Thursday, August 30, 2007
As of 2006, Berkshire Hathaway wrote the third-largest amount of net premiums in the reinsurance industry -- an amazing feat for a firm that started out making textiles. One of the key foundations of Berkshire's reinsurance business is its super-catastrophe line, and the company's annual shareholder letters offer an incredibly valuable case study of that segment's success. Let's take a closer look at the integral components of Berkshire's reinsurance division.
Against all odds
Berkshire's success in super-cat reinsurance, which insures very large catastrophic loss events, becomes more impressive in light of the challenges it faced. Capable reinsurers such a RenaissanceRe , XL Capital, and Montpelier Re compete fiercely for market share. In addition, barriers to entry are minimal, with recently formed reinsurers such as Flagstone Re and Greenlight Re almost constantly emerging. Lastly, reinsurance is a commodity to some extent.
Thus, Berkshire boss Warren Buffett had to overcome considerable obstacles to build his reinsurance operations into the juggernaut they are today. Since day one, Buffett based his strategy on three simple strengths: speed, size, and security.
Why disciplined value investing is so difficult. Ask yourself a simple question - "If Warren Buffett is the second-richest man in the world, why aren't there more professional value investors ?" Jean-Marie Eveillard of First Eagle Funds says "If you are a value investor, every now and then you lad. It can be very painful. To be a value investor, you have to be willing suffer pain"
Wednesday, August 29, 2007
The current credit crunch is "much more serious" for the U.S. financial system than the 1987 stock market crash was, warns Legg Mason's Bill Miller in a conference call with analysts. "The mortgage market is bigger than the whole U.S. economy, and that market is effectively shut down."
But once the immediate crisis has passed, Miller thinks stocks will head higher. And he predicts that the industry sectors that have led the market in recent years, such as energy and basic materials, will become laggards. "The leadership is likely to change," says Miller, whose Legg Mason Value beat Standard & Poor's 500-stock index a record 15 straight years until 2006.
One of my favourite films is The Shawshank Redemption, based on a short story by Stephen King. It stars Tim Robbins and Morgan Freeman, and the whole thing takes place inside a prison. There is a scene where Freeman’s inmate character is talking to another inmate about a guy named Brooks who has been locked up for 40 or 50 years and has basically lived his whole life in prison. Brooks is now an old man and up for parole, and he is terrified of getting out because he does not remember how to live in the real world. My favourite line is in this scene, when Freeman says: “These prison walls are funny. First you hate ’em, then you get used to ’em. Enough time passes, you get so you depend on ‘em. That’s institutionalised.”
This notion applies to many areas of life. It is easy to resign yourself to a bad situation and accept your lot in life. After a while you do not know how to live any other way. You make up all sorts of reasons to justify why it is alright to remain in a bad situation. This can be true of jobs and relationships and other things. Like the money management business.
I think a lot of money managers are like Brooks. They have become institutionalised.
The average actively managed mutual fund in the US holds about 100 stocks. This means the managers can’t possibly be doing in-depth research on each company they hold. So how is the average fund managed, if not by researching each stock in the portfolio?
Warren Buffett has been buying Burlington Northern Santa Fe in “all you can eat” quantities at or below $80/share. Since purchases were made public months ago and some initial analysis was done in the press at that time, yet Buffett is still buying, it seems a good time to think about why he continues to buy this stock.
BNSF has had fairly soft volumes in 2007, compared with 2006, especially in intermodal (containers and trailers) and lumber/building materials. Coal and grain volumes have held up well, but Buffett is likely not buying for 2007 performance.
We know that railroads offer pricing advantages over truckers that increase with higher oil prices, and that BNSF has a network that spans from the Pacific through the heartland and to the Gulf of Mexico.
But what else is there that could make this company even more valuable over the next decade, and potentially even more valuable than Union Pacific?
Thursday, August 23, 2007
The bond market has seized up, stocks are in turmoil, private-equity funds are sidelined and hedge-fund managers and lenders are hosting fire sales.
These are happy days for Warren Buffett.
"I can spend money faster than Imelda Marcos when things are right," he says, referring to the former Philippines first lady and renowned shopper.
For the past three years, Mr. Buffett's traditional bargain-hunting investment strategy has been partly stymied as debt-fueled private-equity funds and hedge funds drove asset prices out of his value-investing orbit.
Wednesday, August 22, 2007
This summer's rumble on Wall Street doesn't faze Larry Coats, portfolio manager of the Durham (N.C.) Oak Value Fund. He has seen his share of ups and downs, and has learned to avoid companies heavily reliant on the credit markets.
Sticking to the investing principles taught by Benjamin Graham and Warren Buffett, Coats buys companies that he can understand and put a price tag on. "This is a great time to be able to say: I know what this business is worth," he says. "It makes it a lot easier to sleep at night."
Coats also likes to find companies that aren't being appreciated in the market. "Our goal is not to eliminate risk," he explains. "It's to identify and understand the pricing, and take advantage of the mispricing whenever we see it."
Sunday, August 19, 2007
Here's what I like about the so-called housing bust. Every house is for sale. It doesn't take a brain surgeon to realise this is a voyeur's dream. First off, before this creeps out, know this: I'm now in the market to buy a house.
I've been renting for the past couple of years and now is the time to buy. There's not only blood in the streets; there's full-scale haemorrhaging. I'll get to specific numbers in a second but this is the exact time you should be considering buying. There's no rush, however. You have a good year before the next stampede begins, but begin it will. So I'm taking my time checking out houses as they come up for sale.
When you go into a house that's on the market you learn a lot about the people who live there. You see the pictures on the wall, the degrees from select schools, the envelopes from the IRS on the kitchen table. You know their taste in cars, in computers, what sorts of books and videos they like.
After a long period of almost unprecedented calm, volatility has returned to the stock market in grand fashion. The reaction on the part of most investors is, at best, unease, and, at worst, downright panic. It’s human nature: for most investors, the pain of stocks going down is more tangible than the joy of when they go up. The common impulse is to do something – anything – to minimise the pain.
While I take no pleasure in others’ misfortunes, we’ve historically made most of our profits from other investors behaving in a panicked and irrational fashion and selling us certain stocks at prices far below their intrinsic value. More volatility equals cheaper stocks, which equals higher returns.
A VALUE INVESTOR THROUGH AND THROUGH, Gifford Combs landed his first job out of graduate school by cold-calling Warren Buffett, who referred him to Phil Carret, who recommended that he talk to George Michaelis, who steered him to Jim Gipson of Pacific Financial Research and the Clipper Fund, where he stayed for 10 years. In 1998, he joined Los Angeles-based Dalton Investments, with $1 billion under management, as a managing director and portfolio manager for its global hedged-equity strategy, where he has delivered annual gains of 22%, on average, for the past nine years. Erudite and urbane, Combs nonetheless leaves the dash and dazzle for his stock picks.
Friday, August 17, 2007
Warren Buffett tells CNBC's Becky Quick in an exclusive interview that market chaos often creates opportunities due to mispricing.
Here, in two parts, is the complete interview with Mr. Buffett, recorded last night (Wednesday) in Omaha, before the Buffett-hosted fundraiser for Democratic Presidential candidate Barack Obama.
Thursday, August 16, 2007
Matthew Rothman is used to working with people who pride themselves on their rationality. He's a "quant," after all, one of a legion of Ph.D.s on Wall Street who use the emotionless rules of mathematics to pick trading positions. But this week, he caught a whiff of panic.
The trouble started Aug. 3, when stocks started moving not only in ways that commonly used models didn't predict, but in precisely the opposite direction from what was expected. Equally troubling, the moves were far more volatile than models based on decades of testing assumed were likely. Those relatively minor anomalies escalated quickly this week, exploding into a global rout for quantitative funds by Wednesday.
"Wednesday is the type of day people will remember in quant-land for a very long time," said Mr. Rothman, a University of Chicago Ph.D. who ran a quantitative fund before joining Lehman Brothers. "Events that models only predicted would happen once in 10,000 years happened every day for three days."
Hon Hai's revenue has grown more than 50% a year in the past decade to $40.6 billion last year. It is expected to add $14 billion in revenue this year. That is roughly the equivalent of Motorola's adding, within a year, the sales of CBS Corp.
Throughout his company's rise, the 56-year-old native of Taiwan has maintained a low profile. Publicity, he says, risks helping competitors and alienating customers. "I hate that I [have] become famous," Mr. Gou said in a recent three-hour interview at Hon Hai's Taiwan headquarters. It was Mr. Gou's first interview with Western media since 2002, following more than five years of requests by The Wall Street Journal. "We are so big we cannot hide anymore."
Hon Hai, and its massive Shenzhen plant, provides a window into the sometimes-secretive world of manufacturing in China. Confidentiality is a selling point for contract manufacturers, whose customers count on them to shield their products and plans from outsiders. Secrecy has also been a central issue in China's recent tainted-product scandal, with the often-quiet relationship between U.S. companies and their suppliers complicating regulators' hunt for the source of defective goods. Recently, citing ongoing investigations, Mattel Inc. took nearly a week to identify its Chinese provider of toys believed to contain lead paint.
Hon Hai hasn't been involved in such scandals, and analysts and industry insiders say Mr. Gou has combined discretion with a solid record of quality control and competitive pricing to build a booming empire. The $43 billion market capitalization of Hon Hai -- a public company listed in Taiwan, which uses the trade name Foxconn -- is equal to that of its 10 biggest global rivals combined. Mr. Gou and Hon Hai control additional affiliates that report revenue separately. Mr. Gou is currently worth about $10 billion, a Hon Hai spokesman says.
Seven of the nation's top 10 metro areas are in the Sun Belt. Only three are in economically hard-hit areas, historically the kinds of places that once produced the highest rates of foreclosure filings.
Stockton recorded one foreclosure filing for every 27 households during the six months ended June 30, a 256 percent increase compared with the first six months of 2006.
Since graduating from Princeton 25 years ago, Feinberg has never given an interview and has never been photographed by the press. Not that there has been much demand until now. On Wall Street, the C.E.O. of Cerberus Capital Management, an investment firm with $26 billion in assets under management, has long been admired. (“You probably think you’re smart,” says one former employee. “Now take your brain and mine, take them to the 28th power, and you have Steve Feinberg.”) To the general public, though, Cerberus has been just another shadowy buyer of companies in an already overpopulated field. The firm’s purchases include a grab bag of brands that lurk on the edge of consumer consciousness: Fila sporting goods, Mervyn’s department stores, Alamo and National rental cars, Air Canada, the GMAC lending arm of General Motors.
All that changed on May 14 when another mustachioed C.E.O., Dieter Zetsche of DaimlerChrysler, announced he was selling Chrysler to Cerberus for $7.4 billion. (Daimler is retaining a 20 percent stake.) It marked the historic end of the German carmaker’s cross-cultural business experiment and the return of an American icon to U.S. soil. Feinberg didn’t even bother to appear at the press conference. “We hesitated [at making the deal],” he says at this meeting a month later, the annual gathering of Cerberus investors, “because we knew it would get an insane amount of press, and boy, we don’t like that. But the deal was so good.”
Tuesday, August 14, 2007
Warren Buffett buys Bank Of America Corp., Dow Jones & Co. Inc., sells H&R Block Inc., Pier 1 Imports Inc. during the 3-months ended 06/30/2007, according to the most recent filings of his investment company, Berkshire Hathaway. Warren Buffett owns 40 stocks with a total value of $61.1 billion. These are the details of the buys and sells. GuruFocus.com
Bel-Oro International and Aurafin to be Acquired by Berkshire Hathaway (May 18, 2007)
Berkshire Hathaway Inc. announced today that it has entered into definitive agreements pursuant to which it will acquire leading jewelry manufacturers Bel-Oro International and Aurafin LLC. Upon consummation of these acquisitions, the two companies will be combined into the newly formed Richline Group and it will continue to market to customers under multiple brands. Berkshire Website.
Berkshire Has Stakes In Union Pacific, Norfolk Southern (May 16, 2007)
Berkshire Hathaway said it owned 10.5 million shares of Union Pacific and nearly 6.4 million shares of Norfolk Southern as of March 31, 2007. WSJ.com.
Buffett Pays Top Market Price for Burlington Northern Stake (April 9, 2007)
Warren Buffett's Berkshire Hathaway Inc. bought a 10.9 percent stake in Burlington Northern Santa Fe Corp. to become the largest shareholder at a time when rail stocks were hovering close to their all-time highs. Berkshire had accumulated 39 million shares of the second- largest U.S. railroad as of April 5, paying between $81.18 and $81.80 for the final 1.6 million, according to filings with the Securities and Exchange Commission.
The market value of the Berkshire Hathaway's Burlington Northern stake is $3.2 billion, making it the company's seventh largest holding by market value following Coca-Cola Co., American Express Co., Wells Fargo & Co., Procter & Gamble Co., Moody's Corp. and PetroChina Co. Bloomberg.
Berkshire Hathaway to Acquire TTI, Inc. (Dec 22, 2006)
Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) announced today that they have entered into a definitive agreement pursuant to which Berkshire Hathaway will acquire TTI, Inc., a privately held electronic component distributor headquartered in Fort Worth, Texas. The acquisition will also include TTI’s subsidiary Mouser Electronics. The terms of the transaction were not disclosed.
TTI operates in over 19 countries with over 50 branch locations. In addition, Mouser has recently completed a major facility expansion which has more than doubled its capacity. Berkshire Hathaway News Releases.
Berkshire boosts stakes in Lowe's (Nov 14, 2006)
Berkshire Hathaway Inc. it raised its holdings in Lowe's Cos. and Nike Inc., but may have reduced its stakes in Anheuser-Busch Cos. and Target Co.
In a regulatory filing, Berkshire said it owned 7 million shares of Lowe's, the home improvement retailer, on Sept. 30, up from 390,000 on June 30. It also said it owned 4 million shares of footwear specialist Nike, up from 2.47 million.
Berkshire also reported a 36.4 million share stake in Budweiser brewer Anheuser-Busch, down from 43.5 million in June. It also reported a 745,700 share Target stake, compared with the 5.5 million shares in June. Reuters.
Warren Buffett is Buying Retailers; Bought Target (Oct 30, 2006)
Billionaire investor Warren Buffett had bought about 24.59 million shares in health-care company Johnson & Johnson, and 5.5 million shares in discount retailer Target Corp. during the second quarter, according to the amended filing of the Berkshire Hathaway.
In separate filings with the U.S. Securities and Exchange Commission, Omaha-based Berkshire said the J&J stake was worth $1.47 billion as of June 30, while the Target stake was worth about $268.8 million. Berkshire started to buy J&J in the first quarter of this year. GuruFocus.com.
Berkshire Hathaway Takes On Equitas Risk For Up To $7B (Oct 20, 2006)
Berkshire Hathaway Inc. (BRK.A) is set to take on all the outstanding liabilities of London-based Equitas in a reinsurance deal worth up to $7 billion. BRK Website.
Converium sells N.America unit to Berkshire Hathaway (Oct 17, 2006)
Swiss reinsurer Converium sold its North-American unit to Berkshire Hathaway Inc. for a total of $295 million. Reuters.
NetJets places US$1.1 billion aircraft order (Sept 26, 2006):
NetJets Europe said it agreed to buy 24 Falcon 7X jets from Dassault Aviation in a deal worth US$1.1 billion (€861 million). The order is the largest ever European contract to buy business planes. International Herald Tribune.
Buffett Triples Tesco Stake (Aug 16, 2006):
Bloomberg reported that Berkshire Hathaway Inc. bought at least 120.2 million shares of Tesco Plc in the second quarter, more than tripling its stake in the largest U.K. supermarket owner.
Berkshire Hathaway buying J&J and Sanofi-Aventis SA (Aug 14, 2006):
Bloomberg reported that Berkshire Hathaway Inc., bought 1.97 million shares of Johnson & Johnson and 488,500 shares of Paris-based Sanofi- Aventis SA, the world's third largest drugmaker.
Berkshire Increasing USG Corp stakes
Berkshire Hathaway Inc. bought an additional 82,900 shares of USG Corp. (USG), boosting its stake in the building-products company to about 15.9%. Easy bourse.
Berkshire Hathaway buying AARIS, ACCA for undisclosed sum (July 19, 2006):
Berkshire Hathaway has agreed to acquire two California workers' compensation firms: American All-Risk Insurance Services (AARIS) and American Commercial Claim Administrators (ACCA), which provide underwriting, operational, and claims- management services for California workers' comp insurers through a network of agents, will become a part of Berkshire subsidiary Columbia Insurance Co.
The transaction is expected to close in July. A purchase price wasn' t disclosed.
AARIS and ACCA are wholly-owned subsidiaries of Acacia Pacific Holdings. Lou Rovens, the founder and principal owner of the businesses, will continue to operate Acacia and its related non-workers compensation insurance activities, Berkshire explained.
Buffett's Berkshire Replaces AIG, Ace as U.S. Hurricanes Loom (June 6, 2006):
Important points from this Bloomberg article:
- Harrah's Entertainment Inc., the world's biggest casino company, is paying 50 percent more for property insurance because Warren Buffett's Berkshire Hathaway Inc. is one of its only options after last year's hurricanes.
- Buffett's prices are as much as 20 times higher than the rates prevalent a year ago.
- ``We will do more than anybody else if the price is right,'' Buffett.
- ``Every major account I've placed, those with half a billion dollars or more of coverage, had Berkshire involved,'' Bullock said. ``That was not the case prior to this year. They were not on any of those placements.''
Applied Underwriters (May 22, 2006):
Berkshire Hathaway has announced the successful completion of its acquisition of Applied Underwriters (http://www.applieduw.com/), the industry leader in integrated workers' compensation solutions and all of its subsidiaries -- including its North American Casualty insurance companies.
Tesco Acquisition (May 17, 2006):
Berkshire Hathaway Inc. bought 57.6 million shares of Tesco, which is valued at $329 million. News from Forbes
ConocoPhillips Acquisition (May 15, 2006):
Berkshire Hathaway Inc. bought 17.9 million shares of ConocoPhillips, which is valued at $1.13 billion.
General Electric Co. Acquisition (May 15, 2006):
Berkshire Hathaway Inc. bought 7.8 million shares of General Electric Co., which is valued at $270.5 million.
United Parcel Service Acquisition (May 15, 2006):
Berkshire Hathaway bought 1.4 million shares of United Parcel Service, which is valued at $113.5 million.
Iscar Metalworking Cos. Acquisition (May 5, 2006):
Warren Buffett's Berkshire Hathaway Inc. agreed to acquire 80% of Iscar Metalworking Cos. of Israel for $4 billion. The privately held firm will leave 20% of the company in the hands of the Wertheimer family, IMC's current shareholders and founders, and values the business at $5 billion, Berkshire Hathaway said in a written statement. News from Berkshire, MarketWatch and Haaretz
Russell Corp. Acquisition (April 18, 2006):
Warren Buffett agreed to buy the sporting goods maker for about $600 million. Russell's brands include Russell Athletic, Jerzees, Spalding, Brooks and Huffy. News from Reuters
Business Wire Acquisition (March 1, 2006)
Berkshire Hathaway announced it has successfully completed its acquisition of Business Wire, the leading global distributor of corporate news, multimedia and regulatory filings. News from Berkshire
Applied Underwriters Inc. Acquisition (Feb 8, 2006):
Berkshire Hathaway Inc. announced it has agreed to acquire Applied Underwriters and all of its subsidiaries, including its North American Casualty insurance companies.
My Family Fund owns a significant amount of Berkshire Hathaway, and keeping interesting acquisitions or events of Berkshire would be exciting. As Berkshire is in Lau Model Portfolio as well, I would gather Berkshire events on this blog page.
Please Read: Berkshire Hathaway Inc; BRK.A April 6, 2006
Please Read: Archive of Dah Hui Lau's Blog
Dah Hui Lau (David)
"Liquidity has become one of the most important issues facing lending institutions today as the credit disruption widens and rating agencies modify their reserve level requirements," explained Hugh Miller, president and chief executive officer. "This has created a capital intensive environment in which it is increasingly more costly to operate. While our adherence to Delta's proven business model, with a focus on fixed rate loans and a diversified wholesale/retail origination platform, provided some insulation and helped us generate positive earnings during the second quarter, it became apparent this current environment would unduly strain our liquidity."
"Accordingly, I am pleased to announce we have entered into two transactions to help strengthen our Company and provide additional financial flexibility," continued Mr. Miller. "First, we obtained a $60.0 million financing facility from an affiliate of Angelo, Gordon & Co., a leading alternative asset management firm. The financing is collateralized by all of our currently existing securitization cashflow certificates. As part of the transaction, Angelo, Gordon & Co. will receive warrants to purchase 10.0 million shares of our Common Stock with an initial exercise price of $5.00 per share, expiring February 2009, subject to extension if we do not obtain stockholder approval for the warrant issuance within 90 days of the closing date. The fair value of the warrants issued will be amortized to interest expense as a non-cash yield adjustment over the life of the associated financing facility."
"At the same time, we have agreed to issue $10.0 million of convertible notes to funds managed by Mr. Mohnish Pabrai, one of our largest stockholders," Mr. Miller explained. "The notes are convertible into an aggregate of 2.0 million shares of our Common Stock, at a conversion price of $5.00 per share. The exercise of most of the warrants and the issuance of all of the shares upon conversion of the notes are both subject to shareholder approval, which we intend to pursue in the near future."
Mohnish Pabrai stated, "Delta is one of the best companies and management teams in this space. I look for them to emerge from the current market disruption and be well-positioned to take advantage of a less populated competitive landscape."
Monday, August 13, 2007
Our life is frittered away by detail... simplify, simplify." Henry Thoreau
Einstein listed the five ascending levels of intellect as: “Smart, Intelligent, Brilliant, Genius, Simple." Investors are detailed oriented and most never get to simple. Analysts have hundred page spreadsheets and focus intently on miniscule details, which are irrelevant over three to five year periods. Most investors miss the big picture due to their overly analytical minds.
“Keep the big picture in mind.” Joel Greenblatt
Sunday, August 12, 2007
A campaign to unlock value at Target is Bill Ackman's boldest move yet. And if history is any guide, the hedge fund manager is quietly employing his large network of investment banker and real estate contacts to help get backing for what will be his most difficult crusade ever.
Ackman, the head of Pershing Square Capital Management, has gained a reputation for innovative and audacious ideas to promote improvements at Wendy's and McDonald's that resulted in millions of dollars of value for shareholders.
In July, Ackman surprised Wall Street by zeroing in on Target, disclosing a 9.6% stake in the discount retailer because he felt the stock was undervalued. The fund manager said he wants to find ways to improve value at Target but didn't provide details of his intentions.
Several industry sources say that Ackman, as with his prior campaigns, is looking to generate more value from Target's real estate assets.
How a poor boy from London's East End became the most exclusive diamond merchant you've never heard of.British billionaire Laurence Graff, the man jewelry business insiders call the new Harry Winston, swears this story is true: A woman and her husband walk into Graff's shop on London's swanky New Bond Street and ask to see the stunning diamond-and-ruby necklace in the window. It's the woman's birthday and hubby wants to buy her a bauble. At $2 million, however, he feels the price is too steep. Instead he offers $1 million and exits the store, giving the jeweler 24 hours to cash the check. Later that day the lady returns with a second man, her lover. He, too, admires the necklace but finds the price too high. Another $1 million check is written and left on Graff's desk. The dapper jeweler, ever discreet and always the consummate salesman, breathes no word of the birthday girl's earlier visit to his store. Later she returns once more to scoop up her present, and presumably tells each of her benefactors that he has gotten a bargain from the jeweler. Graff cashes both checks.
It has the flavor of a very tall tale. Why does Graff tell it? It adds to the mystique and drama that define his business, the upper tier of jewelry retailing. The 69-year-old Laurence Graff climbed from scrubbing toilets in a Hatton Garden workshop to the helm of a worldwide brand with 15 stores in the globe's wealthiest spots, from Monte Carlo to Dubai to Moscow. Behind this retail chain is a wholesale buying operation: Graff Diamonds International is vertically integrated, taking stones from the rough shapes that come out of the mine to the display case. He sells stones of the greatest weight and highest quality and claims an average transaction price of $400,000. By that score he seems to easily surpass such classic outfits as Cartier, Winston, Van Cleef & Arpels and Tiffany.
Saturday, August 11, 2007
Below is the second part of that interview.
Emil Lee: Can you give me your bull case for Montpelier Re?
Tom Brown: Montpelier Re is a reinsurance company with an above-average exposure in the areas with the greatest losses in 2004 and 2005. The market is overreacting to these unusual years. Coming out of that, there were a number of changes -- rating-agency changes -- which forced catastrophe-loss modelers to change. A lot of companies are scared and have reduced exposures. Also, primary insurers are looking to increase reinsurance coverage. So it's a very good pricing environment [for reinsurance]. For example, coming out of the heavy hurricane season of 2005, let's [hypothetically] say pricing was up 20% on Jan. 1, [and] by July it was up 30%. The question is: Where is pricing going to be in 2007? It looks like it'll be down a little bit. Also, attachment points are up, so the risk of loss goes down.
Friday, August 10, 2007
#1. Bill, I understand that you sell when the price of the stock reaches 90% of your estimate of its intrinsic value. Have there been any exceptions? On average, have you found this to be an optimal sell strategy?
Bill Nygren: Four exceptions:
We sell at less than 90% of value if we lose confidence in either the management or the ability of the business to grow. Effectively, those are sales of our mistakes.
We sell at less than 90% of value if the business needs to be owned by someone else to maximize value (generally meaning acquisition synergy) and there is no reason to believe such a change in ownership is imminent.
We will sell at less than 90% of value if non-owned stocks are available at less than 60% of value. The relative gap of 40-50% appreciation is what we are really trying to capture.
We will wait for a holding to go long term if it is selling at around 90%-110% of our value estimate. If it increases past that, we’ll accept the short term tax penalty to avoid the risk of holding a significantly overvalued security.
Importantly, there is no magic in using 90%. For us, it seems to be about the right percentage to allow us to be generally fully invested, create reasonable turnover, and not create false precision in our estimates.
#2. I presume that a buyer of a whole business is willing to pay a premium for control. How much is this premium, typically? Is this premium the reason you as a non-control owner sell at 90% rather than 100% of fair value?
Bill Nygren: When I started in the business, control premiums were quite high, because in many cases, businesses weren’t being run to maximize value for the shareholders. Buyers, therefore, were willing to pay a high premium for control because they were going to radically change how the business was being managed. Today, I believe most businesses are already being run to maximize their value and buyers don’t bring much to the table, other than a willingness to use more financial leverage, so premiums are smaller. I don’t have a guess at a typical control premium. In general, I believe it is highest when a corporate buyer has synergy opportunities.
Thursday, August 09, 2007
When he took over the endowment in 1985, it was worth slightly more than $1bn. By June 30 of last year, it had reached $18bn. The best performing US endowment in that time, it has easily beaten the S&P 500 over that period, with staggeringly low volatility.
During the bear market of 2001-2002, reports Peter Bernstein in his recently published book Capital Ideas Evolving, Yale rose by 10 per cent while the S&P dropped 30 per cent.
“Investment management is a simple business,” he said. It came down to two principles. First, equities are best for the long run (proved by many surveys). “With a portfolio like Yale’s, with a time horizon measured in centuries, everyone would come to the same conclusion: it’s far better to have equities in your portfolio than bonds or cash.” By equity, he means any asset where there is a potential upside that can be taken by the investor.
His second principle is simpler: “Diversification is important.”
Tom Brown is the founder of the $550 million hedge fund Second Curve Capital, which specializes in financial-services companies. I once worked at one of America's largest funds, and ever since, I've been obsessed with all things alternative. From my experience, Tom Brown may be the best financial services analyst on the planet, and I doubt I'm alone in that opinion.
About six months ago, I decided to read every article in the archive of the Second Curve-run website bankstocks.com. It was almost like getting an MBA in finance. I wanted the Fool's readers to learn about Second Curve's methodologies and some of the companies in which the fund is interested. I called Tom Brown up for a phone interview; the notes in italics are my own commentary.
Question: I read some statistics on how you turned some initial capital from your father into a large sum. Can you provide me with details?
Tom Brown: My father got a lump sum contribution in 1984 of $130,000, which subsequently became $18 million by the early 2000s by investing only in financial stocks.
Brown calculated the annual average rate of return at roughly 40%.
Question: Why do you stick solely to financial-services companies?
Tom Brown: Well, financial-services businesses are in my circle of competence. I can try to grow that circle, but I just don't know other industries as well.
Emil Lee: Please tell me about your hedge fund.
Sardar Biglari: I started Biglari Capital right after I graduated from Trinity University. Biglari Capital is the general partner to The Lion Fund, L.P., a private investment partnership. I am a value investor, and I apply the same principles in running Western Sizzlin as I do in operating The Lion Fund. I focus intensely on evaluating an array of situations, searching for pockets of opportunity that are within my sphere of competence.
This maneuver leads me to be risk-averse, concentrated, and conservative with our capital. The right occasions for investment arise when there is general misunderstanding -- and therefore mispricing -- of the worth of an asset. In other words, our plan does not revolve around using common sense -- the logic of the lemmings can be flawed -- but, rather, around good sense, which can be uncommon.
Buffett's magical touch as a long-term investor is so well known, it has become the stuff of financial legend. Investors still dream of the compounded millions they would have banked had they -- or their parents -- been smart (or lucky) enough to buy a handful of shares back when Buffett took control of Berkshire in 1965.
Recent shareholders, however, are still waiting to see some wizardry. Berkshire's shares have returned 2.7% year to date vs. 4% for the S&P 500 index. Over the past five years -- a boom time for value investors -- Berkshire shares are up 61% compared with 70% for the index.
The per acre analyses used by most St. Joe bulls exclude selling expenses and taxes. I believe that the equivalent gross value to the $9,000 an acre used in your analysis is the equivalent of $18,000 an acre, when taking expenses and taxes into account.
As it was, I did not quantify any amount of swampland at the Ira Sohn conference. I simply noted that some of the land is swampland. The weather is much worse than South Florida (just as hot in the summer and cooler in the winter), there are a lot of mosquitoes, there is not a lot to do, and the demographics are poor. I noted that I thought St. Joe overplayed the value of land within ten miles of the ocean and noted that I thought that vacationers would prefer to be "on the ocean." More than a mile is too far for many families to walk to the beach. Finally, I thought the airport development is the type of story often seen in promotional stocks designed to buy years of time to encourage the market to ignore current financial results. The current airport does not operate near capacity. Airports in Jacksonville an Ft. Myers did not spur a lot of development next to their airports and it is odd the St. Joe seems to believe that a lot of people will want to live near the airport, as if that is a residential attraction.
Wednesday, August 08, 2007
Our returns this year, compared to the market’s, are primarily due to our exposure to housing and housing-related securities, and our lack of exposure to energy. A few thoughts on both are in order.
Owning housing stocks in the midst of the worst housing market in at least 15 years, and one where the problems may linger until 2009, may prompt a reaction similar to that one client had when we bought a company in the midst of a scandal: don’t you read the papers? At LMCM we actually try to buy low and sell high, and you don’t buy low when everything is great and the headlines reflect it. Usually, but not always, when you read about some industry or company having the worst time since some period of years, or even decades ago, you will find that buying that industry or company when it was going through those difficulties proved quite profitable if your time horizon wasn’t measured in days or months. The headlines today are all about this being the worst housing market since the early 1990’s. Had you bought housing stocks during that previous period of duress, you would have made many times your money and handily outperformed the market over the subsequent decade.
Tuesday, August 07, 2007
USG, based here in Chicago, is in some ways a throwback to earlier times, when far larger swaths of the economy were unprotected against the brutal ups and downs of the business cycle. From banking to warehousing, modern managers have expanded nationally and globally, to minimize the impact of a downturn in any one region, and employed tactics like hedging and outsourcing to reduce risk and lower costs.
The efforts have been remarkably successful, and collectively have helped lead to mostly shorter and shallower economic recessions across the country.
But not all companies can escape the cycle. And a look at USG provides a stark reminder of why businesses are so desperate to immunize themselves against its effects.
Carlos Slim is Mexico's Mr. Monopoly.
It's hard to spend a day in Mexico and not put money in his pocket. The 67-year-old tycoon controls more than 200 companies -- he says he's "lost count" -- in telecommunications, cigarettes, construction, mining, bicycles, soft-drinks, airlines, hotels, railways, banking and printing. In all, his companies account for more than a third of the total value of Mexico's leading stock market index, while his fortune represents 7% of the country's annual economic output. (At his height, John D. Rockefeller's wealth was equal to 2.5% of U.S. gross domestic product.)
As one Mexico City eatery jokes on its menu: "This restaurant is the only place in Mexico not owned by Carlos Slim."
Monday, August 06, 2007
You may well know Lakshmi Mittal. His company is responsible for 10% of world steel output. He lives in a 12-bedroom London mansion with butlers on call and a Picasso on the wall. And he famously dropped $55 million on his daughter's wedding, which included a party at Versailles. Few outside the steel industry, though, know much about Aditya and the outsize role he plays in his father's success. Where the 56-year-old Lakshmi is the steel industry visionary, Aditya is the financial dealmaker. The smooth, Wharton-educated son pushed for the $38 billion takeover of Arcelor, the giant European steel company, then helped hammer out every aspect of the deal that closed last June.
Sunday, August 05, 2007
Carlos Slim Helú's business career began on the playground, trading baseball cards.
He would buy the adhesive-backed paper cards at a candy stand in downtown Mexico City, then make a meticulous record of each trade in a ledger notebook, carefully evaluating whether he had come out on top in deals with his peers.
By age 12, he had moved on to trading stocks and bonds. Before turning 30, he owned a soft-drink company and a stock brokerage. Now, at 67, Slim is the world's second-richest man and is closing quickly on Bill Gates, according to Forbes magazine's most recent rankings. Slim's business empire stretches from Mexico to the United States - it includes major stakes in companies such as CompUSA and Saks Fifth Avenue - yet most Americans have never heard of him.
Slim accumulated his $53.1 billion fortune by collecting companies in much the same way he did baseball cards. He searches for businesses that are undervalued, infuses them with cash and uses the size of his holdings to overwhelm the competition. He now owns stakes in more than 220 businesses but says he has never forgotten the lessons of his youth.
"Buying well is a discipline," he told The Arizona Republic in a rare interview, noting that trading cards was "the first type of business negotiation you do as a child."
"The world decides our fate, we don't have much of a choice... The first thing that the Singaporeans learned was that if Singapore didn't' change, it would be dealt a brutal blow... Taiwan must change too. If Taiwan doesn't change and face Chinese competition, it will lose this race. "
"If I were a Taiwanese, I would like to invest in China, but not only in China... Taiwan cannot be passive. You have to accept the rise of China... They are quick learners. They are smart. But we are not stupid, because we recognize it. If we do not recognize it, we are stupid... We understand ourselves and our counterparts, then we progress ".
Learn Lifelong, Learn Two Languages
Second, you have to accept the fact that everything you learn will be outdated in 5 to 10 years. You have to keep on learning. As you move into a specific area, you have to develop your skill in that area. But remember, technology may suddenly change, and you may have to change your course. And again, you must re-learn.
In today's world, you must know at least two languages. For Singaporeans, I will advise them to learn English and Chinese. For Taiwanese, I will say learning Chinese and English. I advise Singaporean to cut out the dialect, because otherwise they will confuse themselves. The human brain is made for one language. Very few societies speak two languages. When people speak more than one language, they never speak them well.
I had been to Luxemburg where people speak French, German, Luxembourgian and English -- 4 languages. I read the newspapers there, which were all very poor. I went to Mauritius, which once was governed by the French and then governed by British, so they taught French and English. After it became independent, they taught Chinese to learn Chinese, India to learn Hindi, and they also have a local dialect at the same time. It is so confusing.
My advice: one language, you must do well. The second language, you must try to be competent. And then you can connect to the world.
Character is a must. If you do not have a sense of right and wrong, if you have no sense of honor, you are not trustworthy and you will never achieve anything no matter how good you are. You must be a trustworthy person, then people can work with you.
Boone Pickens arched his left eyebrow into a silvery horseshoe and waited to hear exactly how much personal income he had earned the previous year. It was two days after Christmas in 2006, and he was dressed down in khaki slacks, a gray sweater, and a pair of loafers, which he had propped up on the desk in his Dallas office.
Pickens turned to check the computer screen behind his desk. Except for his thinning gray hair and the flesh-color hearing aids in his ears, he looked as lean and mean as he had in the 1980s, when his exploits as a corporate raider shook Wall Street and catapulted him onto the covers of Time and Fortune.
Since then, Pickens has endured a two-decade roller-coaster ride. In 1996, slumping natural-gas prices led to his ouster from Mesa Petroleum, once the nation’s largest independent oil company. The following year, he founded the energy hedge fund BP Capital. But even as he launched his financial recovery, his personal life had been shattered by two divorces and a continuing series of crises involving his two sons.
Jay Rosser, Pickens’ veteran public-relations aide, returned from an adjacent office with the 2005 personal-income figure his boss had requested. “You made $1.504 billion last year,” he reported. “That’s adjusted gross income?” Pickens asked.
Wally Weitz: Market Commentary—Credit Problems Continue to Dominate Financial News
In the late 1990’s we experienced a technology stock “bubble.” Agood idea—“the Internet will change the way we all communicate and do business”—was carried too far. Investors paid ridiculously high prices for “dot.com” companies with little substance and the episode ended badly as the Nasdaq Composite dropped roughly 70% and the rest of the market followed.
Over the past few years, a surplus of capital has been generated by corporations, individuals, and repatriated trade deficit dollars (spent on foreign oil and manufactured goods). This excess capital created an enormous demand for income-producing assets—loans, bonds, real estate, etc. Wall Street, always eager to accommodate, created new mortgage products for real estate buyers and helped facilitate a boom in leveraged buyouts. Again, generally good ideas were carried too far. Credit quality slipped as lenders found ways to sell the loans they created, thus divorcing themselves from the risk of loss if borrowers defaulted.
Friday, August 03, 2007
Billionaire Warren Buffett's holding company Berkshire Hathaway Inc. reported Friday that its net income jumped nearly 33 percent during the second quarter because of strong performance from its insurance division.
Should you spend countless hours researching a stock before buying it, or just a few hours? The common wisdom is that the more time you spend on research, the better your investment results will be. But is this correct?
Not according to studies on the subject. At least two I have seen came to the conclusion that anything more than a cursory review of a company’s prospects is a waste of time. One study looked at whether more information was useful to experienced horse racing gamblers. The researchers first gave the gamblers a few items of relevant information (age of horse, pedigree, jockey, etc) and asked them to predict which horse would win the race.
They then gave out dozens more items of information about the race and asked the experts to predict again, based on the additional information they had received. The conclusion was that the first few items of information given to them were useful but further information had no effect on the accuracy of their predictions. The gamblers were far more confident about their predictions after receiving more information, but this didn’t translate into accuracy.
The conference featured Mr. Prem Watsa, Dr. George Athanassakos, Dr. John Bart, Mr. Howard Atkinson and Mr. Rob Arnott.
Also featured in this video is Arianna Huffington, author of "On Becoming Fearless"
Thursday, August 02, 2007
On Sunday, Mr. Griffin, the 38-year-old founder of big Chicago hedge fund Citadel Investment Group, first learned about deep troubles at hedge fund Sowood Capital. He called a team of 30 traders at their homes and told them to come into the office, trying to figure out a way to profit from the problems. On Monday, Citadel bought up many of Sowood's investments, including bond positions that were rapidly losing value.
For Sowood, it was a way to salvage something from the losing securities. The Boston-based hedge fund has seen its investments drop more than 50% in value in just the past few weeks, in part because it used borrowed money that amplified its losses. It will give the money it now holds, about $1.5 billion, back to its investors as it winds down its two hedge funds. That makes it the most high-profile hedge fund to collapse in the continuing bond-market difficulties.
The critically acclaimed Broadway musical ``Grey Gardens'' played its 307th and final performance on Sunday afternoon. Money manager Edwin Schloss says his 33- year sideline investing in commercial theater closed with the show.
``I felt wounded by the experience,'' the balding 57-year- old said over lunch last week, about co-producing the $5 million commercial failure. ``If a serious musical like `Grey Gardens' can't make it, I feel producing quality is an exercise in masochism.''
On North Michigan Avenue in Chicago, on the Magnificent Mile, sits one of the city's tallest and swankiest residential buildings. The most notable feature of the structure, a seven-year-old art deco-ish number called the Park Tower, is a two-story penthouse with a set of enormous, darkly tinted windows that give the place a Howard Hughes-like mystique. Occasionally passersby shopping at the Armani or Tiffany stores nearby catch a glimpse of the windows and tilt their heads skyward with an "I-wonder-who-lives-there?" stare.
The answer - Kenneth C. Griffin - probably wouldn't make much of an impression, which suits a secretive hedge fund manager like him just fine. In fact, he fits the hedge fund stereotype quite nicely. He's young (38), fantastically rich (worth $2 billion or so), and he collects museum-quality art (he recently spent $80 million to take a Jasper Johns off David Geffen's hands).
He's got the trophy home, obviously, and is married to a very attractive woman, the former Anne Dias. The company he founded and runs, Citadel Investment Group, has around $13 billion in assets and is one of the largest and most powerful funds in the world.
What sets him apart from his fellow nouveau zillionaires is the scale of his ambition. Griffin, say people who know him, doesn't want a reputation merely as a hedge fund legend like Tiger Management's Julian Robertson or SAC Capital's Steve Cohen. What he really seems to want is to build an edifice for the ages: a diversified, large-scale financial institution on the order of Goldman Sachs or Morgan Stanley.
To get there Griffin has launched a flurry of business deals: buying up a mortgage operation here, some distressed assets from another hedge fund there. Last fall Citadel announced plans to sell up to $2 billion in bonds - a first for a hedge fund. All the while, there's steady speculation that Citadel will go public. (Griffin declined to be interviewed for this piece in time to meet our deadline.)
The ambition doesn't stop there. Griffin seems to be going for full-blown, captain-of-industry immortality, the kind achieved by titans who didn't just dot, but shaped, the landscape of business over the past century. As a former Citadel manager put it recently, "Suddenly it seems like Ken wants to be a J.P. Morgan or John D. Rockefeller."
Forbes: We wanted to start by exploring your arrival in Hong Kong, your background. You're obviously influenced by your father, a teacher. He instilled in you a deep thirst for reading and knowledge. It sounds as if, despite the difficulties of your early career, you are an optimist about the future. Would you classify yourself as an optimist?
Li: First of all, I am an optimist. When you study hard and work hard, your knowledge grows, and it gives you confidence. The more you know, the more confidence you gain. When I was 10 years old, I lost my schooling, but I still had plenty of hope to return to school. When we came to Hong Kong, the family had no choice, and I had to work. I was facing life for the first time. I was 12 years old, but I felt like a 20-year-old. I knew then what life was. My father had tuberculosis, which was as devastating a disease as cancer is today. If you were rich and could afford proper care, you might have a better chance. We had no choice. I needed to be strong, and needed to find some way to secure a future.
And as long as you have that preparation, that confidence, you have the general belief that things will work out?
During the Japanese occupation, besides working, I also needed to get plenty of fresh air to remain healthy, because at that time, I also had TB. But at the same time, I also needed to study and work. That gave me confidence. I got my first break right after the Second World War. My boss needed a letter written. He had a secretary who wrote his letters for him, but he was on sick leave. When he asked around the office to see who could take his place temporarily, my colleagues recommended me. My boss said that my letters were quick and nice, and I got his meaning. He was happy with my work, and I was promoted to head a small department. I always believe that knowledge can change life. It was a case of knowledge changing my life.
Wednesday, August 01, 2007
Bargains don’t arrive at the stock market wrapped in pretty packages tied with a bow. You are not going to find bargain stocks among companies that are thriving, that are consistently generating impressive operating performance. The stocks of thriving companies are almost always fully valued and frequently overvalued.
If you are a true bargain hunter, there is but one place to look. That is in the stocks of companies that have hit a rough patch, that are operating at subnormal levels because of short-term problems. It is fair to say that as the level of negativity surrounding one of these stocks increases, the likelihood that the stock is materially undervalued also increases.
When I use the term “optionality”, I’m referring to a situation where binary outcomes are possible and it’s difficult to determine the likelihood of either scenario occurring. When it’s difficult to determine something, the market will sometimes take the lazy route and just ignore it. That’s where the inefficiency comes in. Bill Miller has said the market won’t pay for optionality. In my experience, this is often true.
One such situation is occurring now with Carrizo Oil & Gas, in which my fund invests. Based in Houston, Carrizo is an exploration and production (E&P) company with natural gas reserves in the Barnett shale in Texas and onshore Gulf of Mexico coastline, coal bed methane deposits in the western US and a recent oil discovery in the North Sea.
The company’s current enterprise value is approximately $1.4bn. To get a fair value for Carrizo’s shares at, or below, the market price of $43 a share, you have to ignore a lot of optionality. I come to this opinion based on the following sum-of-the-parts valuation.
Bill Nygren, who runs the $6 billion Oakmark Select Fund, is not bashful about taking tips from competitors. Earlier this year he noticed in the shareholder reports of Longleaf Partners, Legg Mason, and Dodge & Cox that they were all accumulating shares in wireless telco Sprint Nextel. "Many competitors we respected made it a large position," he says. "That suggested it was worth looking at." When the stock later dipped from 20 to 18, he swooped in. Today it trades at 22.
One current position is Home Depot. The retailer is what Charlie Tian, GuruFocus' founder, calls "a triple buy." Not only do 19 gurus own it, but the company is aggressively buying back stock and corporate insiders are purchasing shares as well. Other triples include car dealer AutoNation, financial software maker Fair Isaac, and Rent-A-Center, which sells furniture and consumer electronics on a rent-to-own basis.