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

Friday, June 06, 2008

Notes from AAII NYC discussion with Bruce Berkowitz of Fairlholme Fund

Notes from AAII NYC discussion with Bruce Berkowitz
[Posted by BenGrahamMan on the Motley Fool's Liquid Lounge board]

Bruce is a well known value investor with concentrated portfolios. He labeled his fund as "Focused and Value Based." The following are my notes to this wonderful meeting. I was very appreciative of the discussion.

1. "Doesn't make sense to have greater than 10 or 20 positions. Diversification is insurance against ignorance."

2. Risk is the chance of permanent loss. There are two concepts of risk.

3. Various investment rules.

A. Rule 1 - don't lose

B. Always figure out how you can "die" in the investment. He mentioned an old country song, "tell me where I am going to die, and I won't go there." Always invert. Try to die in your investment and if you find a good way to die, try to avoid the investment.

C. Crowd is comfortable, but you will pay a high price for being with the consensus.

D. Institutions have a disadvantage in investing because they have an institutional imperative.

E. Don't have a herd mentality.

F. Emphasis on Free Cash Flow and not Fee Cash Flow. Free Cash Flow means "owner's earnings." Free Cash Flow is likened to the old corner grocery store. At the end of the period, how much is left in the register after all payments are made. That is Free Cash Flow.

4. Invests with the Benjamin Graham's dividend payers. Shareholder buy-backs are a means of giving shareholders money.

5. Read annual reports backwards. After reading 60 pages you will be exhausted. Hence you will miss all the good and important footnotes.

6. Sears Holding (SHLD) ($85.26) -

A. Lampert has cards up his sleeve. He is a smart guy. The price of SHLD means you get Eddie Lampert for nothing.

B. Obvious investment is real estate for Sears.

C. Claims lots of Free Cash Flow.

D. Bought back stock at high price.

E. Think about a young Berkshire Hathaway. Buffett struggled with the ailing textile mill for over 7 years before he pulled the plug. Look what Berkshire turned into.

F. Claims that K-Mart and Sears could disappear as retailers and all is still good. If they happen to hit, merely a bonus. "What if they become a Wal-Mart?" Don't count on it, but could happen.

G. You can't kill Sears. If you can't kill it you should own it.