker of forkllfL
parLs wlLh slgnlflcanL brandlng and markeL share,
was Lhe sub[ecL of a managemenL-led buyouL
offer earller Lhls sprlng. 1he offer puL Cascade ln
play, and afLer a well-run blddlng process LhaL
lncluded more Lhan 10 parLles, an ouLslde group
offered Lo buy Lhe company ouL for 17.23.
ManagemenL came back wlLh a laLe 17.30 offer
LhaL was properly re[ecLed by Lhe board.

1he buyouL fell Lhrough when Lhe ouLslde group
encounLered some sklLLlshness on Lhe parL of
lenders. noL surprlslng, several deals have been
scuLLled because of weak debL markeLs. WhaL ls
surprlslng ls LhaL Lhere was a flnal offer from Lhe
group -- $13.73 a share -- LhaL was re[ecLed by Lhe
board as well. ln oLher words, a leveraged buyouL
can be done aL prlces 30 Lo 100 greaLer Lhan
Lhe currenL prlce, and sharks are clrcllng.

8ecenLly C8 k|chard L|||s' (C8C, news, msgs)
golng-prlvaLe LransacLlon goL a shoL ln Lhe arm
when lL successfully placed [unk debL ln an
oversubscrlbed offerlng. 1hls ls a good slgn LhaL
wlLh lower lnLeresL raLes offseLLlng Lhe economlc
rlsk, Lhe [unk markeLs are aLLempLlng a comeback.
l expecL Cascade Lo be Laken ouL ln a reasonable
Llme frame. 1hls llllquld sLock, whlch was
Lransferred from Lhe hands of long-Lerm owners
Lo arblLrageurs durlng Lhe blddlng process, was
unceremonlously dumped by Lhose arblLrageurs
when Lhe deal fell aparL. now approachlng half
Lhe prlce bld [usL a few monLhs ago, Lhe shares of
Lhls old economy dlehard appear a bargaln aL 4.3
Llmes Lralllng nonpeak L8l1uA (earnlngs before
lnLeresL, Laxes, depreclaLlon and amorLlzaLlon)
wlLh slgnlflcanL free cash producLlon. 1he sLock ls
aL abouL Lhree Llmes peak L8l1uA. no doubL Lhe
company faces rougher economlc Llmes ahead,
buL wlLh a Lrlo of bldders wllllng Lo pay over $16 a
share [usL a few monLhs ago, Lhere ls a margln of
safeLy here.

Iourna|: Iune 20, 2001
- Se|| the ent|re pos|t|on |n I8 Inc. (I8, news,
msgs) at the market.

1aklng Lhe easy Lrade
8uy sLocks cheap enough and Lhe news ls bound
Lo be good. As Lhe deal for 1yson Ioods (1Sn,
news, msgs) Lo buy I8 Inc. (l8, news, msgs)
blew up ln laLe Aprll and wenL Lo Lhe courLs, l8
sLock fell Lo around $13, desplLe Lhe facL LhaL
compeLlLlve blddlng for Lhe company less Lhan slx
monLhs earller had prlced Lhe company aL $30 Lo
$32 a share. Moreover, $13 represenLed a 30
galn back Lo Lhe $22.30 prlce aL whlch a
managemenL-led group had offered Lo buy Lhe
company. And flnally, $13 meanL LhaL lf Lhe deal
wenL Lhrough as planned -- roughly 30 sLock,
30 cash -- Lhen you were geLLlng 1yson sLock for
free. lf Lhe deal dld noL go Lhrough, one was
geLLlng a slgnlflcanL cash-generaLlng buslness aL
less Lhan book value. ln shorL, aL $13, one could
argue LhaL any news was golng Lo be good news

l8 won lLs flghL Lo have Lhe merger agreemenL
sLand, and so now l slL on appreclaLed shares of
l8. lf 1yson's currenL share prlce holds and Lhe
prevlously negoLlaLed merger agreemenL sLands,
Lhen l8 wlll be boughL for a sum LoLal of abouL
$23.40 per share. l8 closed aL $23.32 1uesday.

So Lhe naLural quesLlon ls, "WhaL now?"

8lsk arblLrageurs would now buy l8 sLock and
shorL a pro raLa amounL of 1yson sLock ln an
efforL Lo obLaln Lhe dlfference beLween LhaL
$23.40 and Lhe $23.32. 1haL's an 8 spread,
whlch, lf reallzed ln a reasonable Llme frame,
represenLs a good reLurn. 8lsks for Lhese
arblLrageurs lnclude LhaL Lhe deal prlce ls reduced
or LhaL Lhe deal does noL pass anLlLrusL musLer. ln
such a case, 1yson's sLock would rlse and l8's
would fall. Cn Lhe arblLrageurs' slde ls a courL
order mandaLlng 1yson do Lhe deal and 1yson's
sLaLemenL LhaL lL would noL llkely appeal.

l am noL a rlsk arblLrageur. l belleve LhaL rlsk
arblLrage ls a qulLe overcaplLallzed fleld and, by
and large, noL currenLly a very proflLable
endeavor unless one has slgnlflcanL access Lo
borderllne lnslde lnformaLlon. 8ecause Lhere are
only a few monLhs lefL ln Lhls round of SLraLegy
Lab, Lhe only loglcal opLlon for me ls Lo sell l8
now and Lake Lhe galn.

1hose wlLh a longer-Lerm horlzon could make a
good argumenL for holdlng onLo l8 and Laklng
dellvery of Lhe $13 per share plus 1yson sLock
when Lhe deal closes. lndeed, selllng l8 now ls
equlvalenL Lo selllng Lhe 1yson sLock aL $7.16 per
share before even recelvlng lL. 1he key Lo
remember ls LhaL Lhe value of Lhe deal ls noL Lhe
same Lhlng as Lhe shorL-Lerm compensaLlon Lo be
recelved by l8 shareholders. 1haL ls, Lhe value of
1yson sLock ls noL necessarlly LhaL whlch Lhe
markeL ls now quoLlng, as Lhe sLock ls under
lnLense shorL pressure from rlsk arblLrageurs.
Longer-Lerm holders who feel Lhey can correcLly
[udge Lhe underlylng value of 1yson sLock as
posslbly $11 or greaLer would flnd Lhe lmplled
prlce of Lhe 1yson shares embedded ln Lhelr
currenL l8 sLock Lo be qulLe a bargaln.

WlLh respecL Lo l8, l'm a blL laLe here ln SLraLegy
Lab -- Lhe news was announced lrlday afLer Lhe
deadllne for submlsslons for Monday Lrades.
Maklng myself even more laLe, l dld noL submlL an
enLry on Monday. Pence, my "auLomaLlc sell" of
l8 ls on Llme-delay and lL has cosL me a buck or
so. 1wo days laLe and maybe a buck and a half
shorL.

Iourna|: Iune 22, 2001
- Se|| the ent|re Grubb & L|||s (G8L, news, msgs)
pos|t|on at a 6.2S ||m|t, good unt|| cance||ed.

Pow Lo geL even
An ouLslder mlghL Lhlnk flnd lnvesLors' Lhlnklng
odd. resenLed wlLh new money Lo lnvesL, mosL
seL goals of growlng LhaL money. 1hey seL LargeLs
of 20, 30 or someLlmes much more. And Lhey
seL off fully lnLendlng Lo do so. noL so odd, yeL.

Powever, once havlng losL money, lnvesLors Lend
Lo seL a seemlngly conservaLlve new goal:
breakeven. 1he lrony ls LhaL breakeven maLh ls
one of llfe's crueler reallLles. 1haL ls, breakeven
requlres a percenLage galn ln excess of Lhe
percenLage loss lncurred. noL so conservaLlve.

Moreover, losses are Lhe ulLlmaLe sllppery slope.
lf one has losL 20, Lhen one requlres a 23 galn
Lo break even. lf one has losL 30, one requlres a
100 galn Lo break even.

As a resulL, Lhe goal of breakeven ls ofLen much
more aggresslve Lhan one's lnlLlal lnvesLmenL
assumpLlon. ln an aLLempL Lo geL back Lo
breakeven, mosL lnvesLors slmply raLcheL up Lhe
rlsks Lhey Lake. Cf course Lhls usually [usL raLcheLs
up Lhe losses - and lncreases Lhe requlred reLurn
back Lo even. 1alk abouL a deaLh splral.

My experlence ls LhaL when one has losses LhaL
look oLher Lhan Lemporary, Lhere ls usually a
reason. 1he approprlaLe correcLlve acLlon ls Lo
lnvesLlgaLe Lhe reason for Lhe loss. More ofLen
Lhan noL, l flnd LhaL l have sLrayed from Lhe
conslsLenL meLhod of lnvesLmenL LhaL has served
me so well for so long. lndeed, Lhls flndlng ofLen
needs no lnvesLlgaLlon - l knew aL Lhe onseL of
Lhe lnvesLmenL operaLlon LhaL l was sLraylng, yeL
foollshly plowed ahead anyway.

All lnvesLors sLumble. usually some sLubborn
lnslsLence plays a role. 8uL fools wlll noL be
suffered llghLly ln a bear markeL. 1he rlsk of ruln ls
real. As lnvesLors, we musL conLlnually guard
agalnsL Lhe mlssLeps LhaL mlghL lead Lo losses -
and reacL raLlonally lf we flnd ourselves down.
AcLlng llke a fool afLer Lhe facL wlll only
compound Lhe error.

orLfollo updaLes
Sen|or nous|ng (SnP, news, msgs) ls acLlng
beauLlfully and pays a nlce dlvldend. l would noL
be a buyer here, and l do noL expecL flreworks for
Lhe remalnder of Lhe round. 1he sLock was a sLeal
aL 10 or below, and falr value ls beLween 13 and
17. 1he upper end of LhaL range may be reached
as Lhe paymenL slLuaLlon ln senlor llvlng lmproves
even more. 1he dlvldend cerLalnly enhances Lhe
reLurn for long-Lerm holders.

nutt|g 8u||d|ng roducts (P8, news, msgs)
remalns slgnlflcanLly undervalued. l value Lhls
sLock norLh of 10. $30 mllllon could be squeezed
ouL of Lhe real esLaLe acqulred from 8ugby (and
on Lhe books for nearly zero) by [usL rearranglng
some properLles. l conLlnue Lo anLlclpaLe a buyouL
or some oLher value-reallzlng acLlvlLy, as Lhls ls a
company LhaL does noL need Lo be publlc.

Amer|can hys|c|ans (ACA, news, msgs) was a
no-bralner aL 13.30, whlch ls Lhe prlce aL whlch lL
demuLuallzed lasL fall. 8elow 17, l'm a buyer. 1hls
company ls overcaplLallzed wlLh Lons of excess
cash and hence l vlew Lhe move from 17 Lo 20 as
more of a move from 3 Lo 8. 1haL's why l'm
wllllng Lo reduce Lhe slze of Lhls hefLy poslLlon ln
Lhe 20.30 range. 1he blggesL rlsk ls LhaL
managemenL carrles ouL a dumb acqulslLlon.
1remendous value could be creaLed by [usL
buylng back Lhe shares, whlch carry an lnLrlnslc
value norLh of 26.

Grubb & L|||s (C8L, news, msgs) under 3 ls a
decenL buy, buL Lhere are sLrucLural ownershlp
lssues LhaL llmlL Lhe upslde. Meanwhlle, a new
CLC has Laken over and wlll wanL Lo make a mark
even as Lhe commerclal real esLaLe lndusLry ls
enLerlng a funk. l conLlnue Lo belleve LhaL my
long-Lerm downslde rlsk ls LhaL Lhe company geLs
boughL aL a 40 premlum Lo whaL l pald. ln Lhe
near-Lerm, Lhls llllquld sLock can bounce qulLe
low. 8uL l won'L worry abouL LhaL. LasL quarLer,
some blg lnsLlLuLlonal lnvesLors dressed up Lhe
sLock aL Lhe end of Lhe quarLer ln order Lo
enhance Lhelr reLurns. 1haL may happen agaln. ln
anLlclpaLlon, l'll enLer an order Lo sell Lhe enLlre
poslLlon aL 6.23 llmlL, good unLll cancelled.

G1SI (C1Sl, news, msgs) ls prepplng a blowouL for
lasL half of Lhe year. CperaLlonal changes and a
couple of conLracL wlns have boosLed buslness aL
Lhls governmenL Lechnology producLs dlsLrlbuLor,
whlch sells aL a mulLlple of around 3 on Lhls year's
earnlngs. 1he buslness ls much less cycllcal Lhan
Lhe sLock prlce, whlch bounces around a loL. 1he
sLock ls flndlng lLs way lnLo sLronger hands,
however. l belleve Lhe sLock ls worLh aL leasL 8
and probably more.

So LhaL's lL. WlLh my prevlous sale of I8 (l8,
news, msgs), l have only flve poslLlons lefL. When l
sell half of Lhe Amerlcan hyslclans poslLlon,
anoLher sloL wlll be open. l am belng paLlenL for
Lhe end-of-quarLer selllng LhaL ofLen occurs ln
downLrodden names as lnsLlLuLlons rush Lo
wlndow dress Lhelr porLfollos. ln Lhe meanLlme,
my sLandlng order Lo buy We||sford kea|
ropert|es (W8, news, msgs) aL $18.30 mlghL
execuLe.

Iourna|: August 10, 2001
- 8uy 1000 shares of Mesaba no|d|ngs (MAIk,
news, msgs) at 8.80 ||m|t, good unt|| cance|ed.

1o own or noL Lo own Clsco
Clsco SysLems, markeL caplLallzaLlon $141 bllllon,
reporLed comblned earnlngs for Lhe lasL Lwo years
of $1.66 bllllon, and lL ls uncerLaln how or when
Clsco wlll grow agaln. Moreover, lL ls posslble and
maybe probable LhaL Clsco wlll wrlLe off $1.66
bllllon as a one-Llme charge someLlme ln Lhe nexL
few years. As usual, deLalls regardlng Clsco's
opLlons compensaLlon programs are scarce.

So, whlch ls Lhe blgger rlsk: ownlng Clsco or noL
ownlng Clsco? Cne need noL be shorL Clsco Lo
experlence Lhe rlsk of noL ownlng Clsco. lor
professlonals, performance ls benchmarked. 1haL
ls, performance ls relaLlve. ln Lhe relaLlve
performance game, one ls effecLlvely shorL every
sLock noL ln one's porLfollo LhaL ls neverLheless a
parL of Lhe benchmark. 1o lllusLraLe, a 100 cash
poslLlon benchmarked agalnsL Lhe S& 300 lndex
ls 100 shorL Lhe lndex ln Lhe relaLlve
performance game. lf Lhe S& 300 rlses 10, Lhen
ln Lhe relaLlve performance arena Lhe cash
porLfollo ls down 10. 1hls ls how Wall SLreeL
works.

So who ln Lhelr rlghL mlnd would shorL Clsco
now? vlrLually no one. uesplLe musLerlng every
ounce of confldence posslble, mosL analysLs,
porLfollo managers, economlsLs and corporaLe
execuLlves have no clue as Lo when elLher Lhe
economy or Clsco wlll agaln rebound. And on Lhe
off chance LhaL Lhe rebound occurs nexL monLh,
well, beLLer noL be shorL Clsco.

WhaL we have here ls greed overrullng fear,
desplLe Lhe facL LhaL for a flnanclal buyer -- a
buyer LhaL does noL Lhlnk sLraLeglcally buL raLher
Lhlnks ln Lerms of pure proven cash flows -- Lhe
publlc sLock markeL offers preclous few
opporLunlLles. And almosL none of Lhem are ln blg
caps. Clsco does noL quallfy. l have glven some
reasons why ln prevlous [ournal enLrles.

1hls lack of value should be Lroubllng Lo
LhoughLful lnvesLors. 1remendous llquldlLy
conLlnues Lo grace Lhe sLock markeL. Pence, when
lnvesLors flee from growLh, Lhey rush Lo value.
Any blg publlcly Lraded company wlLh a low
prlce/earnlngs raLlo or low prlce/book raLlo and
wlLhouL obvlous warLs has seen lLs sLock have a
blg run recenLly. lndeed, Lhe bull run for value
LhaL sLarLed lasL fall has conLlnued rlghL up lnLo
Lhe presenL. now, however, mosL sLocks are aL
leasL falrly valued. l would argue mosL remaln
overvalued.

Clven Lhe currenL valuaLlon scenarlo across Lhe
markeL -- and evldenL ln my dally revlews of
anyLhlng and everyLhlng LhaL looks elLher
undervalued or overvalued -- lnvesLors would do
well Lo sLarL replaclng fear of mlsslng a rally wlLh
fear of furLher caplLal loss. 8efore Lhe bear goes
back lnLo hlbernaLlon, Lhe Llme wlll come when
fear overrules greed. We are noL Lhere yeL.
1hough we may soon be.

WlLh llLLle doubL, Lhls round has been a
dlsappolnLmenL. now LhaL l'm a shorL-Llmer, lL
seems hazardous Lo enLer a poslLlon now,
knowlng LhaL lL ls only a guess where Lhe prlce wlll
be ln a few weeks when Lhe LoLals are recorded
for eLernlLy. neverLheless, Lhe splrlL of Lhe
SLraLegy Lab ls noL Lo remaln ldle. So here goes.

Poplng for a Mesaba Lakeoff
8uy 1000 shares of Mesaba no|d|ngs (MAl8,
news, msgs) aL 8.80 llmlL, good unLll cancelled.
Mesaba ls a reglonal alrllne LhaL was recenLly
dumped aL Lhe alLar by norLhwesL, whlch ls also
mlnorlLy shareholder ln Mesaba. Mesaba's
prlmary buslness ls Lo be an operaLor ln Lhe
norLhwesL Alrllnk sysLem.

Mesaba ls Lhe cheapesL domesLlc alrllne. lL geLs
pald by Lhe capaclLy lL makes avallable raLher Lhan
Lhe number of passengers lL carrles. lL also has a
favorable long-Lerm fuel conLracL LhaL buffers lL
from fuel cosL flucLuaLlons. CurrenLly, one of lLs
largesL cosL cenLers ls Lhe Lralnlng of plloLs. 1haL
wlll become less of an lssue when Mesaba opens
lLs new domesLlc plloL Lralnlng cenLer lnslde of a
year from now.

1he oLher poLenLlal caLalysL ls Lhe wlnnlng of
addlLlonal rouLes and [eLs from norLhwesL.
Mesaba prlmarlly compeLes wlLh Lxpress Alr, a
wholly owned subsldlary of norLhwesL. 1herefore
lL follows LhaL Mesaba wlll noL geL Lhe ma[orlLy of
Lhe new buslness from Lhe recenLly announced
large purchase of reglonal [eLs by norLhwesL. lL ls
Lhls lack of near-Lerm growLh LhaL really Lurns off
mosL analysLs.

Mesaba wlll geL some of Lhose rouLes, however,
and growLh lsn'L Lerrlbly necessary glven Lhe
valuaLlon. WlLh approxlmaLely $3 a share ln cash,
no debL and $2.31 a share ln Lralllng L8l1uA, $9
seems a cheap prlce for Lhe sLock. And lL ls. 8ook
value per share checks ln aL around $8, and lL ls
growlng aL a nlce cllp. A raLlonal valuaLlon ls
probably ln Lhe mld-Leens, all aspecLs of Lhls
lnvesLmenL consldered. norLhwesL Lurned away
from buylng Mesaba aL $13 afLer an lndusLry plloL
sLrlke resoluLlon made Lhe deal unfavorable for
norLhwesL. neverLheless, norLhwesL was noL Lhe
only company lnLeresLed ln buylng Mesaba. LasL
fall, anoLher alrllne group made an lnqulry Lo Lhe
board regardlng purchaslng Lhe company and was
rebuffed ln favor of Lhe norLhwesL deal.

lf one looks aL Lhe valuaLlons accorded peers such
as Mesa A|r (MLSA, news, msgs), SkyWest (Sk?W,
news, msgs), and At|ant|c Coast A|r||nes (ACAl,
news, msgs) and ad[usLs for Lhe lease sLrucLure aL
each, one would flnd Mesaba worLh $16 a share
or more. lor now, lL ls [usL an llllquld sLock
knocked down by arblLrageurs rushlng for Lhe
exlLs afLer Lhe norLhwesL deal blew up. lL has yeL
Lo recover, and lL probably won'L recover wlLhln
Lhe nexL monLh. near-Lerm downslde may be as
much as 12 Lo 13, buL such downslde would
be far from permanenL.

Iourna|: Dec. 3, 2001

- Don't worry about |ndexes. Worry about your
stocks.

8race for yeL anoLher new paradlgm
Welcome Lo 8ound 7 of SLraLegy Lab. 1he sLraLegy
enLry pleces LogeLher ouLLakes from Lhe quarLerly
leLLers l wrlLe Lo Sclon CaplLal's lnvesLors

1he cumulaLlve reLurn of my plcks over Lhe
prevlous Lwo dlsconLlnuous rounds has been [usL
over 23. Cver Lhe same 14-monLh span, Lhe S&
300 ($lnx) reLurned a cumulaLlve -22, and Lhe
nasdaq ($CCMx) reLurned a cumulaLlve -38.
Whlle Lhe relaLlve performance looks respecLable,
l am noL happy wlLh Lhe absoluLe performance. lL
ls noL generally Lrue LhaL my porLfollos correlaLe
wlLh Lhe varlous lndlces anyway, and l know l
could have done beLLer wlLh my sLock plcklng
here wlLhln SLraLegy Lab. LasL round's
performance was parLlcularly harmed by my
speclal slLuaLlon alrllne and hoLel holdlngs. l wlll
aLLempL Lo do beLLer here Lhls round.

A good frlend and porLfollo manager recenLly
relaLed a conversaLlon he had wlLh a sell-slde
analysL. never ln hlsLory have we seen lnLeresL
raLe cuLs llke Lhls," Lhe analysL waxed, surely
propheLlc ln hls own mlnd, and noL seen Lhe
economy and Lhe sLock markeL recover qulckly."

My frlend's response? unless you're !apanese."

?ou never see a bubble unLll lL pops
1he sLandard argumenL agalnsL a !apan 2000
scenarlo here ln Lhe unlLed SLaLes ls LhaL we
never had Lhe real esLaLe bubble llke !apan dld.
lor us lL was [usL sLocks. Cr so Lhe sLory goes. Cf
course, mosL people don'L recognlze bubbles unLll
Lhey've bursL, whlle preclous few seem qulLe
capable of recognlzlng asseL bubbles even whlle
Lhey are sLlll lnLacL. Cood porLfollo managers -- of
whlch Lhere are preclous few, by no small
colncldence -- belong Lo Lhe laLLer camp. And
good porLfollo managers oughL reallze LhaL Lhe
u.S. real esLaLe bubble ls slmply noL yeL popped.

AnoLher sLandard argumenL agalnsL a prolonged
recesslon or depresslon ls LhaL Lhe u.S. markeLs
are freer, allowlng qulcker ad[usLmenLs. Powever,
lf by ad[usLmenLs, such pundlLs mean hurrlcane-
force layoffs, greased-llghLnlng moneLary pollcy
and Lhe greaL dlsappearlng acL LhaL ls Lhe federal
budgeL surplus, l am aL a loss. AfLer all, none of
Lhls wlll change Lhe facL LhaL Lhe economy ls
mlred ln a sea of sLranded cosLs -- courLesy of
abouL flve years of moronlc caplLal lnvesLmenL
sLraLegles. 1he counLry slmply nelLher wanLs nor
needs much more of whaL addlLlonal caplLal
lnvesLmenL mlghL produce. AfLer all, when was
Lhe lasL Llme a new compuLer acLually seemed
fasLer Lhan Lhe old compuLer?

Moreover, Lhere ls a downslde Lo a low lnLeresL
raLe pollcy ln a naLlon of ever-expandlng senlors.
1haL ls, lower raLes mean lower lncome for Lhe
growlng flxed-lncome populaLlon. Whlch means
less spendlng lf noL crlsls ln cerLaln quarLers.
unllke sLlmulaLlon of caplLal lnvesLmenL, Lhls
consequence of lower lnLeresL raLes ls boLh
cerLaln Lo occur and generally lgnored. l have
already had several of my own lnvesLors lnqulre
as Lo sources of hlgher yleld.

1he yleld chase
1he need for yleld has been apparenL ln Lhe new
lssue bond markeLs of laLe. 1he Iord (l, news,
msgs) deal was doubled ln slze even as lord made
lL clear LhaL Lhe company would be lendlng ouL aL
0 LhaL whlch lL borrows. SLocks don'L pay
dlvldends anymore, savlngs and money markeL
accounLs yleld Loo llLLle. 1he remalnlng opLlon ls
bonds. 1o Lhe degree Lhe need for yleld resulLs ln
a mass panlc for yleld, however, Lhe
consequences wlll be dlre. Whlle earnlngs ylelds
on equlLles are commonly mlsprlced, bond ylelds
are much less commonly mlsprlced. So whaL ls my
recommendaLlon Lo Lhose who approach me ln
search of hlgher ylelds? CaveaL empLor. ln oLher
words, work hard noL Lo be seduced when a Loo-
good-Lo-be-Lrue hlgher yleld lnvesLmenL comes
along.

Moreover, should deflaLlon become a facLor, Lhe
Lremendous debL burden under whlch many u.S.
companles and consumers operaLe wlll become
much more of a burden, even as consumers hold
off on consumpLlon as Lhey walL for lower prlces.

aradlgms are conLlnually Lurned upon Lhelr
heads. 1hls how Lhe unlLed SLaLes as a counLry
progresses. We oughL brace for yeL anoLher new
paradlgm -- one LhaL few lf any pundlLs lncludlng
me -- can predlcL. 8egardless of whaL Lhe fuLure
holds, lnLelllgenL lnvesLmenL ln common sLocks
offer a solld rouLe for a reasonable reLurn on
lnvesLmenL golng forward. When l say Lhls, l do
noL mean LhaL Lhe S& 300, Lhe nasdaq
ComposlLe or Lhe markeL broadly deflned wlll
necessarlly do well. ln facL, l leave Lhe dogma on
markeL dlrecLlon Lo oLhers. WhaL l raLher expecL
ls LhaL Lhe ouL-of-favor and someLlmes obscure
common sLock slLuaLlons ln whlch l choose Lo
lnvesL oughL Lo do well. 1hey wlll noL generally
Lrack Lhe markeL, buL l vlew Lhls as a favorable
characLerlsLlc.

Iourna|: Dec. 14, 2001

- Don't worry about m|ss|ng a ra||y. Worry
about |os|ng your money.

Why l'm all cash - for now
Cash seems qulLe conservaLlve, qulLe borlng. ?eL
Lhe Lyplcal professlonal lnvesLor flnds cash a llLLle
Loo hoL Lo handle, and Lherefore hlgh cash
balances become Lhe Loo-frequenL prelude Lo
forced lnvesLmenLs and poor resulLs. As Lhls
round sLarLed, Lhe markeL roared ahead before
mosL of us SLraLegy Lab players had acqualnLed
ourselves. lndeed, Lhe markeL was [usL conLlnulng
a masslve rally from SepLember lows. And Lhen
Lhere we were, each wlLh $100,000 cash. AbsenL
Lhe ablllLy Lo shorL or use opLlons, l chose, as a
sLraLeglc declslon, noL Lo lnvesL Lhe cash, and l
conLlnue Lo choose noL Lo lnvesL Lhe cash. 1hls ls
by no means a permanenL declslon.

conLlnue Lo avold forecasLlng elLher markeL or
economlc dlrecLlon. 8aLher, l slmply aLLempL Lo
keep boLh eyes and mlnd open Lo Lhe lnpuLs LhaL
lnfluence Lhe prevalllng markeL envlronmenL. l
use any resulLlng lnslghLs Lo help LargeL areas of
poLenLlally lucraLlve lnvesLmenL. CurrenLly, l am
flndlng mosL opporLunlLy ln lnvesLmenLs LhaL
would noL be approprlaLe for posLlng here ln
SLraLegy Lab. 8elow, l descrlbe my vlew of Lhe
currenL lnvesLlng envlronmenL.

1he equlLy eLhlc conLlnues Lo clrcumscrlbe
Amerlcan lnvesLmenL phllosophy. 1haL ls,
Amerlca's LasLe for sLocks ls noL yeL dlmlnlshed,
and Lremendous cash llquldlLy exlsLs, ready Lo
race Lo Lhe nexL hoL or quallLy or safe secLor. ?eL
some baslcs of lnvesLlng go unhlndered, noL Lhe
leasL of whlch ls valuaLlon.

When l speak of overvaluaLlon, l do noL refer Lo
aggregaLe prlce-Lo-earnlngs raLlos. 8aLher, l
survey common sLocks across all markeL
caplLallzaLlon ranges and flnd LhaL Lhe markeL
conLlnues Lo flnd lgnorance bllss. 1haL ls, off-
balance sheeL and off-lncome sLaLemenL lLems
are lgnored even as complex pro forma
accounLlng obscures on-balance sheeL and on-
lncome sLaLemenL lLems. lnslder relaLed-parLy
deallngs, desplcable corporaLe governance and
oLher such lssues conLlnue Lo Lake a back seaL Lo
an lnLense focus on expecLed growLh raLes. Creed
conLlnues Lo conquer fear.

uon'L Lry Lo dlg your way ouL
A key phenomenon drlvlng Lhe recenL sLock
markeL advance ls Lhe need for so many fund
managers Lo caLch up. Pavlng had dlscouraglng
years Lhrough Lhe end of SepLember, many
professlonal lnvesLors Look on lncreased rlsk ln
order Lo dlg Lhemselves ouL of a hole. l warned
agalnsL Lhls Lendency durlng Lhe lasL SLraLegy Lab
round. 1he maLh of lnvesLlng requlres a 30 galn
Lo wlpe ouL a 33 loss, and Lhe only caLch-up Lool
mosL professlonal lnvesLors have aL Lhelr dlsposal
ls Lo Lake on lncreased rlsk.

Moreover, Lhe year-end represenLs a nall-blLlng
flnlsh Lo a very grand one-year performance
derby. 1he wlnners of Lhe derby reap masslve
rewards. lor mosL, mlsslng a year-end rally would
be faLal Lo such asplraLlons. Pence, [usL as
happened Lwlce earller Lhls year, Wall SLreeL has
cllmbed Lhe wrong wall of fear, Lhe common fear
has been of mlsslng Lhe nexL bull markeL, noL of
furLher sLock markeL losses. lundamenLal
valuaLlons have been casL aslde ln Lhe scramble.
And once agaln, ln Lhe shorL run, mob rules.

Cne argumenL LhaL has been used Lo sell and Lo
susLaln Lhls rally as Lhe real Lhlng ls Lhe ldea LhaL
Lhe sLock markeL rallles 23 or so 4-6 monLhs ln
advance of an economlc recovery. 1herefore, as a
rally reaches Lhose proporLlons, predlcLlons of a
recovery 4-6 monLhs ouL become ever more
confldenL and full of blusLer. ?eL, Lo borrow a
phraslng, Lhe markeL has predlcLed Lwo of Lhe lasL
zero economlc recoverles ln 2001 alone! Clrcular
loglc remalns an oxymoron.

Cf course, even lf we have economlc sLablllzaLlon
or recovery, lL would be wrong Lo assume LhaL
Lhls would be a boon for sLocks ln general.
lndeed, for mosL lnvesLors, lL would be beLLer Lo
waLch lnLeresL raLes. lnLeresL raLe changes
become more slgnlflcanL ln sLock valuaLlon when
valuaLlons are very hlgh. 1haL ls, lnvesLmenL ln a
sLock wlLh a prlce/cash earnlngs mulLlple of 23
wlll be much more senslLlve Lo lnLeresL raLes Lhan
lnvesLmenL ln a sLock wlLh a prlce/cash earnlngs
mulLlple of 3. 8lslng raLes palred Lo a rlchly valued
sLock markeL oughL noL resulL ln a slgnlflcanL new
bull markeL, desplLe an expandlng economy. 1o
puL Lhls ln oLher Lerms, mosL wldely held sLocks
have already (over)prlced ln a subsLanLlal
economlc and earnlngs recovery - even as Lhey slL
far below Lhelr hlghs of yesLeryear.

ConLrary Lo Lhe somewhaL absurd noLlon LhaL all
we have Lo really fear ls mlsslng a rally, l Lruly only
fear permanenL and absoluLe caplLal loss. Cver
Lhe course of Lhls round, l wlll place my
lnvesLmenLs as very good opporLunlLles arlse.




Iourna|: Dec. 28, 2001

- Short 100 shares of Magma Des|gn
Automat|on (LAVA, news, msgs) at 529.S0 or
h|gher.

Magma ls one of a handful of companles LhaL
supply Lhe semlconducLor lndusLry wlLh Lhe
sofLware Lo deslgn semlconducLor chlps. 1wo
oLher 2001 lCs ln Lhls lndusLry have performed
decenLly.

Magma also has Lhe meLeorlc prlce rlse, up over
120 from lLs offerlng prlce. 1he sLock has
broken free from any raLlonal valuaLlon and now
seems Lo go up slmply because lL ls golng up. And
Lhe offerlng prlce of $13 was a heck of a sLreLch
ln Lhe flrsL place.

1rue Lo lLs herlLage, Magma's appeal suffers
when one peeks under Lhe hood. Pere are Lhe
baslcs, culled from Lhe company's own
prospecLus, news coverage and my own due
dlllgence, lncludlng conversaLlons wlLh Lop
managemenL and lnslders ln Lhe lndusLry.

1he company ls noL proflLable. ln facL, lL has been
loslng Lens of mllllons of dollars a year. Larller
Lhls year, Magma lald off a slgnlflcanL porLlon of
lLs workforce even as several of lLs compeLlLors
were dolng very good, even record, buslness.

Also earller Lhls year, afLer flllng ln May for a
publlc offerlng, Lhe company found lLself Lhe
sub[ecL of lnLense crlLlclsm as lndusLry pundlLs
noLed LhaL Lhe flllng revealed Magma's
precarlous flnanclal poslLlon. 1he flllng also
helped heave doubL on Lhe veraclLy of Magma's
prlor clalms as Lo Lhe slze of lLs backlog and
markeL share. 1hls followed reporLs LhaL Magma
had been acLlvely shopplng lLself Lo lLs four
blggesL compeLlLors ln Lhe elecLronlc deslgn
auLomaLlon lndusLry and LhaL all had sald no
qulLe qulckly. 1he lC was Lhus delayed.

1he delay creaLed sLress on Lhe cash-hungry
buslness, and ln AugusL Magma requlred a brldge
loan of $23 mllllon for worklng caplLal. 1he
lnLeresLlng Lerms of Lhls loan lncluded glvlng Lhe
credlLor Lhe rlghL Lo converL Lhe loan lnLo sLock aL
67 of Lhe lC offerlng prlce. lndeed, Lhls ls whaL
ended up happenlng, as Magma wenL publlc amld
renewed lnvesLor appeLlLe for rlsk on nov. 20.

rlmplng for Lhe publlc
WhaL dld Magma lLself do Lo spruce up for lLs
debuL? lenLy, lLs flllngs show, and lL ls noL preLLy.
llrsL, sLarLlng ln Aprll, Magma lmposed on lLs
sales sLaff new rules: Commlsslons would no
longer be pald upon Lhe lnlLlal sale, buL raLher
would be pald ln lnsLallmenLs over Llme. 8y
spreadlng ouL Lhe commlsslons expense, Magma
delays cash ouLflows as well as near-Lerm
expenses.

Whlle Magma acLed Lo make expenses appear
less Lhan Lhey really are, lL also acLed Lo make
revenues appear greaLer Lhan Lhey really are.
uurlng Lhe quarLer endlng SepL. 30, Lhe company
changed lLs sales model Lo emphaslze perpeLual
sales over subscrlpLlon sales. 1hls has Lhe effecL
of allowlng greaLer revenue recognlLlon ln Lhe
near Lerm aL expense of revenue recognlLlon
down Lhe road.

1he neL resulL of Lhese Lwo acLlons was Lo delay
shorL-run expenses whlle boosLlng shorL-run
revenue. 1he company also acLed Lo beauLlfy Lhe
cash-flow sLaLemenL, reduclng Lhe caplLal
expendlLure run-raLe Lo less Lhan 30 of
hlsLorlcal levels.

All Lhls should glve lnvesLors pause. Clearly, Lhe
lasL Lhlng lnvesLors need ls yeL anoLher
managemenL Leam wlLh Lendencles Loward
aggresslve accounLlng. And lnvesLors oughL keep
ln mlnd Lhe reason for all Lhese maneuvers was
Lo look good enough Lo pawn Lhe company off on
Lhe publlc aL an lC prlce LhaL values Lhe
company aL roughly $373 mllllon. Magma
dlscloses LhaL Lhe small porLlon of Lhls LhaL goes
Lo company coffers allows only abouL 12 monLhs
of operaLlons aL currenL levels.

Cver Lhe nexL 12 monLhs, oLher lssues wlll arlse.
Magma speclallzes ln an area of elecLronlc deslgn
auLomaLlon LhaL has hlsLorlcally been Lhe lalr of
embaLLled Avant! (Avn1, news, msgs). ln facL,
Magma has beneflLed from AvanL!'s legal
Lroubles wlLh lndusLry leader Cadence Des|gn
Systems (Cun, news, msgs) and from Lhe
assoclaLed markeLlng headwlnd LhaL AvanL! faces.
AfLer Magma's lC, lL was announced LhaL Lhe
wldely respecLed Synopsys (SnS, news, msgs) ls
acqulrlng AvanL!. 1he resulLanL Synopsys/AvanL!
comblnaLlon ls golng Lo be a powerful one for
several reasons LhaL l wlll noL deLall here. 1he neL
effecL on Magma, however, ls LhaL one of
Magma's reasons for belng has been severely
weakened even as Lhe resources of lLs largesL
compeLlLors [usL doubled aL mlnlmum.

An exlL for early lnvesLors
As well, of Lhe nearly 30 mllllon shares
ouLsLandlng, some 24 mllllon or so wlll come ouL
of lock-up durlng Lhe flrsL half of 2002. 1he hlgh
percenLage of shares ln Lhe hands of pre-lC
lnvesLors ls reflecLlve of Lhe Lremendous venLure
caplLal supporL Lhls company requlred, and
wlLhouL a doubL one key reason for Lhls lC was
Lo provlde an exlL for early lnvesLors. ln Llme, Lhls
wlll brlng selllng pressure even as lL mulLlplles Lhe
floaL avallable Lo buyers. Lnglneerlng Llny floaLs
was a key Lool ln achlevlng rapld run-ups of lCs
durlng 1999.

ln Lhe shorL run, l also expecL LhaL Lhe effecLlve
floaL has been made Lemporarlly even smaller, as
purchasers over Lhe lasL monLh nearly all have
galns, and a good porLlon may be unwllllng Lo
reallze Lhose Laxable galns before year-end. lL ls
posslble LhaL early !anuary could see some of
Lhose buyers move Lo lock ln Lhese galns.

1he Lhree maln underwrlLers of Magma's lC
have had Lhelr research arms come ouL wlLh
Lhoroughly unlmpresslve '8uy' raLlngs on Lhe
sLock. CLher aspecLs Lo conslder lnclude LhaL
shorL coverlng may be drlvlng a good parL of Lhe
recenL rally. 1here ls also speculaLlon LhaL
Cadence mlghL be forced Lo acqulre Magma ln
response Lo Lhe Synopsys/AvanL! comblnaLlon.
1hls ls hard Lo lmaglne aL Magma's currenL
valuaLlon, however.

l saved Lhe valuaLlon for lasL. lL wlll be hard Lo nall
Lhe prlce of Lhls securlLy one day ln advance. ln
Lhe lasL half hour or so, Lhe sLock has rlsen
anoLher 7 or so and appears ready Lo crack $30
a share.

valuaLlon ls ouL of whack
valuaLlon ls a blL dlfflculL for oLher reasons. AfLer
all, lL has Lhe requlslLe 1999-era quallLy of
masslve cash losses palred Lo no reasonable
expecLaLlon for acLual proflL ln Lhe foreseeable
fuLure. SLlll, l'll Lake a shoL. AL $30 a share,
Magma approaches a $900 mllllon markeL
caplLallzaLlon. 1haL represenLs abouL 36 Llmes lLs
(lnflaLed) Lralllng revenues, alLhough l'm belng a
blL overpreclse here ln asslgnlng more Lhan one
slgnlflcanL dlglL Lo elLher Lhls volaLlle sLock or Lhe
uncerLaln buslness underlylng lL. lLs sLrongesL
comparables across all markeL caps Lrade for
beLween 3 and 6 Llmes revenue - and are
generally plenLy proflLable.

We also can look Lo a recenL deal Lo help clarlfy
valuaLlon. Synopsys ls paylng an all-Lhlngs-
consldered prlce of abouL 3 Llmes revenues for
AvanL!, whlch generaLes Lremendous free cash
flow and has Lhe besL marglns ln Lhe buslness.

8eallze LhaL Lhls lC occurred for Lwo maln
reasons: Lo provlde an exlL for venLure lnvesLors
and Lo provlde cash Lo allow Magma Lo survlve a
blL longer. My feellng ls LhaL lnslders would sell
llke mad aL $30 a share lf Lhey could. As SLraLegy
Lab [usL loosened Lhe rules Lo allow shorLlng, l wlll
shorL 100 shares of Magma aL $29.30 llmlL, good
unLll canceled



Iourna|: Ieb. 8, 2002

- 8uy 800 shares of L|an (LLN, news, msgs) at
512.70 or |ower.

- 8uy 200 shares of k|ndred nea|thcare (kIND,
news, msgs) at 536.2S or |ower.

- 8uy 1,000 shares of Industr|as 8achoco (I8A,
news, msgs) at 58.S0 or |ower.

- Short 400 shares of Magma Des|gn
Automat|on (LAVA, news, msgs) at 52S.00 or
h|gher.

Amld 'LnronlLls' scare, Lhree 8uys and one ShorL
1hose of you LhaL have been readlng my [ournal
enLrles here for a whlle know LhaL l've been a
falrly vehemenL crlLlc of accounLlng shenanlgans.
ln Lhe pasL, l've whacked C|sco Systems (CSCC,
news, msgs) over Lhe head, dlssed Wor|dCom
(WCCM, news, msgs), and l've had a few cholce
words ln general for Lhe way Lhe professlonal
sLock markeL works Lo Lake advanLage of Lhe
amaLeur sLock markeL

l of course sLlll belleve LhaL companles, ln Lhe
long run, wlll noL be able Lo fool anyone. LlLher
value ls creaLed, or lL ls noL, and Lhe share prlce
ulLlmaLely reflecLs Lhls. SomeLlmes, and maybe
even mosL of Lhe Llme, a company LhaL has been
lnvolved ln scandal wlll be overly punlshed ln Lhe
markeLplace. WhaL's more, as long as Lhe
company has Lhe cash flow and Lhe balance sheeL
such LhaL lL does noL need access Lo caplLal
markeLs, and as long as lLs cusLomers don'L care
abouL Lhe sLock prlce, a company can have a very
decenL shoL aL long-Lerm redempLlon.

1he real Llan
1ake L|an (LLn, news, msgs). 1hls ls a real
company. 8eal shenanlgans. 8eal debL. 8eal cash
and real cash flow. 8eal drugs. 8eal plpellne. 8eal
cusLomers. 8eal value. urug companles don'L
generally Lrade Lo 9-10 free cash flow ylelds.
8emember folks, Lhls ls Lhe pharmaceuLlcal
lndusLry.

1here are plenLy of sLraLeglc buyers for Llan, and
now lL has fallen Lo a flnanclal buyer's prlce
range. Such clrcumsLances usually don'L lasL long.
LLhlcally-LalnLed, scandal-plagued companles
Lradlng aL real flnanclal buyer mulLlples ln an
lndusLry full of poLenLlal sLraLeglc buyers -- well,
such slLuaLlons usually deserve anoLher look.

klndred's splrlL
k|ndred nea|thcare (klnu, news, msgs), a nurslng
home and long-Lerm acuLe care operaLor,
emerged from bankrupLcy early lasL year. very
few are waLchlng Lhls as lL drlfLs lower over
worrles LhaL Lwo key pleces of leglslaLlon
beneflLlng Medlcare revenues wlll essenLlally be
reversed. l won'L geL lnLo Lhe speclflcs, buL only
half of whaL ls feared mlghL acLually come Lrue.
1he oLher half ls 30-30, buL for once l'm rooLlng
for 1om uaschle.

1hls Loo ls Lradlng down aL a roughly double-dlglL
free cash flow yleld, and has a neL cash poslLlon.
1he downslde ln Lhe evenL of a bad leglslaLlve
ouLcome ls maybe a 20 fall from currenL levels,
and maybe even [usL sLablllzaLlon aL currenL
levels. 1he upslde Lo a good leglslaLlve ouLcome ls
a near doubllng of Lhe share prlce from here.

oulLry proflLs
Industr|as 8achoco (l8A, news, msgs) ls a
Mexlcan chlcken producLs producer. no. 1 ln Lhe
counLry, Lradlng aL abouL a 20 free cash flow
yleld and aL half book value. LnLerprlse
value/L8l1uA mulLlple ls [usL over 2.3x. Lconomlc
Lrends vary, buL Lhls company has been around
for Lhe lasL 30 years, and ln Lhe lasL several years
lL pald off, ouL of free cash flow, an acqulslLlon of
Lhe no. 4 player ln Lhe lndusLry.

nos. 2 and 3 ln Lhe lndusLry are assoclaLed wlLh
||gr|m's r|de (CPx, news, msgs) and1yson (1Sn,
news, msgs). l admlL -- Lhls ls noL a greaL buslness.
Maybe [usL worLh book value. Ck, double Lhe
share prlce and glve me book for my shares.

unlocklng shorL value
llnally, lf Magma Des|gn Automat|on (LAvA,
news, msgs) ever geLs near 23 agaln, shorL Lhe
heck ouL of lL. l belleve l've already provlded my
raLlonale. ln llghL of Lhelr earnlngs announcemenL
reporLlng a one penny per share proflL, lnvesLors
should [usL reallze LhaL Lhe company booked a
falrly slgnlflcanL perpeLual llcense order laLe ln
Lhe quarLer. 1hey dlsclosed Lhls on Lhe
conference call. erpeLual orders allow for
slgnlflcanL revenue recognlLlon up fronL, as
opposed Lo revenue from Llme-based llcenses,
whlch are recognlzed raLably over Llme.

Also, we should reallze LhaL durlng Lhe
conference call managemenL dld noL descrlbe Lhe
non-cash sLock compensaLlon charges as non-
recurrlng, buL excludes Lhem from lLs pro-forma
proflL calculaLlon anyway. ManagemenL dld say lL
was hopeful" LhaL Lhese charges would
evenLually decllne.

Lock-up explraLlon ls [usL a few shorL monLhs
away, and Lhen we flnd ouL whaL all Lhe lnslders
really feel Lhe sLock ls worLh

Iourna|: Ieb. 1S, 2002

- |ace order to buy 200 shares of keuters
Group (k1kS, news, msgs) at 546 or |ower.

- |ace order to buy 1,000 shares of Nat|ona|
Serv|ce Industr|es (NSI, news, msgs) at 56.7S or
|ower.

- 8uy an add|t|ona| 200 shares of L|an (LLN,
news, msgs) at 513.2S or |ower.

- Change prev|ous order to short Magma Des|gn
Automat|on (LAVA, news, msgs) to 300 shares at
522.S0 or h|gher.

1wo sLocks LhaL look cheap
Comlng up on Lhe deadllne, so l'll make Lhls
qulck. keuters Group (818S?, news, msgs) looks
cheap. A cash-flow machlne wlLh slgnlflcanL
brand equlLy and a solld balance sheeL, Lhe
buslness ls ln Lhe mldsL of a Lurnaround aL Lhe
hands of a new Amerlcan-for-Lhe-flrsL-Llme CLC.
1he company owns slzable sLakes ln Inst|net
(lnL1, news, msgs) and 1|bco (1l8x, news, msgs),
and lL has a slgnlflcanL venLure porLfollo. lL
recenLly boughL 8rldge lnformaLlon SysLems
asseLs ouL of bankrupLcy. 8uy 200 shares aL $46
or lower

Nat|ona| Serv|ce Industr|es (nSl, news, msgs) ls a
clgar buLL Lradlng aL a deep dlscounL Lo Langlble
book. 1he reason: asbesLos. 1he company has
also been Lhe sub[ecL of a recenL resLrucLurlng
and reverse sLock spllL. none of Lhls looks very
appeLlzlng Lo nearly any lnsLlLuLlon, and so Lhe
shares have been geLLlng dumped laLely. lL Lakes
some work Lo undersLand Lhe Lrue earnlngs
power of Lhe buslness, noL Lo menLlon Lhe
asbesLos llablllLy. AfLer dolng Lhls work, l've
concluded Lhe sLock should be Lradlng aL levels aL
leasL Lwlce Lhe currenL level based on a varleLy of
measures. 8uy 1,000 shares aL $6.73 or lower.

Also, revlewlng prlor plcks, buy anoLher 200
shares of L|an (LLn, news, msgs) aL $13.23 or
lower, and change my order on Magma Des|gn
Automat|on (LAvA, news, msgs) Lo shorL 300
shares aL $22.30 or hlgher.


Iourna|: Ieb. 18, 2002

- Se|| pos|t|on |n L|an (LLN, news, msgs) at the
market and cance| a|| outstand|ng trades.

- Change prev|ous order to short Magma Des|gn
Automat|on (LAVA, news, msgs) to 400 shares at
522 or h|gher.

- Change prev|ous order to buy Nat|ona| Serv|ce
Industr|es (NSI, news, msgs) to 1,S00 shares at
56.8S or |ower.


Whoops. Llan doesn'L look so hoL
1lme for a mea culpa. l am selllng Lhe enLlre L|an
(LLn, news, msgs) poslLlon aL markeL and wlll
cancel all ouLsLandlng orders regardlng Lhls
securlLy. 1he accounLlng here ls preLLy Lrlcky, as
Lhe world knows, and lL Lakes some creaLlvlLy on
Lhe analysL's slde Lo lnLerpreL Lhe numbers
presenLed. l belleve l made several errors ln
[udglng Lhe safeLy of Lhls common sLock
lnvesLmenL, and so l wlll unload Lhe poslLlon.

AfLer furLher revlew of hlsLorlcal flllngs and afLer
dlscusslng my concerns wlLh Lhe company, l feel
Lhe neL lssue here ls LhaL Lhe company has puL
lLself ln a more precarlous flnanclal poslLlon Lhan
was prudenL. lL has leveraged lLself ln order Lo
ramp lLs plpellne as fasL as posslble, and has been
caplLallzlng much of Lhe expense of dolng so. l
flnd lL very dlfflculL Lo fooL Lhe valuaLlon from a
flnanclal buyer's perspecLlve. ln my world, lL ls
prlmarlly Lhe flnanclal buyer's perspecLlve LhaL ls
meanlngful, even lf Lhe sLraLeglc value Lo a
corporaLe buyer mlghL be somewhaL hlgher.

WlLh LhaL lead-ln, l'll emphaslze LhaL common
sLock ls Lhe mosL precarlous porLlon of Lhe
varlous layers of caplLal sLrucLure. ln a bankrupLcy
precedlng, lL ls mosL llkely LhaL Lhe common sLock
ls canceled alLogeLher. 1herefore when assesslng
Lhe safeLy of a common sLock lnvesLmenL, one
musL also evaluaLe Lhe probablllLy of bankrupLcy
aL some polnL ln Lhe fuLure.

1he slmplesL way Lo look Lhls ls Lo examlne caplLal
flows. lf a company does noL earn lLs cosL of
caplLal, Lhen lL wlll have Lo access caplLal markeLs
perlodlcally. lf Lhe hope of earnlng lLs cosL of
caplLal ls percelved Lo be fadlng, Lhe caplLal
markeLs wlll become less accesslble for Lhe
company. ln such cases, bankrupLcy wlll ensue,
wlLh Lhe assoclaLed desLrucLlon of sLockholders'
equlLy.

ln Lhe lnLeresL of noL wasLlng some prevlous
plcks, l'll change some Lrades so LhaL Lhey are
more llkely Lo geL execuLed falrly soon here ln
SLraLegy Lab. Nat|ona| Serv|ce Industr|es (nSl,
news, msgs) -- change Lhe order Lo buy 1,300
shares aL 6.83 or lower. Magma Des|gn
Automat|on (LAvA, news, msgs) -- change Lhe
order Lo shorL 400 shares aL 22 or hlgher.

Iourna|: Ieb. 21, 2002

- |ace order to buy 100 shares of keuters
(k1kS, news, msgs) at 542, good unt|| cance|ed.

- |ace order to buy 100 shares of keuters
(k1kS, news, msgs) at 540, good unt|| cance|ed.

- |ace order to buy 100 shares of keuters
(k1kS, news, msgs) at 538, good unt|| cance|ed.

- Change my order for Nat|ona| Serv|ce
Industr|es (NSI, news, msgs) to buy 1,000 shares
at 57 or |ower, good unt|| cance|ed.

- |ace order to buy 200 shares of Canad|an
Natura| kesources (CLD, news, msgs) at 526.7S
||m|t, good unt|| cance|ed.

Magma sLlll has room Lo fall
Slnce l shorLed Magma Des|gn Automat|on
(LAvA, news, msgs) common, Lhe sLock ls down
conslderably. l do noL feel Lhe need Lo cover Lhe
poslLlon aL recenL prlces. 1he company recenLly
flled lLs form 10 wlLh Lhe SLC. 1hls flllng reveals,
as l suspecLed, LhaL Lhe company ls noL showlng a
cash proflL ln llne wlLh lLs pro forma proflL clalm.
8aLher, Lhe company conLlnues Lo produce
negaLlve operaLlng cash flow. 1he flllng also
reveals an lnLeresLlng relaLlonshlp wlLh a large
cusLomer LhaL recelved 100,000 Magma opLlons
ln november ln exchange for 'advlsory servlces.' l
am aLLempLlng Lo clarlfy LhaL relaLlonshlp, as well
as several sLock repurchase agreemenLs Magma
has wlLh lLs founders. 1hese, Loo, were dlsclosed
ln Lhe 10C. Any lndlvldual who ls long or shorL
Lhe sLock oughL Lo be looklng aL Lhese Lhlngs -- all
Lhe dlsclosure ln Lhe world wlll noL help Lhose
who do noL read Lhe flllngs. ln any evenL, Lhe
sLock ls noL worLh even double dlglLs, so l wlll noL
cover here ln Lhe hlgh Leens. l expecL anoLher
30 galn or so from recenL levels, posslbly even
durlng Lhls SLraLegy Lab round

keuters (818S?, news, msgs) sLock has been ln a
free fall. 1he value ls hlgher Lhan Lhe currenL
prlce by a large degree, however, and Lherefore
falllng prlces are beneflclal. 1he company
produces a prodlglous amounL of free cash flow --
my esLlmaLes are LhaL Lhe recenL share prlce wlll
reflecL less 10 free cash flow ylelds durlng 2002
and less Lhan 12 ln 2003. lor Lhese esLlmaLes, l
assume Lop-llne growLh wlll be flaL ln Lhe face of
a slugglsh world economy. 1he shareholder base
ls llkely Lurnlng over as we speak - overanxlous
growLh lnvesLors selllng Lo paLlenL value-orlenLed
lnvesLors. Several oLher facLors are conLrlbuLlng
Lo Lhe depressed share prlce, buL none
conLrlbuLes more Lo Lhe low valuaLlon Lhan Lhe
myoplc vlews of lnvesLors ln general. l should
noLe LhaL Lhls ls a very volaLlle sLock, so l have no
llluslon LhaL l've found Lhe near-Lerm boLLom
here. ln Lhe evenL LhaL l'm noL waLchlng closely
when lL happens, place an order Lo buy anoLher
100 shares aL $42, an order Lo buy anoLher 100
shares aL $40, and an order Lo buy anoLher 100
shares aL $38, all good unLll canceled. l do noL
necessarlly expecL LhaL Lhls poslLlon wlll recover
before Lhe end of Lhe round.

Nat|ona| Serv|ce Industr|es (nSl, news, msgs)
keeps squlrLlng hlgher. l won'L pay more Lhan $7
per share, and l wlll change my order Lo [usL LhaL:
buy 1,000 shares aL 7 or lower, good unLll
canceled. Maybe one of Lhese days l'll geL some
ln Lhe porLfollo here. l'm expecLlng a horrlble
quarLerly reporL, so maybe LhaL wlll do lL.

Canad|an Natura| kesources (CLu, news, msgs) ls
a borlng favorlLe of mlne. Cne of Lhe largesL
Canadlan exploraLlon and producLlon companles,
wlLh among Lhe besL reLurns on lnvesLed caplLal
ln Lhe secLor, Canadlan naLural has Lhus far
mlssed ouL on Lhe mergers and acqulslLlons blnge
lnvolvlng norLh Amerlcan exploraLlon and
producLlon companles. 1he recenL acqulslLlon of
Canada's AlberLa Lnergy glves anoLher decenL
comp for valuaLlon purposes. All slgns polnL Lo
Canadlan naLural belng worLh over $33 share,
alLhough lL mlghL be as much predaLor as prey. lL
ls relaLlvely llllquld for such a blg markeL
caplLallzaLlon, so l'll seL a low llmlL prlce ln hopes
of Laklng advanLage of Lhe volaLlllLy. 8uy 200
shares aL $26.73 llmlL, good unLll canceled.

Iourna|: Ieb. 2S, 2002

- |ace order to buy an add|t|ona| 2S0 shares of
Industr|as 8achoco (I8A, news, msgs) at 9 or
|ower.

- Cover short pos|t|on |n Magma Des|gn
Automat|on (LAVA, news, msgs) at 9 or |ower.

- Cance| outstand|ng orders |n keuters (k1kS,
news, msgs).
laylng chlcken
Industr|as 8achoco (l8A, news, msgs), a currenL
porLfollo holdlng, Look a hlL lrlday as lL released
earnlngs. Powever, Lhe valuaLlon remalns very
compelllng.

1he markeL caplLallzaLlon of Lhe sLock ls $430
mllllon as l wrlLe Lhls. 1he company has [usL $33
mllllon ln debL palred Lo $128 mllllon ln cash, for
an enLerprlse value of $333 mllllon. Larnlngs
before lnLeresL, Laxes, depreclaLlon and
amorLlzaLlon (L8l1uA) was $143 mllllon durlng
2001. lree cash flow was $100 mllllon. 1he
Lralllng enLerprlse value: L8l1uA raLlo ls Lherefore
2.43, and Lhe free cash flow yleld ls 22. 1he
company conLlnues Lo Lrade aL [usL over half book
value, and lL pald a dlvldend durlng 2001
amounLlng Lo 7.7. 1he prlce/earnlngs raLlo ls
[usL under 4. All Lhese numbers are noL so bad aL
all, especlally when one conslders LhaL 2001 was
a dlfflculL year for Lhe lndusLry, as Lhe economy
sofLened along wlLh prlclng. ln all probablllLy, Lhe
sell-off occurred because of Lhe recenL run-up -- a
sell-on-Lhe-news phenomenon.

As l noLed before, Lhe company ls Lhe leadlng
producer of poulLry producLs ln Mexlco, where
chlcken ls Lhe no. 1 meaL. ||gr|m's r|de (CPx,
news, msgs) and 1yson Ioods (1Sn, news, msgs)
lag 8achoco ln Mexlco, where fresh chlcken
producLs are much more broadly accepLed Lhan
processed chlcken producLs. 8achoco, havlng
been ln Lhe Mexlcan chlcken buslness for
decades, has a naLural advanLage LhaL can be
explolLed lf Lhe company ls run well, and lL does
seem Lo be run well. 8egardless of Lhe recenL
run-up ln Lhe share prlce, l conLlnue Lo LargeL a
$13 or greaLer share prlce for 8achoco. As Llme
goes by, shareholders equlLy wlll conLlnue Lo
grow and dlvldends wlll be pald. 1hls should be a
solld LoLal reLurn lnvesLmenL. l'm noL asklng for
an exLravaganL valuaLlon, 8-9 Llmes earnlngs and
par wlLh book value would provlde Lremendous
prlce appreclaLlon from Lhe currenL level,
especlally when palred wlLh Lhe dlvldend. lf lL falls
Lo 9 or lower, buy anoLher 230 shares.

8egardlng Magma Des|gn Automat|on (LAvA,
news, msgs), Lhe poslLlon ls worklng ouL preLLy
well - a roughly 30 galn on Lhls Loo-small shorL
poslLlon. !usL ln case lL has a mldday melLdown
followed by some shorL-coverlng, l'll enLer an
order Lo cover Lhe enLlre poslLlon aL 9 or lower.
Sounds rldlculous Lo enLer such an order, buL
whlle l dld noL expecL Lhe sLock Lo fall as fasL as lL
dld, l do noL see any reason LhaL Lhe sLock doesn'L
crash Lhe $10 level soon as well. Any rallles ln Lhls
sLock are llkely Lo be shorL-coverlng rallles as
shorLs lock ln Lhelr qulck galns.