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Time for another fund pick. I purchased the Fairholme Fund earlier this month. There’s a $2500 minimum and also an automatic investing option, which you all know I love. It’s so easy to just set up recurring deposits into your fund and watch your money grow. What I love about this fund is their investment theory mirroring that of the world’s best investors - Benjamin Graham, Warren Buffet, et al. This buy-and-hold strategy has been proven time and time again as the best way to maximize returns while minimizing risk.

The Fairholme Fund is a classic long-term value-oriented play. The managers invest in underappreciated assets of good companies that have long-term growth potential. Don’t expect any quick dot-com buy-ins here. Just like Warren Buffet ignored the entire dot-com era, the managers of Fairholme won’t buy into anything based on simply speculation, momentum, or solely growth. Investing in undervalued companies with a long-term outlook reduces volatility - which is great in a market like today. Bruce Berkowitz, the fund’s manager since inception in 1999, when on record several years ago with this quote:

I think our philosophy makes a lot of sense. We’re doing nothing more than what the wealthiest individuals in the world have done. We act like owners. We focus on very few companies. We try and know what you can know. We try and only buy a few companies which we believe have been built to last in all environments. We recognize that you only need a few good ideas in a lifetime to be fabulously wealthy…. We’re always trying to wonder what can go wrong. We’re very focused on the downside.

Berkowitz runs a tight shop. Over 70% of the fund’s assets are in only 10 companies. It’s non diversified - meaning they don’t try and offset risk with some diversification and asset allocation methods. Expert investors can invest non diversified - this is not for the average Joe trying to make it to next week. Berkowitz feels that diversifying your portfolio brings you closer to average returns, which is not what the Fund is pushing for. Instead, he simply refuses to lose money. Sounds like a great motto. In fact in interviews with him in the last eight years, he’s made references to the fact that his only mistakes he’s made were selling a position way too early or too late, but never by buying something that didn’t return positively. It’s actually quite a simple idea that’s not too hard to practice yourself. Every purchase you make, KNOW that this purchase will earn positive cash flow over the long-term as it has over the long-term history. Even when Bruce’s picks decline shortly after the purchase date, he’ll usually take that as a buying opportunity and load up even more (see Brasil Telecom).

Fairholme Funds hold quite a bit of cash. With the investment strategy outlined, this makes perfect sense. They won’t buy at all until they see the opportunity surface. Once it does, make sure to have enough capital to make an impact. Take Warren Buffet’s $35 billion, for example. Right now, about 17% of Fairholme Fund’s $8.5 billion in assets is allocated to cash, meaning they can dump nearly $2 billion into one spectacular opportunity if it really comes around.

Another 20% of the fund’s assets are invested internationally. Personally - I get excited just thinking about international. I’ve got thousands tied up in the Middle East, Africa, and Brazil. The returns are just better there. Of the remainder, the Fund is particularly heavy in financial companies, energy, and media companies. Financial stocks, as an example, is one sector you’re guaranteed to cash in on as long as you have holding power.

Now the meat of it. The fund has returned 5.27% this year, outperforming the slumping market which fell about three percentage points. Annualized over the last five years, the fund’s returned 18%, trouncing the broader market’s 10%. They haven’t been right every time - but they have never lost money in any given year on record except for 2002 - down a mere 1.6% despite the market’s 20% bloodbath. This is a no load fund with only 0.6% expense ratio.

Lastly - go to their website http://www.fairholmefunds.com and look at the title of the page. Ignore The Crowd. They sold me the minute I saw that motto. Ignore what everyone else does - and just buy good companies at cheap prices. You’re bound to make millions.

My entry point was on May 1st at NAV $32.77. In total I’m up 2% for the month of May, 24% annualized.

We read about the world’s richest people and how many billions of dollars they have. Meanwhile - you and me are tracking our net worth statement and excited that we’re into the four-digit zone perhaps. So what are they doing so different than us? How do we become millionaires?

I’ll oversimplify the question - but the general answer is that it’s not all that hard. A quick 3 step guide you can apply right away and be on track to ultimate wealth.

1) Work hard. I’m serious. People who became billionaires got their by working hard and working smart. They exceeded expectations every step of the way. That means delivering results to your bosses and also to your subordinates. The more income you have - the more you get to do #3 below. Especially in your early years. When you’re young and fresh out of school - get a second job with your spare time (if you have any) that makes you an extra $100 a week or so. A better idea however is to spend that time on your current day job - making a career out of what you do and climbing your way up the corporate ladder. I’ve doubled my salary in four years by doing that. Bottom line - don’t cut corners - just work through them.

2) Spend less than you earn; save as much as possible. I know it sounds quite basic - but this is a key second step. No matter how hard you work - you have to be sure to live within your means and not overspend. There are thousands of people who work hard, earn six digits, but spend most of it on a regular basis. Home loans, car loans, student loans, boat loan - etc. It’s easy to justify a $40,000 expense, for example, when you do the math and realize its only $500 per month for five years. However, this is precisely the wrong formula to spending less. What is better is to purchase an asset with plenty of cash and finance for about $200 per month for only three years. The key to becoming wealthy involves investing regular amounts of money wisely - and you won’t get any capital to invest unless you save appropriately.

3) Invest wisely and consistently for long-term. Selecting good investments that earn double digit returns is fundamental to this plan. Invest wisely - allocate properly, reduce your risk profile when possible, and adjust when adjustments are needed. Investing consistently is also key. If you drop $5000 into a great stock today and just let your returns gain - you won’t gain nearly as much than if you were to drop $200 per month into other good stable investments. Automatic investing on a consistent and long-term basis make achieving wealth much easier than hoping for the next big win. Here’s the math for you: $5000 invested today and earning 10% per year (a conservative but realistic assumption) will have earned a total of $13,535 at the end of just ten years. A great investment with a great return. But an even better investment would be if $200 were deposited every month for ten years, earnings 10% per year. Total value: $41,000. In fact even a mere $75 per month would earn higher than your original $13,535.

The path to wealth creation is slow and long. But if you play your cards right, follow the three above rules on a daily basis, and be patient in your endeavors, wealth will be yours.

I’ll be nice and short and try not repeating some of my other posts.

1. $44.27 price from a 52-week high of $53.48 (off 21%) and a low of $40.
2. The stock price has return 130% since Mark Hurd’s entry as CEO in 2005
3. Proven record of integrating companies successfully with the exception of COMPAQ - the result of COMPAQ was poor for the company but did not deter any long term success
4. Proven ability for the company to harness a fundamental trait in an ultracompetitive industry: speed
5. P/E multiple of 15 compared to the industry’s 20.
6. Forward P/E of 11 versus industry’s 15.

Must I continue? I think this is a great long term holding for your portfolio. Now don’t go and buy 5 shares and expect the stock to hit $50 this week. But do your research, buy a large amount dependent on your portfolio size, and then walk away with full confidence that you don’t need to check this stock for weeks. That’s what I’ve done.

This just came across the wires folks - so news is limited as you can understand. But here are my preliminary thoughts.

Firstly - HP has been a solid company that has been able to grow extremely fast (from the tech drop in 2002 of $11.45 to a recent $55 per share). They’re pulling together over $100 billion in annual revenue from a number of offerings - Enterprise Storage and Servers for businesses, IT Services, Software Solutions, Personal System Computers, Imaging and Printing, and financial services. The company’s profit margins are increasing to over 9% (not bad for a production and capital heavy company). The P/E ratio of about 16.5 is under the industry’s 18.5. We’ve seen the stock take a beating from $51 down to $40 and back up to $49.97 this morning. Now with the acquisition news - we’re down to $46. Preliminary reports say the acquisition sticker price is at $12 billion.

Acquisitions are HARD WORK. The reason why the Street will instantly sell a stock once they talk about an acquisition is because many times their acquisition just won’t work out, and a company could lose billions in trying to make it so. Look what happened to Sprint after they bought Nextel. But HP has proven themselves time and time again that they know how to acquire good companies and translate them into top line revenue growth for the company.

EDS - one of the top global providers of IT support - will only strengthen HP’s already strong hold of the IT market. If you’re willing to buy long term (which you should be) - take the weakness in HP today as a buy signal. And any other budding global IT providers better roll up their sleeves, because the battleground just got tougher.

Disclosure: I own stock in HPQ

“Within moments after clicking “PURCHASE” for my Brasil Telecom, the stock started to turn sour. I watched it fall and continue falling. By the time the market closed - my investment was down over 5%.”

I think we all can narrate a story very similar to mine. But don’t worry! We’re investors! Not gamblers!

In fact - having a recent stock make a downturn like this can actually serve as a good exercise. If you did your research and then bought a good company at a good price - you now have a chance for an even cheaper price. Quite simple. It’s like the eggs at the supermarket on sale and you buy a dozen. The next day they’re even cheaper - so you buy a dozen more. Of course, you don’t need more than two dozen eggs because then your pantry is filled with no room for other great investments.

When I bought Brasil Telecom - I was confident of the company and of the price. A 5% decline gave me a chance to pick up some more. Bottom line - if you start to sweat and think about selling because of a couple point decline - then did you really buy yourself a good company? Or not?

That should be investing rule number one. Before you click purchase, ask yourself, “If this stock tanks 5%, will I still be comfortable with my investment?” If the answer is no - then it’s time to retreat to square one and do your company research. Good investments are made only in good companies.

I’m not much into speculative purchases and big wins in the stock market. I don’t buy often, but when I do I make sure I’m not just buying into hype. Buy good companies with solid management at good prices habitually, and wealth will become a secondary habit.

Brazil, one of the four BRIC countries, is facing 6% GDP growth (compared to our palsy 0.4%). Such a burgeoning emerging market carries with it consumers hungry for power and convenience. Brasil Telecom’s ADR (BTM) is one of the country’s strongest telecommunication companies. My research began through our friends over at SeekingAlpha.com. They have three divisions - the first being general phone and network connectivity including local, land line, and international dialing. The second division is their mobile phone network, and the third is Internet services (a standard lineup for telecommunication companies).

The company’s 2007 revenue came in at a stellar $5.7 billion USD, 21% higher than last year. Their revenue is growing at a 19% CAGR since its first public statement in 2002 (19% for five years is fantastic). Operating income is a healthy 10% of revenue, which is tough to pull off in capital heavy businesses.

Looking at their ratios, the company is CHEAP. They’re returning 5% on their assets and 15% on their equity, but with a P/E of only 12.6. This is nearly half of the industry’s 23.6 and still less than the S&P 500’s 19.7 P/E. A price to earnings ratio is a good indicator of how expensive the stock price currently trades at versus how much they make in earnings. Many investors (not the good ones) will just stop their analysis here and say “GREAT P/E! LET’S BUY!” But there’s more… It’s PEG ratio is also quite strong (P/E ratio to % Growth rate). The stock is giving you a magnificent 4% dividend yield (which means if the stock does nothing for 12 months, you’re still up 4%).

I took a look at some technical analysis as well, and the stock is trading below its moving averages and in the bottom range of its bollinger bands. If you take a look at this chart, its riding an upward trend and right now is in the bottom of an upswing. I don’t ever suggest trading based solely on technical analysis - but you can use it as support for your investment thesis.

From what I see - the stock is undervalued until about $36.50 per share. After that, you’re free to hold on to it as a growth play. I can’t say I’m certain about the stock. Most analysts on the Street agree with me, including SeekingAlpha.com. I’ve been wrong before, but I’m comfortable with my purchase at $33.40.

This morning I checked my bank account and realized there was a mysterious $1200 extra in there! It’s only taking eight long years, but the Bush administration has done something right (for the time being — this won’t do anything to stimulate the economy though so after several months we’ll realize it was a big mistake). Nonetheless, I’m pleased with my $1200 and I’m going to invest it. $1200 earning 15% is nearly $6000 after ten years.

Building wealth takes time. Invest a lot of money wisely regularly and let the earnings equate to more earnings. A foolish thing to do is to spend my entire stimulus check on a big screen TV or something. Although I may cave and buy that espresso maker I always wanted, and invest the remainder. If you live within your budget, you’ll find yourself much richer than you realize.

The alternative option, by the way, is paying down debt. Run a financial analysis on how much money you save if you pay down debt with your stimulus check, versus how much you earn if you invest it. Then pick the best option.

April’s been a busy yet a fantastic month. I had to write down some major losses on my investment property in 2007, and therefore got a windfall on my tax return. Thanks to that - I’ve made some major moves in building wealth (net worth).

First thing I did was paid off a credit card. $1200 balance carries somewhere around $12 monthly interest charges. Yikes. I now carry a much more manageable $120 balance, and pay off my credit card in full every month. Leverage is NOT your friend people. Leverage is the single most blameworthy outlet that’s causing the downfall of the American financial system today. You carry debt only when you need to. Affording homes and cars in all cash isn’t easy - that’s where debt comes in. But that $1 pack of gum ends up costing you over $3 in fees over several months. Knock it off people. Use an ATM for crying out loud.

I’ve also beefed up my emergency fund from $3100 to $4300. By year end I’m comfortable with a bit over $5000 - so we’re well on our way. On a side note - a close friend of mine who’s pinching pennies and living paycheck to paycheck with a new baby in his home recently got a $5k price tag on repairing his damaged car. Aren’t you glad you had an emergency fund sitting around (if you’d rather put a bill like that on your credit card, then just stop reading my website and leave).

As you know I’ve also purchased roughly 200 shares of the T. Rowe Price Africa and Middle East Fund. This is one move I’m particularly proud of. It’s a high risk/high reward situation so I don’t count on being in it for more than a few years. But let’s say over the next three years the fund returns 15% per annum, my investment has nearly doubled or given me a 17% CAGR. Not bad for vesting your tax return.

My $75 annual fee to be a AAA member has just paid off. I found out that AAA was offering refinancing car loans at great rates (about 5%). I recently splurged and bought a car and was offered the gracious 7.2%. I was comfortable with the payments - but nonetheless to drop the rate by two points was obviously a smarter move. Give them a call and see if they can help you out. For a $200 loan fee, they secured a 5.6% loan through Sovereign Bank for me - $460 per month - saving $100 per month (that’ll go right into an investment). By the end of the payoff - I’ll have saved a few thousand dollars. And having a lower monthly payment just makes it easier to pay off debt early.

Lastly - I’m pretty sure that my investment property’s furnace is about to go. Once it does, I don’t want to run around looking for four thousand dollars at the last minute. Budgeting for large one-time purchases is always a good idea. I allocated nearly the full amount towards it and locked it into a separate account - opened solely for the rental home. If and when my furnace goes - I’ll get a new one without having to break a sweat.

Here’s the grand totals:

• My cash in hand, thanks to Uncle Sam, has increased 78%.
• With my TRAMX purchase, my investments have over doubled. I’m particularly proud of this as the first way to start building wealth is to JUST DO IT. Next month we’ll see a similar move as I’m buying another fund (stay tuned for details).
• Total assets excluding home increased 8%.
• Paying down my credit cards has resulted in my total liabilities down 5% this month!
• All in all - I’ve seen my net worth increase by 20% in a month. Don’t expect to see your net worth increase like this regularly. In fact if it does one could argue you’re in way too volatile territory. An average monthly increase of 1% is all you need to be rich in the long-term future.

Again - feel free to email me for details or a template. I write this blog to help frame my investment plan - and help you do the same. Don’t hesitate.