Another Buffett Lunch

It's always amazing to me how much people pay for lunch with Buffett given that he is very transparent about the causes of past investment failures and successes.

Yet, perhaps due to tax write-offs, really liking the work Glide is doing in the community, or advertising for one's own fund (in a way that is sure to at least have some tangible result), people continue to pay millions for a lunch with the Oracle of Omaha.

This year's lunch was purchased for $2.11 million by Zhao Danyang. You can read some excerpts about what was said at the meeting here.

The one thing in the whole piece that I found interesting was what the manager of Pureheart Asset Management didn't share--Buffett's view on the USD--and in particular why he kept that a secret: it is too controversial.

Review of Einhorn's Book

In preparation for writing a review of Fooling Some of the People All the Time, I read all 16 reviews (from mostly major publications) listed at its site, and others besides.

With a few exceptions, most did not actually review the book--showing what it said and why what it says is important. I set out to write a review that did do these things. And I did. You can read the opening paragraphs of it here, at The Objective Standard.

Note, for the curious, this is partly why my posts here are going to be few and far between. I decided to focus on doing a few in-depth, quality articles or reviews rather than the many posts I've been putting up here these past few months.

Re: Morningstar Conference

Leading up to the Morninstar Investor Conference I had this to say about it:

As fund managers trying to cope with redemptions, there is likely to be a lot of people talking their book and a bit less candor than usual can probably be expected from each manager too. That said, the other managers are likely to be less polite about their differences--in both style and positions--and that could lead to some very interesting, educational conversations. If I had to bet, I'd say the conference is undervalued.

Haven't seen much more on the conference than the bit that follows (from the WSJ), but if this was all that was said, reading the annual reports for free would have been far better.

The participants of a panel of value-focused managers, including Marty Whitman of Third Avenue Funds, were defiant about their losses last year. Mr. Whitman's Third Avenue Value Fund was down 46% in 2008.

"It was a market fleeing from the asset class, and not correcting or rebalancing at all," said Bill Nygren, manager of Oakmark Fund. "[Value managers] don't add value in that market."

More than one manager called last year's crisis "irrational," caused by forced selling, particularly among hedge funds and quantitative managers, and overstated fears. The value managers said they haven't changed how they approach their stock-picking strategies, despite last year's losses.

One question frequently asked among financial advisers and investment professionals at the Morningstar conference is whether the crisis will push funds to make wholesale changes. Yet many managers see business as usual once the recovery gets under way, with estimates ranging from either later this year or in early 2010, but some did see a possibility of different times ahead.

Note: the posting forecast for the next couple months will be dominated by sporadic showers of wit that you can use to help you invest better (as opposed to the usual 5-day posting schedule).

Greenlight: History Behind the Name

I previously posted the somewhat complicated history behind Leucadia's name. For the curious, the history of how Greenlight Capital got it's name is pretty simple. It was given by Einhorn's wife.

As he explains it in Fooling Some of the People All The Time:

"In early 1996 ... Cheryl named the firm, giving me the green light. When you leave a good job to go off on your own and don't expect to make money for a while, you name the firm whatever your wife says you should."

Recap of the Ira Sohn Research Conference

Bloomberg does a good recap here of what David Sokol-- of MidAmerican Energy Holdings--and David Einhorn--of Greenlight Capital--had to say at the most recent Ira Sohn Research Conference.

Sokol said, talking about the economy, that "we are not seeing any green sprouts" and that the "shadow backlog" of home foreclosures will last until 2011.

Einhorn said that the Obama administration is just like the Bush administration--it is trying to take us back to 2006 and get everyone to lever up again.

The banks don't need to lever up. In fact, according to Einhorn, they still need to write down their assets. Quoting directly: "For the economy to recover, these underwater entities [i.e., banks] need to restructure their balance sheets."

The Warren Buffett Quiz

So you call yourself a Warren Buffett fan? Think you know the Oracle of Omaha like the back of your own hand? Take the below quiz, then answer the above two questions again.

1. What two virtues do Warren Buffett and his business partner Charlie Munger prize most highly?

a. justice and productivity
b. humility and integrity
c. rationality and honesty
d. integrity and generosity

2. Buffett routinely refers to his work at Berkshire as analogous to...

a. taking candy from babies
b. painting the Sistine Chapel
c. dancing the Charleston
d. writing for the New York Times

3. In the early days of the Buffett Partnership, Buffett would read...

a. Moody's Manuals exclusively--and from cover to cover--which could be up to 10,000 pages.
b. Business Week, Moody's Manual and Barron's. He didn't have resources beyond that, though he did talk to management teams a lot, as well as other investors.
c. Balance sheets of the leading companies of the day, written in stone, and brought down from Mt. Sinai by Benjamin Graham.
d. The Pink Sheets, one of his favorite sources, and the National Quotation book, which listed companies too minuscule to even make it onto the Pink Sheets. These were in addition to a variety of other sources.


4. In school, Buffett would often...

a. Graciously put up with stupid questions that came from all the pretty girls.
b. Doodle Mae West's name, always surrounded by a heart, in the margins of his notebook.
c. Impress students by quoting long passages from the textbook, along with page numbers. He also would correct teachers on their text citations--telling one, "You missed a comma."
d. Ignore the teachers, focusing instead on the latest Moody's Manual or Wall Street Journal edition.

5. In a class he himself taught on stocks...

a. Students would toss out names of stocks, asking him whether to buy or sell, and Buffett would speak from memory for about five to ten minutes on any stock they named, giving them a clear--but conservative--answer.
b. Buffett used a biography of Mae West as a supplementary textbook.
c. Buffett was said to be terribly shy by students at the start of the course and supremely confident at the end.
d. Students learned above all that it was the quality of companies one bought that mattered most.

6. Warren Buffett's childhood nickname was...

a. Tornado
b. Whirlwind
c. Firebolt
d. Brains

7. During the early Buffett Partnership days, the kind of companies Buffett researched were often in the...

a. 1-10 million dollar range
b. 10-50 million dollar range
c. 50-100 million dollar range
d. 1-10 billion dollar range

8. Buffett thinks about his time...

a. as the common person does--and gives freely to any person who makes a claim of it.
b. selfishly. He's often a "lousy sport" at doing anything he doesn't want to do and he never lets others waste his time.
c. on earth as a preparation to enjoy the riches waiting for him--and everyone--in another life.
d. comfortably. He often fills in his Franklin Covey planner while getting a back massage from his wife Astrid and a foot massage from his best friend Bill Gates.

9. Buffett would finish the sentence "you are neither right nor wrong because people agree with you" by saying...

a. you are right because the stock market says so.
b. you are right because your reasoning is correct.
c. you are right because your margin of safety is large enough.
d. you are right because your facts and your reasoning are right.

10. Buffett accumulated a portfolio of great companies and great friends by...

a. learning and thinking about all kinds of companies and people, focusing on the promising one's (as determined by the context) and holding on to the great one's.
b. giving money to companies that had proven poor allocators of it and giving compliments to people that did not at first deserve them.
c. sheer luck. He is an Outlier, and his success in both areas is analogous to a coin-flipping monkey.
d. being free with his time, never wasting the time of another, and--as he himself would say--getting a little lucky at the right times.

Answers are in the comments section. But don't peak before you've written down your own, slackers!

Leucadia Investment in Trouble?

The financial partner in The Market Common project in Myrtle Beach has defaulted on its loan agreements with a national bank and might consider filing for bankruptcy protection, according to a notice issued Tuesday.

Leucadia National Corp., a financing partner with developer McCaffery Interests Inc., is contesting the defaults but said it is "exploring all options and remedies available to it including, but not limited to, a bankruptcy filing."

Thus begins an article on the Market Common fiasco--which you can read in full at Myrtle Beach Online. The trouble, however, doesn't stop there.

...[M]ore than one-third of The Market Common's tenants have asked the project's developers to lower their monthly rent payments, according to Tuesday's notice.

Jewelry store Carlyle & Co. plans to close in August and at least two other stores - Victoria's Secret and Bath and Body Works - have said they may close.

The stakes are actually pretty big on this one--i.e., foreclosure on the property by the bank is a possibility, however slim:

The financial default involves $7.6 million worth of payments Leucadia owes as part of an interest rate swap agreement tied to a construction loan.

Failure to pay that amount triggers another default on the primary $92.7 million construction loan and would let JP Morgan Chase foreclose on the property.

Leucadia, in the notice, said it has not paid the $7.6 million "and has no intention of paying such amount to Chase."

In addition to a possible bankruptcy filing, Leucadia said it is trying to negotiate new loan terms with the bank.

As the primary construction loan to Leucadia is scheduled to mature on October 10th, there's an end date to this financial posturing by both sides. But the problems at The Market Common seem likely to continue for a good while after.

Marty Whitman on the Balanced Approach

Munger likes Wisdom

Another title which pretty much states the obvious for us long-time fans.

This post will simply point to an article about the Oracle of Pasadena, Warren Buffett's right-hand man, Charlie Munger. The article talks about the Wesco meeting, and the man that many of the "cultists" go to hear speak.

A lifetime of practicing what he preaches has made Munger a billionaire: Good businesses are ethical businesses, he tells us. A business model that relies on trickery is doomed to fail.

Munger starts the session with "Socratic solitaire," in which he asks himself a series of questions.

"How serious is the present economic mess?" Munger asks. "Deadly serious. The worst mess since the Great Depression. You can't tell what happens when people get discouraged enough."

...

Today he's negative about the economy, but positive about stocks — a bullish sign. In the late 1990s, Munger complained that he didn't see much to buy. The market quickly proved him right. But, at current market prices, Munger sees many long-term investment opportunities.

"I am willing to buy common stocks with long-term money at these prices," Munger said. "Is Coca-Cola worth what it's selling for? Yes. Is Wells Fargo? Yes." He owns both.

"If you wait until the economy is working properly to buy stocks, it's almost certainly too late," he said. "I have no feeling that just because there's more agony ahead for the economy you should wait to invest."

Smart words from a very smart man. After reading the article, if you're wanting more Munger, get the book Damn Right! or Poor Charlie's Almanac.

Whitman Likes HK Real Estate

Marty Whitman likes Hong Kong real estate? That's probably not a secret to those of us who have been following him a long time.

But in Third Avenue's latest letter, Whitman presents some up-to-date information showing in numbers why he likes the great Hong Kong companies.

For example, the adjusted NAV for Cheung Kong Holdings is 100.38; for Henderson Land Development Company, it is 59.21; for Wheelock, it is 32.72.

Updating Whitman's data for the recent rise in share prices, but keeping the same adjusted NAV numbers, Cheung Kong is selling at a 15% discount, Henderson Land is 31% off, and Wheelock is still very cheap at a 41% discount.

"Most importantly," says Whitman, "all of the companies continue to have extremely strong financial positions and are very well poised to take advantage of opportunities presented by the current global recession and credit crunch."

This, he backs up by showing that the net debt to capital at Cheung Kong is 13.2%; at Henderson Land Development Company, 14.1%; and at Wheelock, a very low 1% (as it excludes debt at a major subsidiary which is non-recourse to the parent).

Insider ownership is around 50% at each of the companies--a fact with both postive and negative implications.

Michael Lewis Likes Snowball. I Don't.

The title says it all: the author of Liar's Poker and a long, critical article about Warren Buffett, likes The Snowball. And he wrote a lot about why for The New Republic. The article ends with a look back at his critical piece, along with the main reason that Lewis enjoyed the book:

Even then I thought that his virtues far outweighed his vices, and felt a bit like the guy who, having grown weary of hearing others drone on about the physical perfection of some supermodel, went to the beach with a camera and snapped a photo of her cellulite.

Now Schroeder's brave book offers a close-up of the same cellulite, but more fairly, in the context of a genuinely delightful character.

Buffett might not like it, but this book has done him a very Buffett-like service. Twenty years from now, when the financial markets have forgotten our current trauma, and finance is once again fashionable, some young person will pick it up and discover that history's most legendary investor was not a cartoon but a real live human being. And still, somehow, deeply admirable.

Despite being a fan of some of the books Lewis has written, I'm glad his review ended when it did. Because I am no fan of The Snowball and was more than a bit eager for a rambling Lewis to get to the point as to why he was.

(As an aside, my view on the book is not that it is without merit. In fact, I transcribed some long excerpts that I think are particularly valuable in two of my favorite posts Buffett: The Sleuth Investor and Buffett Author Explains Derivatives.)

My main criticism of the book was stated previously like this: "Buffett achieved success because he was focused and frugal; this biography fails because it is unfocused and verbose." That was true, and still is, but I was being too nice.

This positive (and philosophically-revealing) review has actually motivated me to write more on why I don't like The Snowball. And why other books are better for the person who would like to learn how he accumulated a portfolio of wonderful businesses and friends. To be posted soon...

Greenlight's Q1 2009 Letter

Greenlight's 2009 Q1 Letter detailed his holdings of Ford debt, as well as the common stock of Pfizer, Harman, and EMC. For example, Einhorn explains why Greenlight invested in Ford debt:

Ford is the third largest auto manufacturer in the world. We bought a large amount of secured bank debt (term loan and revolver), of which there is $14.7 billion outstanding, at an average price of 37% of par, starting in the fourth quarter of 2008.

The bank debt is secured by almost all of Ford’s assets including most of Ford’s manufacturing plants, inventory and accounts receivable, working capital, its investment in Ford Credit, most of Ford’s foreign subsidiaries including intercompany debt to Volvo, 66% to 100% of the stock of all major first tier foreign subsidiaries (including Volvo and Grupo Ford S. de R.L. de C.V., a Mexican subsidiary), and certain domestic intellectual property, including trademarks (i.e. the famous blue logo). In addition, Ford has over $20 billion of cash, which it had been burning at a good clip (we expect cash burn to fall). Even so, the collateral pool is worth many times the implied $5 billion valuation of the secured debt.

We observed that when the U.S. Government invested in General Motors, it put its money in junior to the secured bank debt. Even so, it does not appear that Ford will need a government loan any time soon, if ever.

Ford had the foresight to borrow money when the debt markets were accommodating. Ford reacted faster than its competitors to the slowdown by cutting production and other costs, improving manufacturing efficiency and vehicle quality. If auto sales stabilize at these low levels, Ford should reach cash flow breakeven in 2010 and generate $4 to $5 billion of automotive operating income in the next mid-cycle of automobile sales.

We also bought a smaller amount of various bond issues at Ford’s credit subsidiary at very large annualized yields to near-term maturities. The secured bank debt ended the quarter at 45% of par.

The letter, which ends with a quote by JFK--saying that "a nation that is afraid to let its people judge the truth or falsehood in an open market is a nation that is afraid of its people"--can be read in its entirety at Todd Sullivan's Value Plays.

Notes on the Notes from the Leucadia Meeting

For those who haven't read the complete notes from Leucadia's shareholder meeting, Inoculated Investor has posted seven pages worth. Here are my quick notes on the notes:

*The succession plan is basically to focus more on buying great (read: durable) companies, to develop capable managers, and to not die.

*Jeffries shouldn't compensate young know-nothings so highly--and if they use stock as compensation they should buy some back too (in order to cut down on diluting present shareholders).

*Americredit was bought too soon and is heading into a tough time as business shrinks, but it is a viable business, will survive, and at some point will prosper.

*Their top investments, including Fortescue, should outperform as the markets come back.

*Cresud has a great set of assets but the fundamentals in Argentina now are terrible and they're not optimistic.

*Commercial real estate? No thanks, say Steinberg and Cummins. And don't ask again, until they are full of durable companies.

*The company is positioned for inflation as they have borrowed in dollars and invested in hard assets.

*Sangart's Hemospan seems to be working fine but more tests are needed. Nobody has died yet, so that's cool. If it works, it will be a lot cooler.

*Third money managers? Never again, say both collectively. It was a huge mistake--especially the Pershing investment where they lost pretty much everything.

*The two couldn't care less about Moody's rating--and don't think you should either. (Hard to argue on this point.) "They have missed almost everything and been late at each turn."

*They don't have a crystal ball and don't know how long the downturn will last.

*Jeffries (JEF) is in retrospect even a better deal now than what they thought when they first made the deal. The deal was done with LUK stock--when it was trading around $54. (There's a message in that for all the JEF-deal-haters.)

*They buy when something is on sale and start to think about selling when the discount disappears.

*Long-term view on natual gas prices is six to seven dollars per Mcf.

*LUK has cash. Is looking to invest. Have been buying back their debt in the meantime.

Einhorn on the Economy

David Einhorn's comments on the market,from the GLRE conference call, are excerpted below:

...In the first quarter Greenlight Re’s investment portfolio had a better result than it did in the prior two quarters.

There are several factors that contributed to this. First, we enter 2009 with a very conservative posture, about 80% long and 40% short or about 40% net long. Although we are holding a good amount of cash, we became more concerned about the market as it sold off in January and became even more defensively positioned ending January at just 29% net long.

As things continue to dislocate through February, we used this as an opportunity to cover a number of short positions and entered the March slightly more a net long. We also added to our debt portfolio particularly in Ford Motor secured bank debt. At the beginning of the year our debt portfolio was about 12% of capital. We ended the quarter was about a 17% weighting in debt instruments.

Greenlight as always invested in debt instruments with that part of the corporate capital structures offered compelling unlevered returns. We started accumulating our debt portfolio in October of last year and have built our allocation in a patient fashion as markets begin further dislocated.

...

Our current debt portfolio is invested in US companies and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio and we have to start it. Although we have found many compelling investments that appear to be at bargain prices, this is temporary by the worst economy most of us have seen. It is very difficult to develop a high degree of confidence in corporate revenues in earnings even in well established profitable companies with conservative balance sheets.

So we have offset some of this idiosyncratic risk by holding a more diversified portfolio.

...

We continue to be cautious about the environment, especially in light of the market latest rally, and aren’t as convinces as some others to the government response to the prices to date will actually fix the problems in the economy. We think this take some time to play out as the normal forces of supply and demand exert themselves. We continue to be worried about monitory actions and the fiscal situation and continue holding some of our cash involved for the time being.

It's important to remember that Einhorn is speaking for GLRE and not for Greenlight Capital. (Though his thoughts in many cases will be the same, the nature of both investment vehicles can be expected at times to lead to different strategies.)

For the rest of the transcript, which Seeking Alpha provides free of charge, click here.

What Stock Would Buffett Put All His Wealth In?

What stock would Buffett put all his wealth in, if he had to choose just one? According to a recent Bloomberg report, which details his latest investment positions, it would Wells Fargo.

Banks that attract deposits at low rates were undervalued in the first quarter because investors wrongly believed that the entire industry was hobbled by risky bets and reckless lending, Buffett said at Berkshire’s annual meeting earlier this month. The KBW Bank Index fell 37 percent in the first quarter.

“All banks aren’t alike by a long shot, and in our view Wells Fargo, among the large banks, has some advantages the others do not.”

Before you get all excited, and rush to buy Wells Fargo at once, it has to be pointed out that he was speaking about buying the bank at a certain price--namely it's recent low of around nine dollars a share.

The Bloomberg article goes on to point out a few interesting things. For example, the amount Berkshire has invested in equities is the lowest it has been since 2005 (no doubt influenced, however, by the lower value of shares owned).

Also, Buffett took losses in ConocoPhilips, United Health and Carmax, adding to positions in Union Pacific, Nalco Holding, and (not surprisingly perhaps) Wells Fargo--the bank whose stock he said he would go all-in on at nine dollars.

Einhorn Doesn't Like Bugs

At least not of the Volkswagen variety. A recent article in the Wall Street Journal explains why:

Numbers normally speak for themselves with investment returns. It is a rare case when no figure can portray the full impact.

Hedge-fund manager David Einhorn (left), of New York’s Greenlight Capital, in a recent investor letter listed in a table the internal rate of return of 14 positions he closed in the first quarter. A bearish bet on jewelry retailer Zale generated a return of 92% and another on U.S. Bancorp returned 78%, Greenlight said in the May 1 letter. Then there were investments in companies such as Dr Pepper Snapple Group and Aldar Properties that generated losses of 46% and 91%, respectively, it continued.

But for the by now infamous Volkswagen trade, which dealt a punishing blow to hedge-fund managers around the world last year, Greenlight didn’t list a figure. It simply said, “bad.”

The only additional explanation it gave: “a relatively small position that caused a large loss.”

The article goes on to say that the position ending up costing Greenlight over one percent of its performance for the year.

Brokers Like Heebner

For those familiar with Ken Heebner's investment style--which includes big (and frequent) movements in and out of sectors--the title of this post may not come as too much of a surprise.

But just how much do brokers such as Citigroup and Merrilly Lynch like Heebner? That's impossible to tell. However, according to a recent report by Bloomberg, Heebner gave the brokers 71 million reasons to like him. And they could count all those reasons in dollars.

The huge commissions paid to brokers was, of course, partly due to his trading style and partly due to the need to meet redemptions (discussed here).

In any case, those are big numbers, and they definitely put a drag on performance. It's a good thing Heebner's brain travels at the speed of light.

Berkshire Loses $1.53 Billion

Berkshire lost 1.53 billion in the first quarter of 2009 compared to earnings of 940 million in the first quarter of 2008.

Is something lost, however, if you know right where it is?

That may be the question some are asking about the earnings--which were hurt by large write-offs of investments that many expect to work out well over time. (This is particularly the case with Buffett's big derivative bet on the markets.)

As the 10Q shows, the operating businesses struggled but both the utility and insurance operations put in a solid performance. Berkshire continues to show underwriting gains in its insurance business(es) and is using the (more valuable) float from them wisely.

Josh Funk, of the Associated Press, noted:

Berkshire officials say the company's operating earnings are a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses. Berkshire reported $1.71 billion in operating earnings in this year's first quarter, which was down nearly 12 percent from $1.93 billion in operating earnings a year earlier.

This is an important point when trying to evaluate Berkshire today. The company's operating businesses are struggling, but still bringing in a lot of cash, and Buffett is able to invest that at what are most likely very low asset prices.

While those low prices have led to large write-downs, they also provide a big opportunity for Berkshire.

Buffett Author Explains Derivatives

Snowball: Warren Buffett and the Business of Life is a book that I definitely do not recommend. Buffett achieved success because he was focused and frugal; this biography fails because it is unfocused and verbose.

(As I said in a previous post, Buffett: Making of an American Capitalist is the best biography on the great investor.)

That said, The Snowball is not entirely without value. Here is Schroeder at her best, explaining derivative contracts (on pages 544 and 545):

Derivative contracts work like this: In the Rockwood Chocolate deal, the value of hte futures contract was "derived from" the price of cocoa beans on a certain date. If the beans turned out to be worth less than the price agreed to by the contract, the person who had bought the futures contract as insurance "won." Her losses were covered. If the beans were worth more, the person who had sold the futures contract as insurance "won." The contract entitled him to buy below the then-current market price.

Suppose that in the weight deal Buffett had made with Howie for the rent on his farm, he didn't want to risk Howie's actually losing weight, which would drop the rent. Since this was under Howie's control, Warren might want to buy insurance from someone else.

He could say to Susie, "Lookit, I'll pay you a hundred bucks today. If Howie loses twenty pounds and keeps it off for the next six months, you'll pay me the two thousand dollars of rent that I'll lose. If he doesn't keep it off for the whole six months, you don't have to pay me the rent and you get to keep the hundred bucks."

The index that determined the gain or loss was "derived" from Howie's weight, and whether or not Buffett would make such a deal was based on a handicap of the odds that Howie would be able to lose the weight and keep it off.

Anather example: Suppose that Warren made a deal with Astrid to give up eating potato chips for a year. If he ate a potato chip he had to pay her a thousand bucks. This would not be a derivative contract. Warren and Astrid were simply making a deal. Whether Warren ate a potato chip was not "derived from" anything. It was under his control.

However, if Astrid and Warren made that agreement and then Astrid paid Warren's sister Bertie a hundred bucks as insurance, in exchange for a thousand dollars if Astrid lost the bet, the deal with Bertie would be a derivative contract. It would be "derived from" whether Warren ate the potato chips, which was not under either Bertie's or Astrid's control. Astrid stood to lose the hundred bucks to Bertie if Warren didn't eat the chips, and Bertie would lose a thousand bucks if he did.

Einhorn Likes Bagles

Does that come as a surprise to anybody? Probably not. But did you know that David Einhorn owns almost seventy percent of BAGL--the common stock of the Einstein Noah Restaurant Group?

Below is an excerpt from a recent news article about four new franchises of the company opening up in Georgia:

Steele and her partners, Stuart and Marian Gertman and Roger Weiss, recently purchased the rights to open four franchises in an eight-county area of the CSRA. The first one, on Washington Road in front of the Kroger shopping center, broke ground on Feb. 4 and they started training staff on March 23.

“Corporate was incredibly helpful,” Weiss says. “They sent six people here from other locations to help us. We have all worked 12 hours a day, six days a week to get open.”

Einstein Brothers is known for their bagels, which contain no preservatives and are baked fresh daily. They offer regular coffee, flavored and specialty coffees, hot and cold teas, hot chocolate, sodas, and frozen drinks from coffee, ice cream or fat-free fruit base.

“Our brand is all about taking bagels to work and targeting the night-shift people just getting off work,” says general manager Seddrick Brown. “Our hours are early morning to early evening. We are ‘fast casual.’ Convenient, but definitely not fast food.”

For the full article, click here.

Buffett's Sidekick Munger

The Wall Street Journal recently published a decent article on Buffett's long-time business partner, Charlie Munger.

It talks about the differences between the two (e.g., one is laconic while the other is loquacious), some of the deals that Buffett made because of Munger (including the latest one), and what they expect for the economy going forward. Here's an excerpt:

The men share a view that the U.S. financial system will change, and criticize past excesses. "People were horribly overpaid for just pouring on leverage," Mr. Munger said. The two investors have repeatedly warned about the systemic risks posed by the abuse of leverage and derivatives.

Mr. Munger thinks regulators may significantly curb the amount of leverage, or borrowed money, that banks can use. That will drive down pay at Wall Street firms, since traders won't be able to make as many big, leveraged bets. This could benefit Berkshire, with its cash hoard of $24.3 billion at the end of 2008. "There's going to be new rules in the game," he said. "For someone like us, that's going to be very interesting."

Near Transcipt of Berkshire Meeting

Read a near-transcipt of the most recent Berkshire Hathaway meeting at Omaha.com.

Here, for your enjoyment, are two excerpts on BYD, the Chinese auto company we mentioned Warren Buffett investing in earlier:

BYD Chinese company is not early stage venture capital company, Munger says. It is a big maker of batteries, for example. Then finally, not satisfied with a couple of miracles it is now in automobile business. With zero start point and very little capital he built best selling model in China. That was against joint ventures in China. Munger says it is a damned miracle, not a speculative activity.

Munger says engineering graduates are being hired at BYD who were at top of their classes. He says it is a remarkable compilation of talent. Munger says lithium batteries are needed in every utility company in America and using power of the sun will need batteries.

Berkshire has invested in BYD and Munger says it is not a crazy venture. Munger says that car to be seen in the Qwest Center Omaha, the company makes almost every part in that car.

Munger says it is a privilege to have Berkshire associated with a company that is trying to do so much. Munger says it is a small company but its ambitions are big. Munger says he will be amazed if great things don't happen.

...

Berkshire is asked about Chinese companies. Buffett says he didn't know he'd be invested in BYD some years back, nor did he know he would have invested in Petro China.

Buffett says in some ways Berkshire will be restricted by ownership limitations, such as in insurance. But Buffett says it is hard to imagine not doing more in China in coming years because it is a huge market.

Buffett says a Chinese officially recently was upset with the Treasury bonds they hold because the value is dropping. Buffett says he believes the Chinese official is right. Buffett says it is a problem, though not the biggest problem in the world.

Munger says he would exactly what China is doing. Munger says China has one of the best financial managing systems in the world. He says China will be very hard to compete with all over the world, and that is exactly the right policy for China. Munger says that is exactly the right policy and he greatly admires the Chinese.

Asking yourself where you can buy some BYD? You're not the only one. Since news of Buffett's investment, the H shares--which are sold on the Hong Kong Stock Exchange--have gone from around 8 per share to around 20.

The stock symbol for BYD on the exchange is 1211. Here is a quote from Google Finance.

Simoleon Sense Review

Not too long ago, I gave a one thumbs up, one thumbs down review of Guru Focus--a site that you might find useful when doing research, despite its ever-increasing lack of focus.

Simoleon Sense, a site that presents "business issues through an interdisciplinary lens," is almost without fault. In any case, it's close enough to perfect (at what it tries to do) to earn a two thumbs up from me.

The site focuses on a number of areas, providing a plethora of valuable links that show how the brain works, how to make better decisions, what talented businessmen and professors are saying (about their craft or current events), and so on.

Miguel Barbosa, Simoleon Sense's owner, names the areas of research (rather than the benefits) when describing the site. For example, it presents data on value investing, neuroeconomics, behavioral finance, psychology, economics and private equity.

One of the things I like about the site is its simple layout. It is not crowded with information, or ads, so your main attention goes directly to the most important information in the middle. While ads exist, as do links to previous posts (on the side of the screen), they don't compete for your attention like at many other sites.

Another simple feauture is the link to "related posts" at the end of each one. This is not remarkable in and of itself--given that it's a free add-on that many bloggers use--but for Simoleon Sense readers it is remarkable, simply because of the quality of posts linked to (and the fact that, surprise, they really are relevant).

An improvement the site recently made, to keep its focus on business "through an interdisciplinary lens" was to move the nightly investment links to its own site. This site too is a good resource, and I plan to review it at some later point.

Until then, if this review interested you, head to the resource and judge for yourself. I think you'll find that it exceeds your expectations--and that the material provided is useful not just for business but for your life in general.

Marty Whitman Defines Risk

Marty Whitman defines risk, states why it must be preceded by an adjective, and notes why it is incorrect to think in terms of a risk-reward ratio.

Heebner: CGM Focus Redemptions

Holders of CGM Focus, the fund run by legendary investor Ken Heebner, seemed to have one question on their mind in the first quarter of 2009: "What have you done for me lately?"

The answer, as they saw it, was not much. And thus, according to this Bloomberg report, CGM Focus had the most withdrawals of any other fund, $219.2 million in fact.

That sum added up to 5.3 percent of the fund's yearend assets. Not a tiny number to deal with.

Still, according to Morningstar, "the $3.24 billion CGM Focus remains the best-performing diversified U.S. stock fund in the 10 years ended March 31, with an average annual return of 16.7 percent."

Mutual fund investors in CGM got their redemptions. The question to ask now is whether Heebner will redeem himself (not from a bad long term record but from a bad short term assessment by investors).

Berkowitz Sticks with Leucadia

In an article titled "Being Like Buffett May Mean Parting Ways With Him," Morningstar presents why Bruce Berkowitz decided to sell Fairholme's position in Berkshire Hathaway--and what he has decided to keep, or buy.

It's not often you give one of your idols his walking papers. But that's what happened in late 2008 when Bruce Berkowitz of Fairholme (FAIRX) eliminated his stake--once as high as 20% of assets--in Berkshire Hathaway (BRK.B) ...

..Berkowitz doesn't think Buffett is washed up. Far from it. But he's taking the Oracle of Omaha at his word. Buffett himself says Berkshire's size makes it unlikely the firm will return better than a percentage point or so more than the S&P 500 going forward. Berkowitz thinks Fairholme can do better.

That's not hubris. Berkowitz says he's not smarter than Buffett--just smaller. And that gives him a wider range of opportunities in a target-rich environment than Berkshire has due to its girth. The same goes for most Buffett-inspired funds...

I especially enjoyed this bit, on why Berkowitz decided to keep Leucadia shares, and then add some of the company's within LUK's portfolio to his own:

A secret of Buffett's success has been to buy firms outright and then leave proven managers in place and alone. Likewise, a big part of Fairholme's success has come from identifying and investing in top capital allocators while remaining a silent partner.

The fund has long held Leucadia National (LUK), a holding company run by Ian Cumming and Joe Steinberg. Leucadia has compounded capital at a high rate over the years. It has interests ranging from copper mines to wineries to an early-stage biotech firm, among others. Berkowitz and his team know Leucadia's underlying holdings well and think they're cheap. But Leucadia has ownership restrictions that prevent anyone from owning more than 5% of its shares, and Fairholme is at that level. So, Berkowitz has invested directly in a couple of what he thinks are the more attractive firms from the Leucadia stable.

The fund now has a small stake in Fortescue Metals, an Australian iron ore firm whose shares have tumbled alongside ore prices. But Fortescue is a low-cost producer and has a geographic advantage over many rivals due to its proximity to China, a top ore consumer. And AmeriCredit is another Leucadia holding that overlaps with Fairholme...

For more names that Berkowitz is investing in via Fairholme, including some detail on Americredit--a position shared with Leucadia--click here.

Buffett: The Sleuth Investor

I've been reading The Snowball: Warren Buffett and the Business of Life the past couple of days. Here's an interesting excerpt, from pages 194 and 195:

Visiting management was part of Warren's way of doing business. He used those meetings to learn as much as he could about a company. Getting personal access to management played to his ability to charm and impress powerful people with his knowledge and wit. And he also felt that by becoming friendly with the management of a company, he might be able to influence the company to do the right thing.

Graham, on the other hand, did not visit managements, much less try to influence them ... He felt that by definition being an investor meant being an outsider, someone who confronted managements rather than rubbing shoulders with them. Graham wanted to be on a level playing field with the little guy, using only information that was available to everyone.

Following his own instincts, however, Warren decided to visit the Union Street Railway on a weekend.

"I got up at about four a.m. and drove up to New Bedford. Mark Duff was very nice, polite. Just as I was about ready to leave, he said, 'By the way, we've been thinking of having a "return of capital" distribution to shareholders.'" That meant they were going to give back the extra money. "And I said, 'Oh, that's nice.' And then he said, 'Yes, and there's a provision you may not be aware of in the Massachusetts statutes on public utilities that you have to do it in multiples of the par value of the stock." The stock had a $25 par value, so that meant it would be paying out at least $25 per share.* "And I said, 'Well. That's a good start.' Then he said, 'Bear in mind, we're thinking of using two units.' That meant they were going to declare a fifty-dollar dividend on a stock that was selling at thirty-five or forty dollars at that time." So if you bought a share you got all your money back right away, and then some. And afterward, you still owned the slice of the business that represented your share of stock.

"I got fifty bucks a share, and I still owned stock in the place. And there was still value in it..."

You don't have to read The Sleuth Investor to see the importance of such exclusive information, but if you're interested in learning more on how to get it, I can recommend the book highly--more highly than Snowball in fact.

(Roger Lowenstein's Buffett: Making of an American Capitalist remains the best book on the great investor's life, despite having less access to Buffett's family and friends--or perhaps because of it.)

Ira Sohn Research Conference

My wifi access here in Hanoi has been bad all day. Just going to post an announcement for where you can hear a bunch of great investors speak live:

In this era of prolonged economic downturn, with insightful market information at a premium, the Ira W. Sohn Research Conference Foundation today announced the speakers for the 14th Annual Ira W. Sohn Investment Research Conference to be held on May 27, 2009, from 2:30 to 6:30 PM at New York City's Frederick P. Rose Hall, the home of Jazz at Lincoln Center.

The Ira W. Sohn Investment Research Conference is the first of its kind to give premier investors a stage for explaining their best investment strategies and ideas.

Past conferences have been host to some of the most innovative investment advice to be released in a public forum, resulting in immediate market impact and long-term returns. Stock picks and market insights shared by previous conference speakers have proved extremely profitable for attendees. Several presentations at last year's event offered crucial analysis, including David Einhorn's comprehensive review of Lehman Brothers that foretold the company's fate and Michael Price's sobering thoughts on Wachovia.

"We always deliver fresh perspectives on the market," said Daniel Nir, Co-Chair of the Ira W. Sohn Investment Research Conference and Managing Partner of Gracie Capital. "Now more than ever is the time for a conference with a track record of producing the kind of results our conference provides." Conference Co-Chair Douglas Hirsch, Managing Partner of Seneca Capital, added, "Investors come to this event every year hoping to get several good ideas and one great idea - they have yet to be disappointed."

Buffett on Analyzing People

One crucial element in investing is the analzying not of numbers but of people. In a recent interview, Warren Buffett details what it is that he focuses on when making these judgements:

...[T]he real insight you get about a banker is how they bank. You've got to see what they do and what they don't do. Their speeches don't make any difference. It's what they do and what they don't do.

Buffett is talking about John Stumpf, of Wells Fargo, here--but the principle applies across every industry. Thus, if you want to analyze managers "the Warren Buffett way", you should focus not on their words but on their actions (including how the two relate).

What virtues is Buffett concerned with above? The virtues of being productive (i.e., industrious) and of having integrity. In the same article, he mentions a virtue that I've mentioned here recently--that of seeing for oneself, of being an independent thinker.

John is a very good bridge player. But he doesn't play as much as I do. I play all the time. He's smart. He's a different personality than Dick. Dick is a real sales person. They both subscribe to the same principles of banking. They just don't think you have to do things that the other guy is doing.

This manner of judging managers obviously works in the world of investing--and no doubt in the world outside of it as well.

When will the Recession End?

From the most recent Leucadia shareholder report:

"Out of prudence we have a pessimistic view as to when this recession will end. To think otherwise would be to gamble about the beginnings of good times whereas by imagining a bleak future we will most likely survive for the good times to arrive."

That last line is worth reading more than once. It reminds me of the part of an old A.E. Housman poem that Charlie Munger often quotes:

The thoughts of others
Were light and fleeting,
Of lovers' meeting
Or luck or fame.
Mine were of trouble,
And mine were steady,
So I was ready
When trouble came.

Is it a surprise that great investors think alike in this regard? Or is there something about being extra cautious about the future that leads to good results over the long term? You decide.

Review of Buffett's Letters

I often tell people who are just getting started investing to go through Buffett's letters one by one. They provide the careful reader a great education on investing, from the world's best, and they're available for free.

Recently, in Motley Fool, Ravi Nagarajan reviewed a compilation of these essays. And he did a great job. But I'll let you judge for yourself, starting with this excerpt:

One of the interesting aspects of reading Buffett’s letters in chronological order is that one can combine knowledge of the timeframe in which the letter was written and read the document with that context in mind. Not only that, but with benefit of hindsight, it is possible to appreciate Buffett’s statements regarding Berkshire and the business environment in general.

However, while the chronological review is useful for understanding the evolution of Berkshire Hathaway and Buffett’s thinking, it leaves something to be desired in terms of consolidating Buffett’s thoughts on specific subjects. This is where Cunningham’s arrangement comes in.

Cunningham includes an introductory section that provides a great deal of information regarding Buffett’s background and would be useful for those who are new to Berkshire Hathaway. He then arranges Buffett’s letters into seven major themes and then includes excerpts from Buffett’s letters over the years as they relate to each theme. Essentially, this takes shareholder letters intended to be read at a given point in time for a particular audience and transforms it into a well organized book.

By the way, if the name of the author strikes you as familiar, I've talked about his blog here at least once before. You can continue reading the above review at his site, Rational Walk.

Pershing Mentioned in Leucadia Letter

While Pershing Square, the investment firm managed by Bill Ackman, was not mentioned directly in Leucadia's latest shareholder letter--it was mentioned indirectly. I quote:

Over the past several years we have invested our excess cash with various outside managers with a view towards receiving a good return and hoping to uncover investment opportunities. We were disappointed with the results. The returns were not good and we did not uncover investment opportunities. With few exceptions, our fund investments were not immune to the market upheaval experienced in 2008, but the overall return since inception was minus .5%. It could have been worse. For the most part, we do not intend to continue this activity.

Leucadia shareholders will no doubt be happy (or at least happier than otherwise) to hear that last sentence. The move to make a leveraged bet on the valuation of Target was much criticized--in large part because of all the money that would have gone to Pershing (in fees) if the bet was successful.

Follow the Greats; Think for Yourself

In the comments section of a previous post, I wrote the following:

[A]nother problem for the investor that dispenses with thinking--on the premise that "if it's good enough for investor x, it's good enough for me"--is that he never actually develops as an investor.

So, not only is he paralyzed in the face of new data, or extremely unsure and "trigger-happy", but his mind is stultified in a sort of permanent state of dependence on what others think.

The above is exactly the type of mentality that is usually punished severely (at least over the long-term)--again, both in life as in investing. It is no coincidence that every great investor routinely speaks negatively about group-think...

As a scribbler on everything from paper and the margins of my books to restaurant napkins and my hand, I have to consolidate my notes every once in a while to keep my notes clean and organized.

Last night, when doing so, I found this passage from John Galt's speech in Atlas Shrugged written down:

An error made on your own is safer than ten truths accepted on faith, because the first leaves you the means to correct it, but the second destroys your capacity to distinguish truth from error.

Think about that sentence for a minute. Do you agree? Imagine if a government agency (like, I don't know, the SEC) forced some of the truly great investors to divulge their investment positions quarterly, would you be a better investor after following their picks blindly for ten years or after thinking for yourself just one?

Buffett's Investing in the Auto Industry?

Isn't that a lot like investing in the airline industry--something that Buffett (and Einhorn) have considered anything but wise?

Turns out Buffett is investing in the auto industry, albeit one in a country where there is less and less government control (as opposed to the opposite elsewhere).

A recent article from the International Business Times gives some information on BYD--and what attracted Munger (then Buffett) to the company:

...The firm was founded in 1995, and is headed by Wang Chuan-Fu, a man described as a "combination of Thomas Edison and (former General Electric Chairman) Jack Welch- something like Edison in solving technical problems, and something like Welch in getting done what he needs to do," notes Buffet’s business partner Charlie Munger in the article Fortune Magazine. It was Munger who first the idea to invest in the firm.

BYD began with $300,000 that Wang raised from relatives as a manufacturer of rechargeable batteries. By 2000, the company became one of the world's largest producers of cell phone batteries, selling its product to Motorola, Nokia, Sony Ericsson and Samsung. In 2003, BYD acquired a Chinese state-owned car company and began to build cars. By making affordable electric cars, BYD has outpaced much larger rivals such as Toyota's Prius and Chevrolet's Chevy Volt.

Buffett first offered to purchase 25 percent of BYD but Wang rejected the offering which Buffett took as a "good sign."

"I don't know a thing about cell phones or batteries," Buffett admits, "And I don't know how cars work," but he points out: "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary," Fortune reports.

Munger of course was the one who brought See's Candy to Buffett's attention. Will BYD be a cash flow machine like that? It could. While Warren Buffett won't be able to do what he wants with that cash, given that he lacks full control, I bet he'd still be happy. And so would Berkshire shareholders.

Forbes Interviews Whitman

Steve Forbes recently interviewed Marty Whitman. They discussed everything from performing loans analysis to his biggest financial commitments.

Steve Forbes: Now, you've said that equity investors have to learn to understand credit worthiness. And people will say, "Well, the credit rating agencies didn't do a good job." But you feel if you do a little bit of homework, you can do better than the credit rating agencies and some of these companies?

Marty Whitman: Yeah, you had better. I don't think it's that difficult in common stock investing by industry. [It's] the first criteria we have in any common stock investment, except when we make capital infusions.

Steve Forbes: Right.

Marty Whitman: But in passive common stock investing, our first criteria is super-strong financial position. If a company doesn't have it, we are not there. We will be a creditor; we won't be a common stock holder. Now, I would say there are three elements that you could look at for credit worthiness. First, a relative absence of liabilities, whether on the balance sheet, in the footnotes or out in the world. Second, the presence of high-quality assets, which means things that are convertible to cash, or near-cash.

Steve Forbes: Right.

Marty Whitman: Like a triple-A net lease on an office building. And you start out with those two things. You can pretty much say that somebody is eminently credit worthy.

Steve Forbes: So, just as we were taught in school, look at the balance sheet and you can pick up a lot, most people seem to think.

Marty Whitman: Yeah, well, it is balanced. You look at the income account. I mean, the third element of a strong financial position, which may or may not be available, is cash flow from operations available for the stockholders. You take those three elements, maybe with some emphasis on the first two, and you can make a pretty good judgment as to credit worthiness.

Steve Forbes: So, in terms of what the market has taught us about credit risk, it's really just taught us to go back to the basics, and you'll avoid a lot of the problems?

Marty Whitman: Yeah, well, look, you read the literature, starting with Graham and Dodd, and looking at all these academic tests, looking at generally accepted accounting principles. They all believe and they all promulgate a primacy of the income accounts. And they are in error. You have to be balanced. Like I say, to be in value investment today, cheapness is not a sufficient condition. You'd better combine it with credit worthiness.

Steve Forbes: So, not just P&L, you've got to look at the balance sheet?

Marty Whitman: Right, right.

You can read the rest of the interview at the link.

Einhorn (and Buffett) on Position Size

Here, from page 19 of Fooling Some of the People All the Time, is Einhorn sharing how he sizes both longs and shorts within Greenlight's portfolio--and why:

It is hard to find long ideas that are ones and twos or shorts that are nines and tens, so when we find them, it is important to invest enough to be rewarded.

Based on this concept, we decided that Greenlight would have a concentrated portfolio with up to 20 percent of capital in a single long idea (so it had better be a [good] one!) and generally would have 30 percent to 60 percent of capital in our five largest longs.

We would size the shorts half as long as we would longs of the same quality, because when shorts move against us, they become a bigger portion of the portfolio and to give us the ability to endure initial losses and maintain or even increase the investment.

Like reading about a company he's invested in, knowing why Einhorn has done something is as (if not more) important than following it without further thought.

Here, he takes big bets on the best ideas he can find. And, as the book from which this quote is taken shows, he knows these companies inside out.

Do you know the companies in your portfolio well enough to write more than a one page introductory statement on them? How about a book? Can you name their top five suppliers, salespeople, or customers with ease?

If not, you may well choose to size your bets differently. And you should. Warren Buffett states both points here better than I, so I'll give him the rest of the post to do so:

We think diversification, as practiced generally, makes very little sense for anyone who knows what they're doing. Diversification serves as protection against ignorance. If you want to make sure that nothing bad happens to you relative to the market, you should own everything. There's nothing wrong with that. It's a perfectly sound approach for somebody who doesn't know how to analyze businesses.

But if you know how to value businesses, it's crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren't that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness.

The Leucadia Way

In the 2006 Chairman's letter, Leucadia's management team laid out their "rules of the road"--the particular manner in which they run their company.

1. Don't overpay, no matter what the madding crowd is up to.

2. Buy companies that make products and services that people need and want and provide them as cheaply as possible with consistently high quality. Lower cost and higher quality is a never-ending task.

3. Earnings sheltered by NOLs are more valuable than earnings that are taxed!

4. Compensate employees for performance and expect hard work and honesty in return.

5. Don't overpay!

Those familiar with Buffett's two rules of investing--where rule number one is to not lose money and rule number two is to never forget rule number one--will see a similarity in points 1 and 5 above.

While that's not where the similarities end, this post is meant as a "foundation post" that I'd like to refer back to in a general way later on--so I'll let you make connections if you want in the comments section.

One thing worth pointing out here, is what Leucadia does when its management team views everything as overvalued. From the 2004 Chairman's letter:

"Our investment philosophy is bimodal, either we invest in high return opportunities or have the money in the bank or under our mattresses."

Thus, while they like to buy "assets that are out of favor and, therefore, cheap" ... then "work very hard at improving their performance until they are the most efficient and productive in their market segment," when there are too many people competing for even those investments, they'll step aside--or, according to their philosophy, should.

Third Avenue Sues MBIA

While Marty Whitman was given a few soundbites in reports about Third Avenue's litigation against MBIA, as a reader here you may be interested in reading more--direct from the source.

What, exactly, does the Complaint against MBIA allege?

The Complaint alleges, among other things, that the recent corporate “transformation” announced by MBIA, Inc. (“MBIA”) was illegal and was accomplished without due consideration in an attempt to defraud holders of MBIA Insurance Corporation’s debt.

The Complaint describes how the Third Avenue Funds purchased notes issued by MBIA Insurance Corporation in February 2008 (the “Surplus Notes”) based upon the balance sheet of that entity and representations that this and other capital raises would be conducted to recapitalize and revitalize MBIA Insurance Corporation following losses in its structured finance insurance business.

Little more than a year later, however, MBIA announced that MBIA Insurance Corporation was transferring approximately $5 billion in cash and its entire profitable domestic public finance business to another entity (MBIA Insurance Corporation of Illinois) that has no obligation under the Surplus Notes...

The Complaint asserts that these transfers have left MBIA Insurance Corporation only with “toxic” structured finance and credit derivative insurance liabilities and a credit rating that was downgraded deep into junk territory. The Complaint asserts that, as a result, MBIA Insurance Corp now has no viable business or earnings. The Complaint alleges that these transfers were illegal and unfair and resulted in damages to the Third Avenue Funds’ investment in the Surplus Notes. Third Avenue seeks an unwinding of the transfers discussed above or the award of appropriate monetary damages.

What are Marty Whitman's personal thoughts on the matter?

“We are now being improperly denied the benefit of our investment – namely, a well-capitalized insurance company that is able to conduct a profitable business insuring municipal bonds,” said Mr. Whitman. “MBIA has stripped that business away from us and left us with a run-off portfolio that is likely worthless.

Ironically, MBIA is now in the marketplace attempting to raise capital for the new entity, despite Third Avenue’s bad experience with MBIA’s last capital raise, which has given rise to this litigation,” he continued.

Does this have any relation to your portfolio--today or in the future?

Actually, even if you don't have money invested with Third Avenue, or MBIA, it does. The question of who you are investing your money with is a crucially important part of investing--as important at times as looking at the balance sheet.

How do you judge managers though? Are there any good rules of thumb that help you in determining another's credibility?

I have already posted some of my own but would love to hear your own thoughts on this, or any books you might have read on the subject.

Ken Heebner's Macro View

This article on Ken Heebner in SeekingAlpha is short and doesn't say much, but it does have some decently cool graphs.

What's more, the article agrees with something I wrote a lot about before, mainly how this great investor achieves his (usually correct) mountain-top perspective:

Ken Heebner has a bottom-up driven investment process, but takes big macro bets as a result of his bottom-up analysis.

Despite recent bad returns, I continue to think that this is a valid approach to investing (as well as all areas of knowledge).

Coming to a macro viewpoint in investing is after all really no different than coming to the same in engineering or politics or medicine. If reached after applying logic to an exhaustive look at all the relevant facts, the conclusion reached is actionable.

One can of course be wrong, especially in the short term, as new circumstances arise, the relevancy of data used change, or whatever, but the only way to rise above the error is to apply the same method: applying logic to the new relevant data and reaching a conclusion based on it.

Sell in Europe, Buy in China

Marty Whitman and the Third Avenue team recently announced that they will launch a series of funds for European investors.

The asset manager is to launch an Ireland domiciled Third Avenue Capital umbrella fund with four sub-funds, including a Value, Small Cap, Real Estate Value and International Value funds.

The Ucits funds, which were rolled out on Tuesday will have the same portfolio management team as Third Avenue's US mutual funds.

The firm's investment philosophy will centre around investing in undervalued securities of well capitalised and well managed companies with attractive growth prospects.

So it's really the same strategy, with no changes, being sold in simply a different place.

Where Whitman is buying hasn't changed at all. As recent filings and this recent article show, he's buying performing loans in the US that should yield 25% to maturity--and he continues to look overseas for opportunity in the equity markets.

Companies listed on the stock exchange in Hong Kong are particularly attractive at the moment, especially if these companies have a considerable presence in mainland China, he said.

Einhorn on Investing Benchmarks

I've said it before, and I'm sure to say it again, understanding how great investors think about investing is much more valuable than discovering their latest pick.

Here, from page 17 of Fooling Some of the People All the Time, is Einhorn sharing what he thinks an appropriate investing benchmark is--and why:

"We consider ourselves to be absolute-return investors, and do not compare our results to long-only indices. That means our goal is to try to achieve positive results over time regardless of the environment.

I believe the enormous attraction of hedge funds comes from their absolute-return orientation. Most long-only investors, including mutual funds, are relative-return investors; their goal is to outperform a benchmark, generally the S&P 500.

In assessing an investment opportunity, a relative-return investor asks, 'Will this investment outperform my benchmark?' In contrast, an absolute-return investor asks, 'Does the reward of this investment outweigh the risk?'

This leads to a completely different analytical framework. As a result, both investors might look at the same situation and come to opposite investment conclusions."

That excerpt is worth reading (at least) twice. Notice how the benchmark Einhorn uses focuses his attention on the nature of an investment itself and in particular its risk-reward profile.

Some questions to leave you with:

Is this focus on the facts of a particular investment (and how one comes to conclusions based on them) peculiar to Einhorn--or is it a method shared by other great investors?

What is your benchmark? For instance, are you primarily focused on specific companies and on learning everything about them, or on what others as a whole are doing and the returns they've earned year-to-date?

Leucadia: History Behind the Name

For the curious, here's the history behind where Joseph Steinberg and Ian Cumming got the name for Leucadia National:

We have been asked numerous times from whence the name Leucadia appeared. Thirty years ago in the summer, one of us, then age 37 was elected Chairman of Talcott National Corporation, the other, then age 34 became President shortly thereafter. Talcott’s existence goes back to 1854. We have documents showing that, during the Civil War, Talcott financed socks for the Union Army.

Talcott became listed on the New York Stock Exchange in 1937 and evolved into a finance company with four businesses: consumer finance, commercial finance, factoring and real estate. Interest rates were very high and imprudent real estate investments left the Company with a negative net worth and lots of debt. That is when we jumped where others had feared to tread!

On May 27, 1980, we sold Talcott’s factoring business, James Talcott Factors, Inc., to Lloyds and Scottish Limited, a joint company of Lloyds Bank and the Royal Bank of Scotland. James Talcott was a name long associated with factoring and the buyers wanted the name. After a spirited negotiation, we were paid more money but were left nameless.

We had suspected this might be the outcome and had been trying to register names acceptable to New York State. There have been lots of names filed in New York since the Indians sold Manhattan Island. Driving north on Route 5 from San Diego, California, we passed a big green sign “Leucadia Next Exit”, so decided to try Leucadia. It was immediately approved.

The word Leucadia is of Greek origin. Lefkadia (Leucadia) is one of the Ionian Islands and has a long and colorful history.

Taken from the Chairman's letter for 2007, so you'll never have to ask "Where did they get the name Leucadia from?" ever again.

The Marty Whitman Way

I'm not always kind to business journalists, especially some of them on CNBC, so when one does an exceptionally good job, I like to pause and give them their just praise.

Levi Folk, of the Financial Post, wrote a truly excellent piece of business journalism--showing Marty Whitman's strategy by reference to Graham's. It should be read by all, and I'll show why below.

He starts off by accurately summarizing Graham's views on net-nets--"companies whose liquidation values exceed by a wide margin their market capitalizations net of all liabilities." And then he goes on to show how Marty Whitman refines Ben Graham's net-net concept.

First and foremost, companies must be well-financed in keeping with the core tenet of Third Avenue's "safe and cheap" method of value investing...

...The second adjustment is to the assets themselves. Graham and Dodd focused exclusively on current assets when calculating liquidation value whereas Whitman includes long-term assets that are easily liquidated.

...The third adjustment is the inclusion of off-balance-sheet liabilities.

...The fourth and final adjustment to Graham and Dodd is the inclusion of "some property, plant and equipment" for their liquidated cash value and associated tax losses that often produce cash savings.

I edited out the examples given below the adjustments above--which included US banks, Encana Corp, and two long-term holdings of Third Avenue: Henderson Land Development Company and Toyota Industries.

With those examples edited out it is easier to see Whitman's method stripped bare. To understand how it is applied is tougher of course, and that is what the examples in the article allow you to do.

Are you sold that Levi Folk is a business journalist to keep an eye on? You should be. Folk does miss making one point, but it comes after the following few paragraphs--which provide an actionable net-net idea:

Sycamore Networks Inc. (SCMR/NASDAQ) is the most compelling example of a net-net situation in the United States offered up by Lapey.

The telecom equipment company has more cash -- US$935-million in all -- than the total value assessed to it by the market, in light of its US$800-million market capitalization and US$38-million in total liabilities.

...Lapey is also attracted to the one-third of outstanding share ownership by management because it presents an important alignment of their interests with those of Third Avenue, who are by and large passive investors.

The fifth adjustment Whitman and his team make in looking at net-nets (or investments in general) is an inclusion of how all the different interests within and around a company are aligned.

As is made clear in their annual reports, in Whitman's books, and in this recent article at Morninstar, Third Avenue looks to enter positions that are not only cheap (on the above basis) but also one's where they are investing alongside managers with successful long-term track records and aligned interests with stockholders.

Marty Whitman's strategy of investing in what is versus an estimate of what will be has proven to be a very successful one over the years--and has proven particularly successful when stocks are wildly mispriced.

Are they mispriced wildly now? Marty Whitman thinks so but feel free to differ in the comments section below.

Who Will Take Over For Buffett?

Buffett shook another person's hand and the world is abuzz with speculation once more about his next successor. I was a guest poster at Wide Moat Investing today--posting on why there are far better questions to ask and far greater things to worry about than who will replace Buffett at some unknowable time in the future. You can read the article at WMI (a blog that we recommend) or at SeekingAlpha--where it also appeared.

The Validity of Value Investing

Are you having second thoughts about the validity of value investing? In this market, you're probably not alone.

Ben Steverman, at BusinessWeek, recently penned an article asking whether it was time to rethink Buffett's strategy.

The past year has sometimes looked like a practical joke that the stock market is playing on value investors.

Disciples of the value strategy, like Berkshire Hathaway's (BRKA) Warren Buffett, focus on the long-term intrinsic value of a company, hoping to buy shares in good companies at reasonable prices. By focusing on value, they avoid fast-growing firms with expensive stocks, and, by thinking long term, they try not to worry about the fickle gyrations of the market from month to month or day to day

Hasn't helped them much lately, Steverman points out. In fact, they've been downright abused by the market. And that sweeping statement includes Buffett too--who held on to Wells Fargo, UBS and American Express shares as they plunged lower.

Thankfully, the article puts the most recent time-frame (being used to judge a strategy) in a more proper perspective:

Value investors are insistent on a long-term focus, so it's not exactly fair to judge them on one or two years. (Even if this is a momentous time, when stocks, represented by the Standard &Poor's 500, have lost almost half their value in a year and a half.)

A value investor like Buffett has an "extremely impressive" long-term track record, says Lawrence Creatura, the portfolio manager of several value-focused investment funds at Federated Clover Investment Advisors. This appears to be one of those times when the value style has underperformed. "That doesn't mean that Warren Buffett or value investing are broken," he says.

In fact, many value managers insist the market is full of opportunities. "The selling at times has been so incredibly irrational that there is a high probability that some stocks are mispriced," Creatura says. "The value investor's job [is] to identify those mispricings."

For more, continue reading the article. It's a good one, and worthy of being read. But don't let the focus on short-term results of different managers take up too much of your time, okay?

As we pointed out in a previous post, the top investors don't worry too much about such things--they are focused instead on improving their investing method (which looks at the long-term value of the company's they may invest in).

Leucadia on AmeriCredit

Having already read (in this post) some of the reasons why Cumming and Steinberg might be invested in AmeriCredit, you might find it worthwhile to actually read what they said on the company themselves (at the start of their investment).

As of this writing, we have acquired 26% of AmeriCredit Corp. (“ACF”) for $373.9 million. We have known of this excellent company for many years, having been in the sub-prime auto business ourselves. ACF has made and financed over $53 billion of these loans and none of its lenders has lost a penny. In this environment, financing for ACF is going to be very difficult and management is taking appropriate steps to downsize the company. We are guardedly optimistic that the financial market will climb out of its bunker next year. People need auto financing to get to work.

The above was taken from the 2007 Chairman's letter. What's the deal with the last line--about people needing auto financing to get to work? That's something I'll cover later, as it refers directly to the "rules of the road"--their particular method of investing--that Leucadia's management team follows.

Morningstar Investor Conference

This is not an advertisement for Morningstar, but it is hard to even imagine a better gathering of great investors than those that will assemble at the coming 21st Annual Investment Conference.

The keynote speakers are Bill Gross, Chris Davis (of Selected Funds), and Bob Rodriguez (of First Pacific).

-- Vanguard founder John Bogle will take part in an in-depth conversation about the current challenges and opportunities that investors face.

-- David Winters, Wintergreen Fund; Diana Strandberg, Dodge & Cox; and Rajeev Bhaman, OppenheimerFunds will discuss where they're finding great investments.

-- Wally Weitz, Weitz Funds; Bruce Berkowitz, Fairholme Capital Management; and Tom Marsico, Marsico Capital Management will swap stock picks.

-- John Rogers, Jr., Ariel Investments, LLC; Chuck Royce, The Royce Funds; and Jeff Cardon, Wasatch Funds will debate whether or not the small-cap rally is over.

Marty Whitman, Bill Nygren (of Oakmark Funds), and Meggan Walsh (of Invesco AIM) will offer their differing takes on value investing, Jeremy Grantham will offer his seven year forecast, and so on.

The cost is 795 per person, but what a collection of minds! Read more about the conference, and the other speakers, in this FoxBusiness article. The Guru 5 will be looking to link to anything new that is said at the conference--or anything revealing of their methods.

As fund managers trying to cope with redemptions, there is likely to be a lot of people talking their book and a bit less candor than usual can probably be expected from each manager too. That said, the other managers are likely to be less polite about their differences--in both style and positions--and that could lead to some very interesting, educational conversations. If I had to bet, I'd say the conference is undervalued.

The Berkshire Arbitrage--Over

At least for now, the Berkshire arbitrage we posted about back in February is over. We linked to Felix Salmon blogging about it, back then, and we will link to someone else discussing the issue now.

Ravi Nagarajan, at Rational Walk, has an excellent post on the movement in Berkshire A and B stock over the past month. This is a blog to keep an eye on for sure.

An excerpt of his thinking at the start on the arbitrage that's gone au revoir follows:

Based on my research, on February 20, a record high spread developed between Class A and Class B shares. On that day at the close of trading, it was possible to purchase 32.26 B shares for the same price as a single A share. Any A shareholder was free to sell a single A share and purchase 32 B shares plus pocket the change represented by the fractional 0.26 B share.

By doing so, the A shareholder would effectively increase his economic interest in the company by 7.53% (including the retention of the cash equivalent of the fractional share).

Granted, the A shareholder would now only have a fraction of his prior voting rights, but that appears to be the only downside, aside from potential tax implications related to the A sale which could be significant. A long position would be maintained with significant addition to the shareholder’s economic position.

It would also have been possible to make a move that would not bet on the direction of Berkshire’s stock price but only on the eventual narrowing of the historically wide A/B spread. By shorting one A and purchasing 30 Bs, an investor could effectively bet on an eventual closing of the historic spread.

Regardless of the direction in which Berkshire shares trade, the investor could profit when the spread returns to more typical levels. At that time, the A share would be repurchased with the proceeds of selling the 30 B shares. The main risk here would be if the spread widens further and does not narrow again in the future.

For the rest, including a comment on efficient market theory, click here.

Einhorn Buys Ticketmaster

From BusinessInsider:

Hedge fund manager David Einhorn's Greenlight Capital recently took a 5.2% stake in Ticketmaster, according to regulatory filings.

...

"Einhorn is a very sharp, value-oriented manager," Gould notes, suggesting that Einhorn chose to pick up his nearly 3 million shares because he thinks Ticketmaster's stock is at a good price. Currently trading at around $4 a share, TKTM has likely been bogged down by concerns that its proposed merger with Live Nation wouldn't be approved for antitrust reasons.

...

Buffett (Not) Related to Recent Fraud

Though not before significant (and possibly total) losses to some investors. the SEC just reported that it caught a fraud early--something its workers should take great pride in.

The story, in short, is that a supposed international real estate firm claimed Buffett as an honorary chairman and Credit Suisse as a significant investor. These two names were enough for many people to invest substantial amounts of money with the company.

As one of the victims stated, "My analysis was that if IRH was good enough for an investment and endorsement by Warren Buffet[t] it was good enough for me."

The one hundred grand that this guy invested, along with hundreds of thousands of dollars of other victims, was wired to the Philippines--and the US government is hoping to get it back. The full story, including a statement by Buffett about his non-relation to the firm, is here.

Why mention it at The Guru Five? While wrong, I found the thinking behind the victim very interesting, because what he stated is remarkably similar to the process of many investors in choosing stocks owned by Berkshire or other investors.

You may have heard something like this before: "If Burlington Northern is good enough of an investment for Warren Buffett, it is good enough for me."

Now, investors can know with a great deal more certainty whether Buffett is actually invested in BNI, or Heebner in Morgan Stanley, and so on, but there are still serious problems with this type of reasoning.

The biggest problem results from the fact that the above investor "drops the context"--meaning he ignores the reality that the ongoing cash flow stream, other portfolio companies (which may or may not serve as hedges that offset a weakness in the business), and knowledge are going to be different in each case.

What is proper for one investor to hold, may not always be proper for another to hold.

Perhaps there are safer investments, with more upside, for the investor managing a smaller sum of money. Perhaps the super-investor is hedged via instruments or positions that aren't required to be reported. And perhaps the investment that another great investor picked isn't as safe for a person who knows nothing about it (and will act vastly different in light of new data, usually with horrible results).

In life, as in investing, thinking independently is a good thing. And, as the returns of some of the investors profiled here show, it is a virtue that (over the long term) is usually rewarded handsomely.

Distressed Investing with 3 of the Guru 5

A lengthy but excellent article comparing Americredit to Clayton homes appeared in SeekingAlpha recently.

Written by Sumit Shah, a writer we've never heard of but hope to read more from, the article even used the term "outside passive minority investor"--which is how Marty Whitman refers to "regular" stock investors in two of his great but little-read books. (Call us impressed!) Here's the beginning of the article:

The goal of the value investor is to identify investments where there is a potential for earning outstanding returns over time with little to no risk of permanently losing one’s capital. Such investments are relatively rare when considering the entire universe of publicly traded equities, and outside passive minority investors usually have to scour the stock market to find companies that trade at deep discounts to intrinsic value and that have attractive risk profiles.

Usually, the securities that meet these criteria trade at such deep discounts because they are misunderstood or underappreciated by the marketplace, but sometimes securities that appear to be misunderstood are trading at depressed levels for legitimate reasons – because the underlying companies are at risk of going into default or, even worse, into bankruptcy.

Distressed equity securities are usually too difficult for most ordinary investors to handle, and the majority of outside passive minority investors would be well-advised to stay clear of such companies unless they are extremely confident that they will not lose their principal in the case of bankruptcy, run-off, or, in times like these, receivership or nationalization.

Deep-pocketed outside investors or control investors, on the other hand, enjoy quite a different position than ordinary investors, as they can try to influence a distressed company’s restructuring process, implement turn around plans, invest new capital into the company, or in some cases acquire the troubled company at an extremely low price.

Warren Buffett has often stated that he tries to purchase great businesses trading at fair prices, but Buffett, unlike many investors, also often has the opportunity to acquire distressed companies that could be great businesses under different circumstances, and that are trading at great prices.

Last year, for example, Berkshire’s MidAmerican Energy subsidiary made a bid for Constellation Energy (CEG) that was so low it would have effectively been stealing the company had another bidder not appeared. Buffett was able to make such a lowball bid because Constellation had severe liquidity issues, and Berkshire (BRK.A) was offering Constellation an immediate cash infusion that would have enabled the company to avoid filing for bankruptcy protection.

Deep-pocketed value investors such as Bruce Berkowitz’s Fairholme Fund and Leucadia National (LUK), the conglomerate run by Ian Cummings and Joseph Steinberg, are at their best when they are able to find distressed investment opportunities like the ones Buffett enjoys. Fairholme and Leucadia have found just such an opportunity in their investment in AmeriCredit (ACF), an auto finance company that operates primarily in the subprime space.

To understand what they see in AmeriCredit, it is important to recognize that Berkowitz, Cummings, and Steinberg – some of the shrewdest investors out there – are huge Buffett admirers and have probably learned a great deal from closely following his deal making.

Indeed, their investment in AmeriCredit has many similarities to Buffett’s acquisition of a manufactured housing company called Clayton Homes in 2003, which Buffett discussed at length in this year’s annual letter to the shareholders of Berkshire Hathaway. It would be instructive to discuss Buffett’s acquisition of Clayton Homes to understand the opportunity Fairholme and Leucadia see in AmeriCredit and also to learn some useful lessons about subprime lending and securitization along the way...

If you're not intrigued by that lead-in, you're in the wrong place. You can read the rest at SeekingAlpha or at Sumit Shah's website. (Note: I added a handful of paragraphs to make the above more readable in the different format.)