Tuesday, December 02, 2008


He is a little bit greyer than he was before the beginning of his biblical seven lean years, and a little bit balder, and slightly more wrinkled, but wiser, too. He has learned. He has discarded one of his own personal commandments, a rule he rarely breached in 20 years: Thou Shalt Not Give Interviews to the Press. He has opened his mind and his mouth to journalists, analysts, skeptics and enemies. He has a PR agent now. He does conference calls and takes questions. He has done all this because he had to--because his life's work was attacked, and because it became clear to him that the world had changed, and it wasn't good enough any longer to stay cloistered in his comfortable circle of friends and admirers and confidants and fellow travellers.

But that doesn't mean he likes it. And it doesn't mean he wants the attention any more than he did a decade ago, before all the trouble started, when he was still labelled a "recluse" and Bay Street loved him and his peculiar creation, insurance and investment company Fairfax Financial Holdings Ltd. Over the decades, The Globe and Mail has named dozens of CEOs of the Year. Prem Watsa is the first, as far as anyone can recall, who tried to reject the honour. Vehemently.

It's Fairfax policy to reject all awards to individuals. In 1999, Watsa even turned down a business leader award from his alma mater, the Richard Ivey School of Business; other Fairfax executives have rejected similar nominations. Watsa would not pose for photographs or grant an interview for this story (though he has given several interviews to The Globe this year, most recently in early October, when he spoke at length about the financial crisis and predicted a long, deep and painful recession). Through the company's chief legal officer, Paul Rivett, Watsa asked us to rename the title "Company of the Year" and grant it to Fairfax instead of him. He even offered to try to find us a more willing candidate. These efforts were not an act of false modesty. In Rivett's Toronto office, there is a limestone plaque that reads: "There's no limit to what a man can do or where he can go if he doesn't mind who gets the credit" --a quotation often attributed to Ronald Reagan. Watsa gave one to all senior Fairfax executives.

Well, tough luck, fella. Sometimes you have to suck it up and accept the credit. And this year--the most extraordinary year in financial markets since the Depression--is unquestionably Prem Watsa's time. His critics, the so-called cadre of hedge funds and their hired hatchet men whom Watsa alleges tried to destroy Fairfax in 2005 and 2006, are in retreat. The very practice of short-selling, while hardly discredited, is under scrutiny now, as are the practices of the brokers and traders who serve short-sellers. An analyst who helped touch off panic selling in Fairfax shares--by writing a report that essentially claimed the company was on the road to bankruptcy because it had failed to set aside a necessary $5 billion (all currency in U.S. dollars) for insurance claims--has been fired for leaking that document to some clients before its release. Fairfax seems financially healthy for the first time since Monica Lewinsky was on everyone's lips. In the summer, Moody's Investors Service raised Fairfax's credit rating, which it hadn't done since 1998; DBRS Ltd. moved the company's bonds to investment grade, where they hadn't been since 2002.

But these are mere details. The real reason Watsa is the (reluctant) recipient of the title is that, in three words, he called it. He didn't know that the greatest financial disaster in decades would unfold in the autumn of 2008, of course, and he didn't predict that it would sink such leviathans as Lehman Brothers and American International Group, his biggest rival in insurance. But he did spot the source of the trouble long before most everyone else. And he has $2 billion to prove it.

Full Article

Friday, November 21, 2008

Whitney Tilson: Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries

I’ve seen a lot of crazy things in my investment career, but I struggle to think of anything that tops this: Berkshire Hathaway’s five-year credit-default swap spreads have more than tripled in the past two months and now stand at 475 basis points (CDS quotes in this article are as of the end of day 11/19/08 and stock quotes as of 11/20/08), as this chart indicates (click charts to enlarge):

To get some perspective on what this means, the median CDS spread for companies with the lowest investment grade bond rating (BBB-) is 348 basis points, according to Moody’s, so the CDS market is indicating that AAA-rated Berkshire is junk! Or consider this chart, which shows that Berkshire’s CDSs are higher than a wide range of other financial companies [more than 4x Travelers, 3x JP Morgan Chase and well above Citigroup, even after Thursday’s stock collapse – the world has truly gone mad!]:

Friday, October 24, 2008

Governor Schwarzenegger Discusses the Economy with Warren Buffett at the 2008 Women's Conference

CHRIS MATTHEWS: The stock market dropped 350 points this morning. What should people do here, do now, today, as they make their investment decisions from here on out, Mr. Buffet?

WARREN BUFFETT: Well, I have no idea what the stock market is going to do in the next day, week, year. There's no question in my mind that stocks 10 years from now will be appreciably higher than they are now and there's no question in my mind that people that leave their money in cash equivalents are going to own something of less value at that time. Now, I can't time when you get in but if you own something that's destined to become worth less with cash equivalents and you have a choice to swap it into something that's destined to be worth more -- when you do it is up to you.

I don't think people can time it, so I believe in doing it promptly. And as I mentioned last week, I actually, in my personal portfolio, was going from 100 percent governments into 100 percent stocks, as stocks are going down.

CHRIS MATTHEWS: So still, what we hear from our managers -- and we always hear the same thing -- stay in the market?

WARREN BUFFETT: Yes. Well, in this country in the 20th century we had the Great Depression, we had two World Wars, one of which it looked like we were losing for a while and we had the flu epidemics, we had the resignation of a president, we had about a dozen recessions and panics. The Dow started that century at 66 and it ended at 11,497. This country works. It can get gummed up from time to time, the economy but this country works. (Applause)

CHRIS MATTHEWS: Governor Schwarzenegger, before we get to public policy I want to talk to you about the way I know you started off. As a business guy, right?


CHRIS MATTHEWS: I want to ask you just a really basic question. Why is it better to be your own boss?

GOVERNOR SCHWARZENEGGER: Well, first of all, let me just say that I'm very happy to be back here again at the Women's Conference. And I just want to say thank you again to Maria, to my wife, who was working on this all year long to make this a great conference and to have so many women show up, so let's give her a big hand for the great job that she is doing. (Applause)

And I also want to thank the 14,000 women that are here today for supporting this conference and I also want to thank the sponsors for coming here and supporting this and putting their money behind it. So, thank you very much. (Applause)

I always have enjoyed having my own business. I started at the age of 10 -- Warren and I were talking about this backstage, because Warren said the most important thing to be a successful businessman is that you start early and that you get it early, of what it takes to be an entrepreneur. I started at the age of 10 selling ice cream and I made 150 to 180 schilling every weekend when I ran around the lake where I grew up in Austria selling ice cream. And every year during school vacation I always went out and worked and tried to run my own little businesses.

So it was just something that was in my blood. I don't know where it came from, because no one in my family was into business, no one had their own business but I always enjoyed that. And so, when I grew up I ran a gym in Munich at the age of 19 and when I came to America I started my own mail-order business. And so everything was always involved around running my own business.

Also, I think when you are a person that believes in taking risks and not just relying on a safety net -- I came to America because there were great opportunities here. But it was not a safety net that was underneath there. You were out there and you took the risk and if you fall, you fall. And I like that, I like to take the risks, because the bigger the risks the greater the gains but the greater the fall is also, at the same time, so you have to recognize that. So I always enjoyed that.

Friday, October 17, 2008

Warren Buffett: Buy American. I Am.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Thursday, October 16, 2008

Whitman Sampler Of Value Stocks

Let's talk about some of your current favorite buys.

Toyota Industries

We have a big position in Toyota Industries. Nobody is thinking of what happens if Ford or General Motors or Chrysler stops making cars. What would happen to Toyota's market penetration? In any event, Toyota Industries is a large shareholder in Toyota Motors. At a recent price of $23, you are basically getting the value of Toyota Motors. Toyota affiliates have a market value of $8 to $9 a share, plus you get Toyota Industries' other magnificent worldwide operating businesses, which have operating income of $800 million to $900 million. In other words, you get a minimum of $20 of additional value for free, when you buy Toyota Industries at current prices. Total value is thus around $40, and the stock sells for $23.

Investor AB

This company is essentially a European private equity company, and the Swedish Wallenberg family controls it. In their last quarterly report, they claimed net asset --virtually debt-free, by the way--was 180 Swedish krona. Today, you can buy all the stock you want at $97. Over the years, they have grown that NAV by double digits, on average, each year. They own engineering and power company ABB, Swedish appliance maker Electrolux, and they are big in the medical sciences, including 11% of AstraZeneca.

Henderson Land

Henderson Land is our largest holding. It is the biggest land bank in Hong Kong, and it has a lot of office buildings. They have a huge presence in mainland China.They also control Hong Kong & China Gas and Miramar Hotels. Henderson has an NAV of 57 in Hong Kong dollars, but you can buy all the shares you want at 27 Hong Kong dollars today. The company also has American Depositary Shares (ADS) symbol HLDCY. NAV in real estate means a lot in for international accounting, because unlike GAAP, income-producing real estate is carried at NAV, not at depreciated historic cost as it is here. The reported NAV is 57; we think it is well over 60. Stock sells for 27.

Sunday, October 05, 2008

Thursday, October 02, 2008

Charlie Rose: An Exclusive Conversation with Warren Buffett

Warren Buffett: I Haven't Seen As Much Economic Fear In My Adult Lifetime - Charlie Rose Interview

Charlie Rose:
We are in San Diego, California this afternoon for a conversation with Warren Buffett. He is a man congressional leaders, the administration, and the Federal Reserve want to talk and talk to. He is the legendary chairman and CEO of Berkshire Hathaway. Its success has made him the world's richest man. He's admired for his investment results over a long period of time. He is trusted for his common sense and the fact that he's warned over the years, in his annual letter to stockholders, about some of the things that are contributing to the crisis facing America and the global economy. For all those reasons, we have come to see him in San Diego where he is attending the Fortune Magazine's most powerful women's summit. Later, he will be interviewed at a conference by the Fortune reporter and long time friend, Carol Loomis. We come this evening from the studios of our public television affiliate in San Diego, KPBS. I thank my friend, Warren Buffet, for taking time in a busy schedule to talk to us.

Warren Buffett:
My pleasure, Charlie.

Charlie Rose:
Let me talk of the news of today. You have announced an investment of $3 billion in General Electric, along the same terms as the the Goldman Sachs --

Warren Buffett:
Yeah, almost identical.

Charlie Rose:
Why GE?

Warren Buffett:
Well, I got a call this morning from a friend of mine at Goldman Sachs saying they might be interested in such an investment. I'm familiar with the company. I've known the management, the current management, Jack Welch before Jeff Immelt. I've known him for decades. And so I understand their businesses. We do lot of business with him, and GE has been -- I think it's the longest running stock in the Dow Jones industrial average. It will be 100 years now it will be around. I hope I'm around then, too. And it was an attractive investment. And we have had a lot of money around, over the last two years, and we're seeing things that are attractive now.

Charlie Rose:
Are you looking at other things?

Warren Buffett:
I look at everything, Charlie. That's my job. I really do. I mean every day, I think about everything, yeah.

Charlie Rose:
I know, but cash is said to be king now. Are you sitting on a lot of cash so that this is the time for Berkshire Hathaway and Warren Buffet to look carefully at a lot of opportunities.

Warren Buffett:
Yeah, we want to use cash. The reason we haven't used our cash two years ago, we just didn't find things that were that attractive. But when people talk about cash being king, it's not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of the other times when it buys a fair amount more, so we use it.

Charlie Rose:
There is a time to accumulate and a time to spend.

Warren Buffett:
Absolutely. You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple.

Thursday, September 25, 2008

CNBC INTERVIEW TRANSCRIPT: Warren Buffett Explains His $5B Goldman Investment

BECKY QUICK: We know you get all kinds of deals, all kinds of people who come knocking asking you to jump in. You've said no to everything to this point. Why is this the right deal at the right time?

WARREN BUFFETT: Well, I can't tell you it's exactly the right time. I don't try to time things, but I do try to price things. And I've got a formula that says bet on brains, and bet of them when it's the right type of deal. And in this case, there's no better firm on Wall Street. We've done business with them for years, with Goldman, and the price was right, the terms were right, the people were right. I decided to write a check.

BECKY: Does the backdrop of the Federal government potentially getting involved with a massive bailout plan for Wall Street, does that have anything to do with this deal?

BUFFETT: Well, I would say this. If I didn't think the government was going to act, I would not be doing anything this week. I might be trying to undo things this week. I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly. It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.

BECKY: Why would that be a mistake? Because the institutions would collapse, or because you could get a better price?

Wednesday, September 24, 2008

Buffett on Goldman Sachs

Buffett to Invest $5 Billion in Goldman

Berkshire's plan "is a sign of confidence from one of the nation's most respected investors," said James Angel, a finance professor at Georgetown University, who added that "sharp investors" now are "sniffing around the wreckage of the credit crunch to pick up good assets on the cheap."

The deal is structured in two parts, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. Berkshire will spend $5 billion on "perpetual" preferred shares of Goldman. These are not convertible into equity but pay a fat 10% dividend.

Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.

Goldman also will go to the public to raise at least a further $2.5 billion by selling common shares. Once it does, Berkshire's stake -- if it has exercised the warrants -- would fall to about 7%. Goldman will have the right to repurchase the preferred shares at any time for a 10% premium.

What can we learn from Buffett's deal, please read: Lollapalooza Investing

Tuesday, September 23, 2008

A Message by George Carlin

The paradox of our time in history is that we have taller buildings but shorter tempers, wider Freeways , but narrower viewpoints. We spend more, but have less, we buy more, but enjoy less. We have bigger houses and smaller families, more conveniences, but less time. We have more degrees but less sense, more knowledge, but less judgment, more experts, yet more problems, more medicine, but less wellness.

We drink too much, smoke too much, spend too recklessly, laugh too little, drive too fast, get too angry, stay up too late, get up too tired, read too little, watch TV too much, and pray too seldom.

We have multiplied our possessions, but reduced our values. We talk too much, love too seldom, and hate too often.

We've learned how to make a living, but not a life. We've added years to life not life to years. We've been all the way to the moon and back, but have trouble crossing the street to meet a new neighbor. We conquered outer space but not inner space. We've done larger things, but not better things.

We've cleaned up the air, but polluted the soul. We've conquered the atom, but not our prejudice. We write more, but learn less. We plan more, but accomplish less. We've learned to rush, but not to wait. We build more computers to hold more information, to produce more copies than ever, but we communicate less and less.

These are the times of fast foods and slow digestion, big men and small character, steep profits and shallow relationships. These are the days of two incomes but more divorce, fancier houses, but broken homes. These are days of quick trips, disposable diapers, throwaway morality, one night stands, overweight bodies, and pills that do everything from cheer, to quiet, to kill. It is a time when there is much in the showroom window and nothing in the stockroom. A time when technology can bring this letter to you, and a time when you can choose either to share this insight, or to just hit delete...

Remember; spend some time with your loved ones, because they are not going to be around forever.

Remember, say a kind word to someone who looks up to you in awe, because that little person soon will grow up and leave your side.

Remember, to give a warm hug to the one next to you, because that is the only treasure you can give with your heart and it doesn't cost a cent.

Remember, to say, 'I love you' to your partner and your loved ones, but most of all mean it. A kiss and an embrace will mend hurt when it comes from deep inside of you.

Remember to hold hands and cherish the moment for someday that person will not be there again.

Give time to love, give time to speak! And give time to share the precious thoughts in your mind.


Life is not measured by the number of breaths we take, but by the moments that take our breath away.

Monday, September 22, 2008

Christopher Hohn Rethinks Activism

Christopher Hohn is beside himself. It’s a dreary rain-swept morning in early September, and Hohn, looking more like a graduate student, with his rimless glasses and rumpled shirt, than the most feared shareholder activist in Europe, strides briskly across a conference room in his hedge fund’s stark, glass-partitioned, modern headquarters in Mayfair, London, and drops down into a black leather chair. The intensely private, 41-year-old founder of the Children’s Investment Fund Management (UK) has just made a rare public announcement and still wears the pained expression of the reluctantly exposed: TCI is joining with New York–based Atticus Capital to once again challenge the management of German stock exchange operator Deutsche Börse Group.

“The company’s valuation has collapsed this year, and shareholders are suffering,” declares Hohn. ”We’re frustrated with Deutsche Börse.”

These are frustrating times, indeed, for Hohn, the golden boy of activist investing, who rose to fame by halting Deutsche Börse’s 2005 bid for the London Stock Exchange and who last year single-handedly sparked the sale of ABN Amro Bank — the biggest banking transaction in history. In five years his assets under management have soared 30-fold, to more than $15 billion.

But 2008 has been another story entirely. Hohn is struggling seemingly everywhere — with markets, investment targets, uneasy investors and, increasingly, with himself. His high-profile effort to challenge corporate culture in Japan by trying to take a commanding stake in one of its largest energy wholesalers has been thwarted by the Japanese government. And in late May he had to endure a public grilling for more than an hour in open court in New York City in his yearlong battle with CSX Corp., the U.S. railroad group that operates an extensive network of freight lines and port connections on the East Coast.

Above all, after a heady run of eye-catching returns, Hohn’s flagship, the Children’s Investment Master Fund, is losing money. And Deutsche Börse is a very big reason why. With the global credit crisis hammering financial stocks, the German exchange’s shares have plunged by more than half since January, dragging down the returns of TCI’s flagship fund, which lost 12 percent through June 30 — a painful experience for a manager whose highly concentrated, long-biased portfolio had delivered net annualized returns of 42 percent in its first four years through December 2007.

Friday, September 19, 2008

Constellation Energy: Stars Align for Buffett

To read my comments on Constellation Energy, please visit:

Lollapalooza Investing

Warren Buffett's Berkshire Hathaway Inc. is reaching into its deep pockets to give a steady hand to Constellation Energy Group Inc. and, at the same time, grab a bargain.

Berkshire's MidAmerican Energy Holdings Co. said Thursday that it will buy Constellation for $4.7 billion and give it an immediate $1 billion infusion after shares of the nation's largest wholesale power seller plummeted and liquidity concerns had analysts worried it would go out of business.

"Obviously we're in unprecedented times," MidAmerican President and CEO Gregory Abel said. "Liquidity and solvency issues are a top priority for many companies. We don't have any of those concerns, again, at MidAmerican and Berkshire."

Des Moines, Iowa-based MidAmerican will pay $26.50 per share in cash for Baltimore-based Constellation, well off the utility's 52-week high of $107.97 reached Jan. 8. The shares traded as high as $67.87 last week before hitting a low of $13 Tuesday.

Full Article

Thursday, September 18, 2008

Wednesday, September 17, 2008

AIG Bailout: Buffett's Advice

Please read my comments, Buffett's, Munger's and Grantham's advice at:

Friday, September 12, 2008

Bill Ackman's Letter to Shareholders and Board of Directors of Longs Drug

Longs’ Valuation
In light of the disparate collection of assets that comprises Longs, we believe that the conventional valuation shorthand of precedent transaction multiples, discounted cash flow analyses and trading comparables fails to reflect a fair value for the Company. The four unique value drivers that distinguish Longs include (1) owned real estate, (2) leasehold real estate, (3) the PBM business and (4) readily available operating improvements to the Company’s core retail operation.
Owned Full Service Real Estate1
Based on the Company’s disclosure in its 2008 10-K, we believe that the Company owns approximately 3 million square feet of real estate. After discussions with real estate investors with expertise and retail ownership in the California and Hawaii markets, we believe that a very conservative $30 per square foot market rent for these properties is appropriate. At a 7% capitalization rate, the value of these properties alone would be approximately $1.3 billion.
Ground Leases and Leased Full Service Real Estate
We understand that the Company’s leases typically have a 20-year initial term with three 10-year below-market renewal options, often with a favorable purchase option in the case of ground leases. Based on the Company’s public disclosures, we believe that the Company’s current rental expense is approximately $11.60 per square foot on the approximately 7.8 million square feet of full service leased real estate. Applying a $30 per square foot market rent yields a $18.40 per square foot rent spread.
Using a leasehold capitalization rate of 9%, the leaseholds are worth approximately $1.6 billion. While it is impossible to precisely estimate the portion of this value that would accrue to Longs in a monetization of these leaseholds without reviewing underlying leases, this is another overlooked source of substantial value in the business.

With owned real estate of $1.3 billion and leased full service real estate of $1.6 billion, the Company’s real estate assets alone are worth $2.9 billion, or approximately $71.50 per share. In effect, CVS is buying Longs’ real estate and is getting its PBM business and retail operations for free.

Thursday, September 11, 2008

Warren Buffett's happy housing story

The company's loan delinquency rates have been stable: On June 30, 2004, the rate was 3.26%; last year it was at 3.5%; and now it's 3.82%. (In comparison, the delinquency rate in the traditional housing market is around 6.4%.) Annual credit losses are running steady at a reasonable 1.5% of the loan portfolio. And Clayton's foreclosures have actually dropped from two years ago, from 5,823 to 4,588.

What's behind the portfolio's strength? Clayton is more careful about lending because it keeps all loans on its own books rather than offloading them to others by means of securitization.

Full Article

Wednesday, September 10, 2008

TRANSCRIPT & VIDEO: Warren Buffett Tells CNBC Treasury "Did Exactly the Right Thing" on Fannie/Freddie

Becky: There are some people who would say, 'Why not wash out the common shareholders, at least? Why put the taxpayers at risk?' What would you say to that?

Buffett: Well, the common shareholders are going to get nothing until the Treasury gets paid back, and even then, as I understand it, the Treasury is getting a warrant at a nominal sum for 79.9 percent of the resulting common, so assuming there is anything left for the common four or five years down the road, the Treasury will get 80 percent of it, so they're getting paid very well for stepping in. And like I say, the question of whether the common gets anything is problematical. The common is an option at this point.

Full Transcript

Thursday, September 04, 2008

Ruane, Cunniff & Goldfarb Investor Day May 2008


I noticed that you trimmed your stake in Wal-Mart and increased it in Target. I was wondering if you might talk about Target, its position and why you like it so much.

David Poppe:

What I would say is we bought most of the Target before we sold any Wal-Mart. Sequoia still holds Wal-Mart.

Interestingly, I think if you look over the last seven years since 2001, Wal-Mart and Target have almost identical EPS growth rates. I think going forward, both are likely to have pretty good EPS growth rates. Right now, Wal-Mart might be a little bit better positioned in that its business is more oriented to food, commodities and staples.

Bob Goldfarb:

One difference between the two companies is that Wal-Mart has allocated a fair amount of its capital to opening stores abroad, whereas Target is strictly in the United States. I would say generally we have a preference for companies that do have foreign exposure, but in this case, Wal-Mart has failed to demonstrate to date that they can earn the kind of return on investment abroad that they've been able to earn in the United States.

As some of you may know, they've exited a couple of countries. Germany was a particularly expensive exit. They exited Korea. They've put a fair amount of money just recently into a struggling Japanese chain, and it's going to be a turnaround. Terence or David — how would you describe the return on investment, on ASDA, for example?

Terence Paré:

The return on ASDA has not been great. Part of the reason that Wal-Mart's returns overseas are less attractive in places like the UK than they are in the US is that they don't have the same kind of structural advantages there that they have here.

One of Wal-Mart's big edges is its ability to get goods from the supplier to the store very, very efficiently. It's harder to do that in countries like the UK. Is just not easy to get around. Wal-Mart's edge here, which is their superior logistics courtesy of our highway system, just doesn't exist in a lot of other areas. Their big differentiator is just not as important over there as it is here. I don't think they will ever be able to get the kind of returns overseas that they get in the US, but they'll do okay.

Full Transcript

Wednesday, August 27, 2008

Warren Buffett May Have Quadrupled Berkshire Hathaway’s Position in ConocoPhillips

In the latest filing of Berkshire Hathaway, Warren Buffett’s previous position in ConocoPhillips (COP) did not show up. This makes us Buffett followers wonder what he did to the stock.

The filing said this about ConocoPhillips: "Confidential information has been omitted from the Form 13F and filed separately with the Commission. Included in the confidential filing is information regarding Berkshire Hathaway's position in ConocoPhillips. At March 31, 2008, shares held in ConocoPhillips were included in Berkshire Hathaway's public Form 13F."

Did Buffett buy more COP, or just sold it out?

According to the latest quarterly reports of Berkshire Hathaway, during the first half of 2008, Warren Buffett bought $5.5 billion of stocks, $1.5 billion of that was purchased during the first quarter. Also Warren Buffett sold more than $1.6 billion of stocks during the second quarter.

The sale of $1.6 billion is mostly from the reduction of AnheuserBusch Companies Inc (BUD). Berkshire had about 35 million shares at the first quarter. He sold about two thirds of it, which is worth about 1.3 billion, close to the dollar amount of sale he reported.

Tuesday, August 26, 2008

Freddie Mac: An Interesting Bet?

Please read my comment at: Lollapalooza Investing

John Stumpf: Wells Fargo cracks the whip

As one of the country’s top two mortgage originators and distributors, Wells knew that steering clear of subprime and securitised lending would mean ceding valuable business to more aggressive competitors.

“You can imagine the pressure on us. We were the number one mortgage originator and we had to give up market share and earnings,” Mr Stumpf says. “[But] it is more difficult to attend a party and leave before the trouble starts than not to attend the party at all. Part of my job here is to make sure we don’t attend parties that make no sense.”

With his laid-back delivery and penchant for catchy metaphors – traits he shares with Warren Buffett, his occasional bridge opponent and Wells’ largest shareholder – the 54-year-old Mr Stumpf makes Wells’ escape from the crisis sound easy. The reality is that the lender’s bold counter-cyclical call saved the company from the worst US housing bust since the Great Depression.

To be sure, Wells did suffer some $3bn in credit losses and has a sizeable portfolio of home equity loans that could continue to lose money for some time. But while some rivals such as Citigroup and Wachovia were forced to raise billions of dollars to close the gaping holes in their balance sheet and others such as Countrywide Financial had to sell themselves to avoid extinction, Wells’ relative financial health turned it into the hottest property in US banking.

Wallace Weitz on WealthTrack

Monday, August 18, 2008

Warren Buffett's Favourite Security 1952: Western Insurance Securities

This article was written by Warren Buffett...
Again my favorite security is the equity stock of a young, rapidly growing and ably managed insurance company. Although Government Employees Insurance Co., my selection of 15 months ago, has had a price rise of more than 100%, it still appears very attractive as a vehicle for long-term capital growth.

Rarely is an investor offered the opportunity to participate in the growth of two excellently managed and expanding insurance companies on the grossly undervalued basis which appears possible in the case of the Western Insurance Securities Company. The two operating subsidiaries, Western Casualty & Surety and Western Fire, wrote a premium volume of $26,009,929 in 1952 on consolidated admitted assets of S29,590,142. Now licensed in 38 states, their impressive growth record, both absolutely and relative to the industry, is summarized in Table I below.

Western Insurance Securities owns 92% of Western Casualty and Surety, which in turn owns 99.95% of Western Fire Insurance. Other assets of Western Insurance Securities are minor, consisting of approximately $180,000 in net quick assets. The capitalization consists of 7,000 shares of $100 par 6% preferred, callable at $125; 35,000 shares of Class A preferred, callable at $60, which is entitled to a $2.50 regular dividend and participates further up to a maximum total of $4 per share; and 50,000 shares of common stock. The arrears on the Class A presently amount to $36.75.

The management headed by Ray DuBoc is of the highest grade. Mr. DuBoc has ably steered the company since its inception in 1924 and has a reputation in the insurance industry of being a man of outstanding integrity and ability. The second tier of executives is also of top caliber. During the formative years of the company, senior charges were out of line with the earning power of the enterprise. The reader can clearly perceive why the same senior charges that caused such great difficulty when premium volume ranged about the $3,000,000 mark would cause little trouble upon the attainment of premium volume in excess of $26,000,000.

Adjusting for only 25% of the increase in the unearned premium reserve, earnings of $1,367,063 in 1952, a very depressed year for auto insurers, were sufficient to cover total senior charges of $129,500 more than 10 times over, leaving earnings of $24.74 on each share of common stock.

It is quite evident that the common stock has finally arrived, although investors do not appear to realize it since the stock is quoted at less than twice earnings and at a discount of approximately 55% from the December 31, 1952 book value of $86.26 per share. Table II indicates the postwar record of earnings and dramatically illustrates the benefits being realized by the common stock because of the expanded earnings base. The book value is calculated with allowance for a 25% equity in the unearned premium reserve and is after allowance for call price plus arrears on the preferreds.

Since Western has achieved such an excellent record in increasing its industry share of premium volume, the reader may well wonder whether standards have been compromised. This is definitely not the case. During the past ten years Western's operating ratios have proved quite superior to the average multiple line company. The combined loss and expense ratios for the two Western companies as reported by the Alfred M. Best Co. on a case basis are compared in Table III with similar ratios for all stock fire and casualty companies.

The careful reader will not overlook the possibility that Western's superior performance has been due to a concentration of writings in unusually profitable lines. Actually the reverse is true. Although represented in all major lines, Western is still primarily an automobile insurer with 60% of its volume derived from auto lines. Since automobile underwriting has proven generally unsatisfactory in the postwar period, and particularly so in the last three years, Western's experience was even more favorable relative to the industry than the tabular comparison would indicate.

Western has always maintained ample loss reserves on unsettled claims. Underwriting results in the postwar period have shown Western to be over-reserved at the end of each year. Triennial examinations conducted by the insurance commissioners have confirmed these findings.

Turning to their investment picture, we of course find a growth in invested assets and investment income paralleling the growth in premium volume. Consolidated net assets have risen from $5,154,367 in 1940 to their present level of $29,590,142. Western follows an extremely conservative investment policy, relying upon growth in premium volume for expansion in investment income. Of the year-end portfolio of $21,889,243, governments plus a list of well diversified high quality municipals total $20,141,246 or 92% and stocks only $1,747,997 or 8%. Net investment income of $474,472 in 1952 was equal to $6.14 per share of Western Insurance common after minority interest and assuming senior charges were covered entirely from investment income.

The casualty insurance industry during the past several years has suffered staggering losses on automobile insurance lines. This trend was sharply reversed during late 1952. Substantial rate increases in 1951 and 1952 are being brought to bear on underwriting results with increasing force as policies are renewed at much higher premiums. Earnings within the casualty industry are expected to be on a very satisfactory basis in 1953 and 1954.

Western, while operating very profitably during the entire trying period, may be expected to report increased earnings as a result of expanding premium volume, increased assets, and the higher rate structure. An earned premium volume of $30,000,000 may be conservatively expected by 1954. Normal earning power on this volume should average about $30.00 per share, with investment income contributing approximately $8.40 per share after deducting all senior charges from investment income.

The patient investor in Western Insurance common can be reasonably assured of a tangible acknowledgement of his enormously strengthened equity position. It is well to bear in mind that the operating companies have expanded premium volume some 550% in the last 12 years. This has required an increase in surplus of 350% and consequently restricted the payment of dividends. Recent dividend increases by Western Casualty should pave the way for more prompt payment on arrearages. Any leveling off of premium volume will permit more liberal dividends while a continuation of the past rate of increase, which in my opinion is very unlikely, would of course make for much greater earnings.

Operating in a stable industry with an excellent record of growth and profitability, I believe Western Insurance common to be an outstanding vehicle for substantial capital appreciation at its present price of about 40. The stock is traded over-the-counter.

Thanks to Investor's Consigliere: Article

Friday, August 15, 2008

Bruce Berkowitz Stays In The Sunshine

The fund has been busy buying health care stocks, ranging from generic drug makers to health maintenance organizations. What do you like about the health care sector right now?

There are predictions about the demise of this industry, with a new president coming in. The bottom line is that we want--especially baby boomers--to live until we're 100 years old. We want a very high quality of life until the last day. The unintended consequence is that health care costs are going to skyrocket. The only chance we have to control skyrocketing health care costs, while still trying to improve services, will be through the large HMOs.

But investors might be worried about committing capital to pharmaceutical and managed care companies because we don't know who will be in the White House next year and what that change in administration will mean for these industries.

So there is a simple question: Who else will do it? Barack Obama talks about having health care like they have in Congress. Who does the health care in Congress? It's the HMOs. The government can only write a check. When all you can do is write a check, you can't control costs. So costs will go through the roof, even more so. The government needs the HMOs. Who helps the government develop the pricing that's paid for products and services? It's the HMOs. The HMOs are the system. Then look at the pharmaceutical industry, which develops these miraculous drugs.

One of your top picks is drug giant Pfizer. How come?

$17 billion of free cash, which turns out to be over $2 per share of free cash for a triple-A quality company. This is the largest pharmaceutical company in the world trading under $20 per share.

Let me make sure we all understand what I mean by free cash: It's the amount of money that is possible to pull out of the business without hurting the franchise. Ten years ago, everybody loved Pfizer. It was trading between 40 and 50 times earnings. Today, it's under 10 times earnings and nobody wants it.

How come?

Because they are all worried about Lipitor and the new president. Lipitor doesn't come off patent for another three years, and the company is dramatically changing. There is a new CEO with a wonderful strategy.

You will see Pfizer, in my opinion, do a lot more joint ventures. I think they will become almost like Exxon Mobil, which is really a merchant bank that has the distribution, size and cash to partner up with a lot of people around the world. Pfizer will do that. People just don't realize the number of joint ventures they have and the power of their distribution channel.

Also, the pharmaceutical companies in the past have been quite stodgy and lazy in not pursuing generics. They have given the generics away. I don't think we will as much now. We will see Pfizer become a larger generic manufacturer. As their drugs go off patent, you will see them compete more with the generics too.

They are the 800-pound gorilla. They and UnitedHealth have one-fifth of the entire insured population in the United States. That's it. They are the answer.

The problem now is that everybody is blaming everybody else: the doctors, the insurance companies, the government, the patients. Things have to change. The system needs to change more toward wellness. You should not be able to get a new pair of knees if you are 300 pounds overweight and you haven't made a valiant effort to lose weight. What's the point? You will just blow out your new knees. There has to be a huge shift. It is starting with the baby boomers as they try to keep their weight down and do some exercise. If the shift doesn't happen, then the costs are going higher and higher.

Frankly, the companies aren't making that much money. They look great now because their prices have fallen 50%.

Full Article

Saturday, August 02, 2008

MUST-WATCH: A Conversation with Charlie Munger

Charles Munger presented the Institute's 2008 DuBridge Distinguished Lecture in Beckman Auditorium on March 11. Munger, the vice chairman of Berkshire Hathaway Inc., a business partner of Warren Buffett, and one of the richest people in the United States, was joined in conversation by Caltech's Tom Tombrello, chair of the Division of Physics, Mathematics and Astronomy, and Kenan Professor and professor of physics.

Monday, July 28, 2008

Prem Watsa: Fairfax Financial beats bad markets

Q: Everybody else is running for the exits and melting down and Fairfax just had its credit rating upgraded so how did you pull this off?

A: “Very simply it goes back to this 100-year storm concern of ours. We took action that reflected our belief that everything was headed downward. Predicting rain doesn’t count, but building an ark does. And that’s what we did. We built an ark and we had a little bit of good fortune. This is why our rating went up.”

“Our focus has had a tremendous effect on our results. Last year we made in excess of US$1.1 billion and in the first quarter of 2008, US$631 million. Our capital, shareholders equity in 2006, was US$2.9 billion and it grew by 50%.”

Q: What was your thinking that led to these results?

A: “We have always taken a long term view and in 2003 we started worrying. We were concerned about asset-backed paper. We saw the moral hazard in all this credit that we saw was being blended and blown out. This was because interest rates were dropped to 1% to bail out the technology companies after the bubble burst in 1999 and we saw that this would lead to the real estate and auto loans and credit card problem. We saw that half of consumer spending was from home equity loans. So we protected ourselves. Credit default swaps are why our ratings went up.”

Saturday, July 26, 2008

Thursday, July 24, 2008

Tom Brown: Is it a Bottom in Financial Stocks?

One never knows until long after the fact, of course, when stock prices reach the exact top or bottom of a given cycle. And, besides, trying to pick precise tops and bottoms always turns out to be a pointless, unprofitable game. So don't even try.

Have I hedged myself sufficiently? Good. For, as it happens, I believe July 15, 2008 will turn out to be as good a date as any to mark the end of the long, painful bear market financial stocks have endured for the past 18 months. And more to the point, it marks the beginning of the greatest financial stock bull market in our lifetime, one that will be much broader than the bull market that began in 1990.

Caution! The observation above is offered to investors only. If you can't stand the idea of seeing another, say, 20% on the downside, please stop reading at once and head back to CNBC.com. If you measure your investment horizon in weeks or months, please, for your own good and sanity, leave this site pronto.

But if you understand what drives stock prices, and have an investment time horizon of at least one year, feel free to keep reading. And if you are a patient value investor, get out your highlighter and get ready to buy stocks.

I believe the current valuations of scores—even hundreds—of financial companies are wildly out of whack with the companies' long-term earnings potential. The companies are extraordinarily undervalued, in my view. In the vast majority of cases, I can get comfortable with their potential future credit losses and (in the cases where they're needed) the possibility of future, dilutive capital issuance.

With the gap between current market values and business values so wide, investors shouldn't even worry too much whether July 15th was indeed rock bottom for the stocks. The margin for error today is so wide that any investor with at least a one-year horizon and a little analytical ability can pick huge winners. We wouldn't buy across the board, but the vast majority of the depressed financial stocks will survive, recover, and deliver high investment returns from these levels.

Monday, July 21, 2008

Lollapalooza Investing: My New Blog

I have launched a new blog: Lollapalooza Investing, which I will use as a platform to share stock ideas. I have just posted my first write-up: A.H. Belo (AHC).

Please visit: Lollapalooza Investing

Tuesday, July 08, 2008

John Templeton, Global Investing Pioneer, Dies at 95

John Templeton, the billionaire U.S. philanthropist who made his fortune as the pioneer of global investing in the postwar boom, has died. He was 95.

Templeton died today at Doctors Hospital in Nassau, the Bahamian island that was his home, his spokesman, Don Lehr, said in a statement. The cause was pneumonia.

The Templeton Growth Fund was one of the first mutual funds to give Americans access to investments in companies abroad. Since its start in 1954, the fund has returned 13.5 percent a year on average, meaning a $10,000 investment would be valued at about $8.5 million as of March 31, including reinvested dividends and capital-gains distributions.

Like Warren Buffett, Templeton developed a cult following, with fund investors flocking to annual meetings to hear his pronouncements. Money magazine in 1999 called him ``arguably the greatest global stock picker of the century.''

A devout Presbyterian, Templeton may be remembered as much for financing the study of spirituality as for his canny investments. In 1972, he set up the $1 million-plus Templeton Prize. Mother Teresa was the first recipient, six years before she collected the Nobel Peace Prize. He always made sure that his award offered more money than the Nobel Prizes.

``What we say about investments isn't as lasting as what we say about spiritual matters,'' Templeton, who was a board member of the American Bible Society, said in a 1993 interview from his home in the Bahamas.

Wednesday, July 02, 2008

Bill Gates and Warren Buffett Discuss "Creative Capitalism"

Warren Buffet: I would rather have Bill, if he will, give me the main points.

Bill Gates: Well it’s not completely well defined. It’s a phrase that I used in a speech at Harvard a year ago, because I totally believe in markets as such powerful forces for drawing out innovation and creating things that are sustainable. And yet, you do get trapped in this situation where the markets serve where the dollars are, so you don’t get markets meeting the needs of the poorest. And so how do you bootstrap or support the needs of the poorest so markets are reaching out to them. I mean, when I view the last hundred years as an experiment in how good markets are, the answer is very, very clear and very strong. It’s one of those things that’s so clear people won’t even discuss it with you anymore. Like in this [Edward] Teller biography: he says, Look, if he didn’t believe in innovation, he would have been a communist. If the economy is a zero-sum situation, then you ought to try some crazy sharing thing. It’s only the innovation and pie-growing activity that made Teller feel comfortable with the capitalistic approach. And I think that that’s been validated.

You often hear people saying that companies should do something besides profit maximization. And it’s amazing how strong a message is hidden in words like “diversity” or the broad term “corporate social responsibility.” Warren and I were just at the Microsoft CEO Summit for the last couple days and it was amazing how many of the talks were about how a company needs to have core values of who they are and what they do as the thing that makes the employees feel they have a purpose and guides their action. And how that needs to be really at the center, even more so than the short-term profit metrics. Jack Welch was very good on that and Lee Scott [CEO of Wal-Mart] was very good on that, I think in a very sincere way. I think it’s more true all the time.

Bill George [of Harvard Business School] ran the leadership panel, and he was saying how the younger generation really wants to go to work with people who have a purpose. So what I’m saying is when people write down that purpose, when they write down their values, that an element of that should be: what can we do based on our skill set, our innovators, whatever unique capacities we have as a company--what can we be doing for the poorest 2 billion? And that can either be taking more risk in terms of trying to develop markets there, which is C.K. Prahalad-type stuff, or just doing things like the Merck donation that are not profit seeking and yet not giving up huge percentage of profit.

So somebody can read the words “creative capitalism” and say, “Okay, Bill Gates said that you should serve the poorest 2 billion and ignore profit.” That is not what I intend to say at all, but then I am being a bit ambiguous about how far you go in being willing to give up something. Am I saying one percent? Two percent? Three percent? Nobody who sets these dual roles is very good about being clear. I mean, what do they say you’re supposed to give up for corporate social responsibility. Well, they’re not willing to be numeric because they feel like the two goals, profit and social responsibility, aren’t totally at odds over time—or diversity, or whatever the value is.

Full Article

Bruce Berkowitz: Ignoring the Crowd

A five star investor gives market strategies, with Bruce Berkowitz, Fairholme Capital Management president and CNBC's Erin Burnett.

EXCLUSIVE: Warren Buffett one-on-one with BNN's Kim Parlee

How much would you pay to dine with the Oracle of Omaha? Warren Buffett has already raised $650,000 for the rights to dine with him and the bidding is still open.

Find out why the icon of the investment world is putting the proceeds from the auction to philanthropic use.

Video Link

Monday, June 30, 2008

Jim Chanos: A Short-Seller Comes To Stanford

Jim Chanos, the world's biggest short-seller, today made an appearance in the enemy camp.

Chanos, the president of Kynikos Associates, which has $6 billion invested in bearish bets on the stock market, gave a talk this morning at the Stanford Directors' College, an annual symposium at Stanford Law School for the directors of public companies.

Chanos provided some insights on what he does, areas of the market where he sees opportunity to short stocks, and how directors ought to react when the find short interest in their stocks rising. Here are a few bullet points from the talk:

  • Chanos noted jokingly that he doesn't often get invited to talk to corporate directors - and that when he does, "there tends to be a battery of lawyers in the room and a stenographer." More seriously, he said part of his goal was to make it clear that shorts are neither "the evil omnipotent financial geniuses the market thinks we are on down days or the village idiots the market thinks we are on up days."
  • Kynikos has 5 investment partners with a combined 160 years of experience, and 20 investment professionals in all. Chanos notes that the firm has "no opinions on interest rates, or drilling offshore, or the dollar, or the Fed." Instead, he says, "we are just looking at companies, the only place we feel we can add value." And he adds that they "delve into companies more than you would ever want to know."

Seth Klarman's interview

Seth Klarman is nobody's idea of a fast-buck, quick-change investor. Since helping to found Boston-based Baupost Group in 1982 with $27 million pooled from four families, he has emulated prototypical value-investment role models like Warren Buffett and the late Benjamin Graham. He buys underpriced equities and securities of bankrupt or distressed companies and usually steers clear of leverage and shorting, though last year he made very profitable investments in credit protection and recorded his best-ever annual return (52 percent). Klarman credits his "very strong team" and stresses that he doesn't even consider himself a hedge fund manager in the traditional sense (though he accepts only legally qualified investors and charges a 20 percent performance fee). Yet his nearly 20 percent annualized returns rival those of larger peers who take more risks. A professorial 51-year-old who manages $12 billion today, Klarman has an economics degree from Cornell University and an MBA from Harvard Business School but traces much of his success to two Wall Street mentors, Max Heine and Michael Price.

How did you decide value investing was for you?

I was fortunate enough when I was a junior in college — and then when I graduated from college — to work for Max Heine and Michael Price at Mutual Shares [a mutual fund founded in 1949]. Their value philosophy is very similar to the value philosophy we follow at Baupost. So I learned the business from two of the best, which was better than anything you could ever get from a textbook or a classroom. Warren Buffett once wrote that the concept of value investing is like an inoculation- — it either takes or it doesn't — and when you explain to somebody what it is and how it works and why it works and show them the returns, either they get it or they don't. Ultimately, it needs to fit your character. If you have a need for action, if you want to be involved in the new and exciting technological breakthroughs of our time, that's great, but you're not a value investor and you shouldn't be one. If you are predisposed to be patient and disciplined, and you psychologically like the idea of buying bargains, then you're likely to be good at it.

What traits in Heine and Price influenced you?

Max Heine was great at not looking at what something was called, what its label was. He looked at what it actually was. For example, back in the late '70s, Mutual Shares was buying the bonds of bankrupt railroads, and I think a lot of people would have said, "They're bankrupt," and "Who needs railroads?" Max and one of his partners knew how many miles of track the railroad had, what the scrap steel on the track could have been sold for and which railroads might have wanted pieces of those networks. They also knew what the real estate rights above the terminals were worth.

Michael Price was fabulous at pulling threads. He would notice something, and then he would get curious and ask questions. And one thing would lead to another thing, and that would lead to another thing. I remember a chart that Michael made of interlocking ownership of mining companies that was an extension of a thought where one good idea led to another and had the potential to lead to many more if the threads kept being pulled. That was a great lesson — to never be satisfied. Always be curious.

Sunday, June 22, 2008

Chris Hohn profile: Britain's biggest charity donor

Before his latest £466m donation, he had already given away more than £230 million, dwarfing his estimated fortune of £110m.

Mr Hohn, 41, is a controversial figure in the business world because of his aggresive money-making tactics, but his private life remains largely secret and he very rarely gives interviews or talks about his philanthropy.

The father of four is the son a of a white Jamaican car mechanic who emigrated to Britain in 1960 and moved to Sussex after marrying a secretary called Winifred.

Mr Hohn went to Southampton University before attending Harvard Business School, in Massachusetts, USA, where he studied the Master of Business Administration course.

He was an excellent student and became a Baker Scholar – an award given to the best five per cent of the graduates.

Tuesday, June 17, 2008

David Einhorn: The Confidence Man

Six years ago, hedge-fund manager David Einhorn made a speech at an annual investment conference about a stock he didn't like—a mid-cap financial company called Allied Capital—and the world came crashing down on top of him. He was investigated by the Securities and Exchange Commission for conspiring with other investors to sink the stock. Allied stole his personal phone records in an attempt to prove the conspiracy. An article in The Wall Street Journal compared his treatment of Allied to "a mugging." New York's then–Attorney General, Eliot Spitzer, vowed to do his own investigation. And Einhorn's wife, an editor at the financial weekly Barron's, mysteriously lost her job.

The repercussions of that one speech dragged on for years, an experience that would have embittered most people, or at least have made them back off. But Einhorn kept digging at the company, ultimately finding evidence of fraud that made his initial report seem tame. Then Einhorn took a very unusual step for a hedge-fund manager, most of whom would rather you didn't know their names, much less how they run their businesses. He wrote a very candid and illuminating book about his firm, Greenlight Capital, and the complete Allied ordeal. The purpose, he says, was not to become famous or to settle scores; it was to tell people that he had been right all along. He wanted them to see the Allied story as having a "bigger meaning"—that the political, financial, and media Establishments can, and do, conspire to quash truth-telling.

Fooling Some of the People All of the Time was published just in time for this year's iteration of the same conference. His plan was to go there and give a talk about the book.

In the hedge-fund world, this event, known as the Ira W. Sohn Investment Research Conference, is a big deal. People pay up to $3,250 a seat to hear a dozen or so highly regarded investors pitch an idea. It's a charitable event, benefiting pediatric-cancer programs, but it's also a heavyweight Wall Street ritual, with serious profit opportunities at stake.

A few days before this year's conference in May, Einhorn and his analysts at Greenlight had a private call with Erin Callan, the then–chief financial officer of Lehman Brothers. In two previous speeches at other investing conferences, Einhorn had raised doubts about Lehman; in April, he had explicitly stated that his firm was shorting Lehman, meaning that it had borrowed stock and sold it, with the idea that the firm would replace it at a later date when the stock declined in value (in essence, a bet that the stock would go down, not up). Very few people publicize their shorts, and when Einhorn did, it got Lehman's attention. The conversation with Callan was to give her a chance to explain discrepancies he had uncovered between the firm's latest financial filing and what had been discussed during its conference call about that filing.

That very week, a glowing profile of Callan had appeared in The Wall Street Journal, describing her in the headline as "Lehman's Straight Shooter." But she'd only been on the job six months and her background was as a tax lawyer, not in finance. She was evidently not prepared for the complexity of Einhorn's questions and tried to bluff her way through. "The conversation was reminiscent of the ones I had with Allied," says Einhorn. "We had our questions, we were organized, but she was evasive, dishonest. Their explanations didn't make any sense."

Full Article

Donkey's Tale

One day a farmer's donkey fell down into a well. The animal cried piteously for hours as the farmer tried to figure out what to do.

Finally, he decided the animal was old, and the well needed to be covered up anyway; it just wasn't worth it to retrieve the donkey.

He invited all his neighbors to come over and help him. They all grabbed a shovel and began to
shovel dirt into the well. At first, the donkey realized what was happening and cried horribly. Then, to everyone's amazement he quieted down.

A few shovel loads later, the farmer finally looked down the well. He was astonished at what he saw. With each shovel of dirt that hit his back, the donkey was doing something amazing.He would shake it off and take a step up.

As the farmer's neighbors continued to shovel dirt on top of the animal, he would shake it off and take a step up.

Pretty soon, everyone was amazed as the donkey stepped up over the edge of the well and happily trotted off!

Life is going to shovel dirt on you, all kinds of dirt. The trick to getting out of the well is to shake it off and take a step up.

Each of our troubles is a steppingstone. . We can get out of the deepest wells just by not stopping,never giving up! Shake it off and take a step up.

Thanks to Dr. Lim Sean Teik for this article.

Friday, June 13, 2008

Bill Ackman Part II: Eight Easy Steps to Becoming a Short-Seller

So you want to be a short-seller (or an activist). Here are some lessons gleaned from Pershing Square Capital founder William Ackman at our Deals & Deal Makers conference Wednesday.

Do your homework: Ackman said he gets most of his ideas not from sophisticated tips but just by "brute force" just from reading annual reports and looking for ways in which companies are undervalued by the stock market. Then he can pull just a few simple levers to boost the companies' stock valuations to where he believes it should be.

Find a theme and export it: Ackman says he invested in Sears and Sears Canada because the retailing companies financed their credit-card receivables on its own balance sheet, which wasn't well-understood by the markets. He used the same kind of thinking to tackle Target, which he believed was strong company with a solid debt profile and also one of the only retailers to still finance its credit cards in-house.In the case of Sears, Ackman evaluated it as its component parts, including Sears Hardware, Home Services, Sears Canada, Land's End and Sears Mexico, all of that is before you get to the company's extensive real estate value. "The only thing wrong is the stock price," he said, a line that drew laughs, because Ackman acknowledged later, it bore a similarity to the old joke about "other than that, how was the show, Mrs. Lincoln."

Operate unlevered: Ackman's hedge fund doesn't use debt. (A co-investment vehicle uses non-recourse leverage, which are loans that don't require collateral). "We're never exposed to market fluctuations and our prime broker doesn't make margin calls," he boasted. Without worries about debt, market panic is "just noise," he said. "It's all opportunity."

Full Article

Tuesday, June 10, 2008

Buffett's big bet

Will a collection of hedge funds, carefully selected by experts, return more to investors over the next 10 years than the S&P 500?

That question is now the subject of a bet between Warren Buffett, the CEO of Berkshire Hathaway, and Protégé Partners LLC, a New York City money management firm that runs funds of hedge funds - in other words, a firm whose existence rests on its ability to put its clients' money into the best hedge funds and keep it out of the underperformers.

You can guess which party is taking which side.

Protégé has placed its bet on five funds of hedge funds - specifically, the averaged returns that those vehicles deliver net of all fees, costs, and expenses.

On the other side, Buffett, who has long argued that the fees that such "helpers" as hedge funds and funds of funds command are onerous and to be avoided has bet that the returns from a low-cost S&P 500 index fund sold by Vanguard will beat the results delivered by the five funds that Protégé has selected.

We're way past theory here. This bet, being reported for the first time in this article (whose author is both a longtime friend of Buffett's and editor of his chairman's letter in the Berkshire annual report), has been in existence since Jan. 1 of this year.

It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 million at the bet's conclusion.

That $1 million will then go to charity. If Protégé wins, it has asked that the money be given to Absolute Return for Kids (ARK), an international philanthropy based in London. If Buffett wins, the intended recipient is Girls Inc. of Omaha, whose board includes his daughter, Susan Buffett.

Full Article