Friday, January 30, 2009

Is Buffett Bashing Bullish?

In a new article by the Globe and Mail, David Berman asks a good question: "Is all the Buffett bashing these days bullish?" He notes for starters what happened the last time this was prevalent (in 1999), gives some facts recounting what's happened at Berkshire of late, and in response to a recent article by Doug Kass, notes:
What's interesting is that, by Barron's estimate, Mr. Buffett's stock picks beat the S&P 500 in 2008 by an impressive 13 percentage points (though Mr. Buffett's holdings and the S&P 500 both fell). The criticism, then, comes from the performance so far this year. Mr. Buffett, a long-long-term investor, would probably be appalled to learn that his investing prowess is being called into question based on just 17 trading days.
He didn't point out the illogic of Kass calling Buffett's strategy "stale" at the same time he accuses him of "style drift"--but it's a good article worth reading in any case.

Barron's on Buffett (and BNI)

Barron's recently reported on Buffett's continual buying of Burlington Northern stock and as usual (especially these days) has somebody questioning the move.

"Buffett is the poster boy for following form 4 [insider trading] data, but I'm not sure I would follow him into this," says Moreland. "Aside from the price going up right away on any Berkshire buy, Buffett, in my experience, is often early with his transactions, so you generally have time to wait if you want to follow him in."

Despite Buffett's losses, Moreland notes that the man's definition of "buy and hold" is much longer than a normal investor's, due to his resources.

"I imagine he chuckles when he hears a pundit on TV say that buy and hold is dead," he says. "Only time will tell if all his purchases will be profitable in the end, and by that time those pundits probably won't have their shows anymore. He'll outlast them all."

The article goes on to provie some useful information on insider buying for those interested.

Einhorn Buying Gold

An article in Bloomberg reports that Einhorn is buying gold these days.

Since Einhorn was 10 years old, his grandfather has warned him that investing in bullion and gold-mining stocks was the only “sensible” thing to do given the threat of inflation and the risks of so-called fiat currencies, New York-based Greenlight said in a Jan. 20 letter to clients. The firm had never before considered buying bullion or mining-company shares.

“To everyone’s dismay, we believe some of Grandpa Ben’s predictions are playing out,” Greenlight said in the letter, a copy of which was obtained by Bloomberg News. “The size of the Fed’s balance sheet is exploding, and the currency is being debased.”

Greenlight is turning to the centuries-old currency to mitigate the effects of the economic collapse and government efforts to end it. Bullion gained for the eighth straight year in 2008 as governments in Europe and the U.S. rescued banks from collapse.

Greenlight said in the letter that in addition to buying gold, it has added call options on gold and the Market Vectors Gold Miners exchange-traded fund to its other investments. Call options are the right to buy a security or commodity at a set price, within a set period of time. The owner of the call profits when the security rises above the set price.

Einhorn himself added, in the article, the following:
The Federal Reserve’s policy of taking unorthodox steps to boost the supply of credit is essentially “printing money,” Greenlight said. The government’s “aggressive” fiscal policy also signals all efforts will be made to stem the effects of the current economic problems, the fund said.

Thursday, January 29, 2009

Cresud--A Leucadia Pick

A recent article at the website, focused on Cresud--noting that Ian Cumming and Joseph Steinberg of Leucadia National are invested heavily in it.
Another is Cresud (Nasdaq: CRESY), a Buenos Aires-based asset holding company that owns and operates farms in Latin America and that holds equity stakes in IRSA (NYSE: IRS), a mall and hotel owner in Argentina, and BrasilAgro, an agricultural asset play in Brazil. We've watched over the past few months as the stock has dropped from $18 to $14, then $14 to $10, and finally from $10 on down to $5.

It's since rebounded to around $8, but that price still seems too cheap for a company with Cresud's quality management team and asset base -- regardless of what commodity prices do in 2009. Further, Ian Cumming and Joe Steinberg of Leucadia National (NYSE: LUK) -- two value investors with a stellar track record -- own shares, having bought in for a far higher price.

It's to the point where I (Tim) turned to Nate recently and asked, "Does the market think Argentina is going to nationalize all of its land and shut down its export market?"

Read Nate's reply, and the rest of the article--which goes into some detail on Latin American politics--at the following link.

Wednesday, January 28, 2009

Fund Redemptions at Third Avenue

A recent article by Morninstar does a good job explaining fund redemptions--particularly the implications for stock investors.
So, we've seen the damage, but how can redemptions harm fund shareholders who elect to stick around? When a mutual fund is hit with a high rate of redemptions, the manager has a difficult task because most funds don't hold enough cash to meet sizable redemptions, so they must sell stocks to return cash to shareholders.

Take Marty Whitman, manager of Third Avenue Value, who has built a great long-term record thanks to his expertise in distressed investing. Whitman has reported that many of his stock sales in recent months have been necessary to meet redemptions, and he's had to keep about 7% of the fund's assets in cash so that he can meet redemptions without selling stocks at extremely depressed prices.

So, redemptions pose opportunity cost risk, because managers like Whitman may be selling shares of stocks that they think are poised for a rebound--just to meet redemptions.

It also does a good job telling investors who have money in funds what information they should expect to get from managers:
Your fund should be explaining to you, through shareholder letters and semiannual and annual reports, how it is managing redemptions, but sadly, most funds have been mum in the recent market crisis. Many managers do not explain much about their fund's inner workings beyond quarterly performance, let alone the effect of redemptions in their letters.

Among international stock funds, Marty Whitman continues to be the best example. Aside from talking in-depth about individual holdings and putting the current environment into perspective, he was upfront with shareholders in his October 2008 letter regarding the difficulties of managing redemptions.

Tuesday, January 27, 2009

Copying Buffett's Picks

Geoff Gannon made a post on how to copy Buffett today. It started like this:

Warren Buffett is best known for his work at Berkshire Hathaway (BRK.A) where he grew book value per share 21.1% a year over the last 42 years.

But Buffett was a money manager long before he was a CEO. He earned his super-investor stripes by running an investment partnership. Buffett Partnership Ltd. beat the Dow every year from 1957 to 1969, never had a down year, and posted annual returns of 29.5% a year. The Dow managed just 7.4%.

Those numbers are phenomenal. And Buffett’s record is all the more phenomenal for its length. How many investors have a track record stretching back half a century?

But past results are no guarantee of future returns. And Berkshire’s size is a guaranteed headwind. So can you really Buffett-back ride your way to investment success? Maybe. But there is a right way to do it and a wrong way to do it...
Though he doesn't go into a ton of detail, he does make two important points.

The first is that piggy-back riders should distinguish between the common stock they can buy and the deal that Buffett got if he bought the preferred. Secondly, he thinks you should pay attention to where Buffett is putting a significant amount of his money--and right now that means Burlington Northern.

The article can be read in full at Gannon on Investing.

Quotes from Margin of Safety

"Investors in a stock expect to profit in at least one of three possible ways:

a. From free cash flow generated by the underlying business, which will eventually be reflected in a higher share price or distributed as dividends.

b. From an increase in the multiple that investors are willing to pay for the underlying business as reflected in a higher share price.

c. Or by narrowing of the gap between share price and underlying business value."