Interview: Julian Robertson Oct 19, 2007

CNBC's Erin Burnett discusses the economy and the prospects for a recession with legendary investor Julian Robertson.

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A Storied Name on Sale?

Ackman used seemingly conservative break-up estimates. Yet the $8.5 billion enterprise value he assigned to Sears' U.S. retail real estate both on and off the mall worked out to just $33.05 per square foot, based on an estimated 257 million square feet. The number pales beside the enterprise values per square foot of Sears' various rivals.

Target and Kohl's both boast implied real-estate values of more than $300 a square foot, or around 10 times Sears' number, despite generating cash flow per square foot less than three times that of Sears. Appliance- and tool-heavy Home Depot (HD) and soft-goods-oriented Penney also have per-square-foot numbers that are multiples of Sears', weighing in at $277 and $144 respectively. The comparison gets downright nutty when Sears is compared to, say, the retailing real-estate investment trust Simon Property (SPG), which, according to Ackman, has an implied mall value per square foot of $698.

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Pzena Investment Management's IPO presentation

Good presentation regarding how Pzena Investment Management built its AUM from $3billion to $30billion.

Important take home messages:

1. To be a successful investment firm, one has to deliver long-term superior results through constant, repeatable process that clients could understand.
2. The first step towards finding potential investments is using its own proprietary screening method. For every industry, Pzena's team would rank all the companies into five quintiles. The way they do it is by using its current earning and extrapolate naively into the next few years what its earning should be. Then, they would concentrate on finding potential investments on the top quintile.
3. Three most important questions they ask themselves regarding potential investments are:
   a) Is this company any good? b) Are the problems temporary? c) Will its earning rebound back to normal?
4. Pzena and his teams will only invest in companies that answer "Yes" to all those questions.
5. Thought process: Think like a business owner rather than a stock picker.
6. Pzena team thinks like a business owner and imagine that they are like private equity, buying the whole business and thinking what the companies will earn in future.
   
7. One example that Richard Pzena used was Boeing. Post 9/11, Boeing stock took a hit, dropped from the $70s to the $20s. Through Pzena's own proprietary stock screen, it showed up on the top quintile.
8. The conclusion that they made on Boeing was it is a superior company with only one competitor, it has very sticky customers as they would use the same company to service their planes to keep their costs down, it has defense business that is doing well and thus provides downside protection and they believed that its business should rebound in a few years.
9. Boeing is definitely a wonderful business, clouded by temporary problems and will have higher normalised earnings in future.
10. Investment decision: A team approach.
11. For every portfolio, there are 3 co-portfolio managers and everyone of them would have to unanimously say "Yes" before a stock is added into the portfolio.
12. Buying an selling strategy: Rigid and discipline; Pay no attention to portfolio managers' intuition.
13. They would only buy companies ("Yes to all 3 important questions") that are ranked on the top quintile and sell when the prices approach the middle quintile. Period.
14. Portfolio diversification: Concentrated portfolio with 25 to 30 stocks.
15. Clients education: Pzena team spends good amount of time educating clients what they are doing and discourage clients who might be upset or nervous if the funds are not doing well in the next 1, 2, 3 or 4 quarters.
    
16. This will results in highly educated and sticky clients.
17. In summary: Pzena team uses old fashion, holy grail approach of investing: Buying good businesses, which are available at low prices caused by temporary problems with high likelihood that earnings will rebound in future.
    

To watch this excellent presentation, please visit: Retail Road Show

Pabrai's Annual Meeting at Chicago Sept 2007

These are some of the things that Mohnish Pabrai said during his annual meeting.

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Pabrai was asked about possibility of investing in commodities, such as gold.

He responded by quoting Buffett, saying, "If Martian were to to observe the activity of human beings for many many years, they would not understand what these humans were doing. They are digging the gold out from the ground, proccess them and put them in the vaults and never touch them again."

He only wants to invest in companies with businesses that Martian could understand.

Another question was what he thought about relationship between volatility of the market to stock market valuation.

His response was.... "You have asked the wrong person, you should ask Chicago Business School." What a great response. Plenty of applause from the crowd.

Understanding his investment in Ipsco.

When he invested in Ipsco, 1/3 of its market cap was cash. It was selling at 2X free cash flow. It has high visibility of earnings for 2 years, but uncertainty after that. Mohnish's thinking was after 2 years of investment, the total amount of cash generated and those on the balance sheet would be equivalent to the total worth of the company at the time of investment. Thus, he would get the steel business for free.

Despite not knowing the intrinsic value of Ipsco at the time of purchase, it was a high uncertainty, but low risk bet. Ipsco was eventually bought out and he earned over 100% of return. Dhandho!

Understanding his investment in Lear Corp.

Duopoly business. The other automotive seat maker is Johnson Controls. High ROIC and has been growing revenue 13% per year for the last 10 years. Problems started in 2005 when commodity prices increased and they were unable to pass the costs to its clients. However, as contracts were running out, Lear could renegotiate its contracts and pass the price increases to clients.

Mohnish sold his position when Icahn offered to buy out Lear. As the deal fell through, Lear is still a listed company. Mohnish mentioned that he might be interested in buying Lear again if price falls below $25/share. So, keep an eye on Lear.

Would he ever hire an analyst?

No. Mohnish said that Buffett, despite managing billion of dollars, is basically one man business. The more brains get into investment, the worse the performance would be. He also quoted Munger for saying.."Nothing useful comes out of a committee."

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I was very grateful to have the chance to ask Mohnish a few questions that are relevant to me.

One of the questions was... prior to setting up his fund, has he thought of working for anyone else besides Buffett?

His answer was no. Buffett is the best. He has not thought of working for anyone besides Buffett.

As I don't have any business background and is a self-taught value investor, I asked him what he thought of CFA?

He told me I can skip the CFA. :)

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All the above are recollection from my memory, so they might not be the exact words of Mohnish.

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If you are interested in seeing some of the photos I have taken at Mohnish Pabrai's meeting, please visit: Mohnish Pabrai 2007 AGM at Chicago

Steven McIntyre & Todd Stein: Railroads, Following Buffett's Lastest Move

We were sitting in the audience at the Berkshire Hathaway shareholder meeting in 2006 when Warren Buffett talked about his inevitable shift in deciding to buy solid companies at 90% of X (X being the company’s intrinsic or true value) as opposed to 50% or 60% of X in the past. This shift is largely a function of size as managing enormous amounts of capital usually means paying higher prices and sacrificing some margin of safety in order to “put money to work”. Buffett has in recent years bought shares of companies such as Wal-Mart, Johnson & Johnson, Procter & Gamble, Tesco, and UPS at what we feel is 90% of X.

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Source: Lincoln Minor

Emil Lee: Buffett's Capital Riddle

Here's a riddle for you. Say you could own one of two companies:

• Company A, which earns $2 million with $8 million in net tangible assets, and costs $25 million to purchase.
• Company B, which earns $2 million with $18 million in net tangible assets, and costs $18 million to purchase.

Furthermore, let's assume both companies will have flat unit volume for the foreseeable future. Which one would you pick?

A value investor's dream
Hmm ... let's think about this. If you pick Company B, you get more tangible assets, the same amount of earnings, and you're buying at a multiple of earnings of 9, versus 12.5 for Company A. Not only that, but wasn't Ben Graham, the godfather of value investing, a proponent of buying stocks at a discount to asset values?

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Sham Gad: Don't Invest in the Most Valuable Business

Pabrai examined this list and determined that if you had started with $10,000 invested in the most valuable businesses in 1987, when Fortune released its list, and every subsequent year reinvested the funds in what was at the time the most valuable business, in 2002 you'd have an annualized gain of 3.3%. During the same period, the S&P delivered about a 10% annualized return.

You can clearly see from the results that the maximum pessimism approach would yield a far more superior result. As the saying goes, what has risen shall fall, and what has fallen shall soon rise again. Surely not every stock that deteriorates will again rise -- it's up to you to provide the thorough analysis and determine whether or not a superior investment opportunity exists.

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Buffett: Bear Stake

Mr. Buffett, in particular, reached out to Mr. Cayne about a month ago, these people said, when the stock was approaching its one-year low of $100. While he is not known to be close friends with Mr. Cayne, Mr. Buffett might find more in common with the Bear Stearns boss than other Wall Street chief executives. Both in their mid-70s, they hail from the Midwest and are passionate bridge players.

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Buffett All-Stars Welcome Yankees' Chamberlain

``I just talked to Mr. Buffett,'' Wilson wrote, ``and he said that he is a big fan of Joba and that the welcome mat is out here anytime!''

``It says a lot about Joba,'' Ogilvie, the golfer, wrote via e-mail. ``The amazing thing about an audience with Mr. Buffett, his advice about money is directly correlated to whatever job you are doing, whether it be golf or a pitcher. Discipline wins. And Joba and the Yanks will be better in the long run.''

An unsettling thought for hitters.

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Tom Brown: Thoughts on FMD

FRANCHISE PLAYER: For years, the bears’ big complaint about First Marblehead has been that that the company doesn’t contribute anything of material value the student-loan origination process. It doesn’t lend (the bank partners do); it doesn’t service (third-party servicers do); it doesn’t guarantee (TERI does), and on and on. Eventually, therefore, Marblehead will be disintermediated by its partners and its business will disappear. Simple! To back up this line of thinking, critics pointed in instructive contrast to Sallie Mae, which originates a substantial portion of its business directly, without involvement of partners, and thus has its own solid, standalone franchise.

I happen to think that objection is nonsense, of course. Marblehead has considerable underwriting and product development expertise its competitors and partners can’t duplicate. If the company weren’t part of the lending process, its partners wouldn’t be able to originate student loans nearly as profitably as they do.

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