Friday, February 27, 2009

Leucadia picked at Motley Fool

From the Motley Fool:
For example, 98% of the 876 members who've rated Leucadia National have a bullish opinion of the stock.

Two weeks ago, one of those Fools, decrooj, cited the holding company's dynamic investment duo, Ian Cumming and Joseph Steinberg, as the main reason to get in:

This company has its hands in every sector and is bound to pick up with the economy. ... They have some good natural gas plays. ... Timber company will pick up after housing bottoms. They also have wineries that will be major players in the next 1 to 2 years. ... the owners invest fearlessly, but they know what they are doing. "Buying good companies at low prices." This stock stands to grow at least 20% year over year for a good while.

Thursday, February 26, 2009

Basic Buffett

Forbes has a decent article for those new to Buffett. An excerpt:

In a nutshell, Buffett looks for companies that have strong brands (which promotes premium pricing) that run understandable businesses with a good return on capital without a lot of debt. Profits should show up in cash flow, earnings should be predictable, and management needs to be owner-oriented.

Robert Hagstrom, author of The Essential Buffett: Timeless Principles For The New Economy, summarizes Buffett's approach:

--Analyze a stock as a business
--Demand a margin of safety
--Manage a focused portfolio
--Guard against speculation and emotion

One of Buffett's famous aphorisms is to "buy when others are fearful and sell when others are greedy." John Train author of The Money Masters, helps to summarize Buffett's outlook in his 1980 book: "Most of the time, most businesses are not worth what they are selling for, but on rare occasions the wonderful businesses are almost given away. When that happens, buy boldly, paying no attention to current gloomy economic and stock market forecasts."

Wednesday, February 25, 2009

Whitman's Kmart Investment

In an article that focuses on contrarian investing, Marty Whitman's old Kmart investment is detailed:

Also during that time, Marty Whitman, manager of the Third Avenue Value Fund, purchased bonds of K-Mart both before and after it filed for bankruptcy protection in 2002. He only paid about 20 cents on the dollar for the bonds. Even though, for a while, it looked like the company would shut its doors for good, Whitman was vindicated when the K-Mart emerged from bankruptcy and his bonds were exchanged for stock in the new company.

Shares jumped much higher in the years following the reorganization, and then were taken over by Sears Holding (nasdaq: SHLD - news - people ), which produced a nice profit for Whitman. Thanks to moves like this, the Third Avenue Value Fund has earned a market-beating 14.3% return since Whitman founded the fund in 1990.
The same post also takes a look at Buffett's initial investment in The Washington Post, which he bought during the bear market of '73-'74.

While the article is focused on contrarian investing--a style that we think has serious limitations (in that the main focus is on what others think as opposed to the true value for a stock and its price), it is well worth reading. Head to Forbes and see for yourself.

Tuesday, February 24, 2009

4Q Loss for Greenlight Capital Re

Greenlight Capital Re has been written up two times on Value Investors Club. In the first write-up it was described (properly) as "in large part a closed-end fund version of Greenlight Capital" with an added reinsurance business component.

Monday, property and casualty reinsurance company Greenlight Capital Re, Ltd. (GLRE: News ) reported a loss in its fourth quarter, hurt by net investment loss. For the fourth quarter, the company reported a net loss of $31.3 million or $0.87 per share, compared to a net income of $29.2 million or $0.80 per share in the year-ago quarter.


David Einhorn, chairman of the board of directors of Greenlight Re, commented, "2008 presented a soft reinsurance market and a challenging investment environment. While we were disappointed with the investment result, our underwriting portfolio performed well. Our conservative balance sheet affords us a good opportunity to take advantage of the dislocations that are now occurring in a hardening reinsurance market and in the capital markets."
For the news release from which the above was excepted, go to the RTT News link. Another comment, taken from the announcement at Greenlight's site, follows:
“In 2008, we further established and diversified our frequency-oriented nderwriting portfolio by strengthening the partnerships with our clients,” said Len Goldberg, Chief Executive Officer of Greenlight Re. “In addition, we are already seeing a significant increase in frequency business opportunities that could fit well into our portfolio. With the industry attracting very little fresh capital to replace losses, clients and prospective clients are turning to Greenlight Re, with our unlevered balance sheet and innovative approach to reinsurance, as a solution to help reduce strain caused by the events of 2008.”

Monday, February 23, 2009

The Berkshire Arbitrage

Felix Salmon at Portfolio points out an arbitrage opportunity in Berkshire:

"In my opinion," says Warren Buffett, "when the B is at a discount of more than say, 2%, it offers a better buy than the A." Right now the discount is a whopping 7%. So if you want to take Buffett's advice, start buying up B shares. If, that is, you want to buy his stock in the first place. Which is a different matter entirely.

Thursday, February 19, 2009

Heebner's Recent Moves

An interesting article is up at Forex Hound on Ken Heebner's recent moves. An excerpt:
If you have been following the market with even [one] eye you can see that move was again in error, but one positive thing about Heebner is if he changes his mind he will go whole turkey. So in the latest report those 3 positions are now GONE. Now his focus seems to be insurers, which have struggled since Jan 1 - but in theory if the government treats them as banks and takes some of their bad assets out and onto the tax payers shoulders; then you "win" ...

[Lists the biggest additions in Quarter 4]

If we assume he kept these for the past 6 weeks, Newmont Mining has an excellent run (in lockstep with gold), Research in Motion had an excellent run until a week ago when it updated its guidance and the stock has been in freefall since (it will be interesting to see if he hung on), healthcare has been one of the better places to hide, and adult education has been one of the "thesis" areas in the market. The rest is insurance, insurance, insurance.
Enjoy the rest of the article at Forex Hound or, where it appeared first, at Trader Mark's site.

Wednesday, February 18, 2009

Leucadia Finds a Friend in Pabrai

Dave Bui, at Seeking Alpha, notes that Pabrai added eight new positions to his portfolio recently, one of which was Leucadia.

Pabrai's new positions can be summed up as a bunch of commodities with a hint of financials. New mining stakes include Horsehead Holding Corp (ZINC), Teck Cominco (TCK) and indirectly, Leucadia National (LUK). He also moved into the agriculture space with Potash (POT) and Cresud SA (CRESY). He also added a good-sized position in Goldman Sachs (GS), which received a well-publicized capital boost from Pabrai's acknowledged idol, Warren Buffett. Pabrai completely divested his WCG position and massively reduced stakes in Buffett's Berkshire, Cryptologic (CRYP), CompuCredit (CCRT) and Fairfax Financial (FFH).
The same link has information on the new picks by Berkowitz and Rodriguez, noted value investors. Well worth clicking over.

Tuesday, February 17, 2009

Einhorn on Insider Buying

I recently re-read Fooling Some of the People All the Time, and will be sharing some quotes from it directly related to how Einhorn views different aspects of investing.
Speaking of insider purchases, Allied management made several small insider purchases between my speech on May 15, 2002, and the end of the year. As one shareholder asked me, "Allied insiders have been buying shares and not selling. In fact, I think the last insider sell was more than a year ago. This does not seem like the behavior of a management that is hiding something. If, as you suggest, they are privy to negative information that likely would be detrimental to the stock price, it's inexplicable to me that they would put more of their own money at risk."

This, of course, is a straightforward and logical analysis. I agree that insider purchases are generally bullish. However, in this case, the insider purchases were so small relative to the financial wherewithal of the participants and to their existing stakes in the company that they appeared to be simply an effort to "signal the market" with news of insider purchases, thus reassuring retail investors like this fellow. In context, this was not a serious effort to increase their stakes by taking advantage of discounted prices.

...If insider purchases are indiscriminately believed to be a bullish indicator, bad actors can use them as false indicators at desparate times. Dennis Kozlowski and Mark Swartz of Tyco each spent about $15 million to signal the market with insider purchases in January 2002. In June 2005, Kozlowski and Swartz were found guilty on twenty-two of twenty-three counts of grand larceny and conspiracy, falsifying business records and violating business law. They were ordered to pay fines and restitution of over $200 million and given lengthy prison sentences.
The above is from page 131 of the book. It shows that Einhorn does not limit himself to rules, such as insider purchases are good, but looks at any one action by management in the context of everything else he knows and only then reaches a conclusion.

Monday, February 16, 2009

Closed Funds Opening?

In an article at CNNMoney, Yuval Rosenberg points out a silver lining in the dark clouds over the stock market: many previously closed funds are now opening to new investors. Third Avenue's Small Cap Value gets a nice mention, excerpted below:

Manager Curtis Jensen has been at the helm since the fund's inception in 1997. The fund lost nearly 35% last year, but it bested the S&P 500 (SPX) by 2.4 percentage points. Over the last decade, it has topped the Russell 2000 (RUT) index by 3 percentage points a year and beaten the S&P 500 by better than seven percentage points a year.

Like Samra and O'Keefe, Jensen looks for well-financed companies trading at deep discounts of 30% or more to their intrinsic values. He's willing to buy bargains wherever he finds them, whether it be Japanese firms like brewer and beer hall operator Sapporo Holdings, his top holding, and shopping mall operator PARCO, No. 2, or Denver-based oil and natural gas producer St. Mary Land & Exploration Co. (SM), No. 3.
At the link above, more information on this fund and others. If you're interested in some of the holdings mentioned above, we highly recommend you read the investor letters. Third Avenue as a whole provides great information on why they like what they like--and Jenson is no exception.

Friday, February 13, 2009

Gayner Increases Leucadia Stake

After noting that Tom Gayner, of Merkel Corp, is selling more than he is buying (at least as of the latest report), Guru Focus points out that the well-respected money-manager has increased his stake in Leucadia.

Quoting: "Tom Gayner added to his holdings in Leucadia National Corp. by 54.39%. His purchase prices were between $14.56 and $31.83, with an estimated average price of $22.3."

The investment vehicle of Ian Cumming and Joseph Steinberg, was also added to Jean-Marie Eveillard's portfolio. He joins a long list of fellow value investors--including Marty Whitman and Bruce Berkowitz--who are confident in LUK's strategy, management team, and its market price relative to its intrinsic value.

Thursday, February 12, 2009

A Difference in Focus: Buffett and Journalists

In what is becoming a routine criticism, yet another article mentions that Buffett started buying too early.

Warren Buffett likes to say his favorite length of time to hold a stock is "forever." That's a good thing, because some of his more recent investments aren't making him money in the short run.

Buffett, 78, who is ranked the richest man in the United States by Forbes magazine, placed bets over the past two years on companies ranging from Kraft Foods and Johnson & Johnson to the oil producer ConocoPhillips.

After last year's 38 percent drop in the Standard & Poor's 500 Index, they are among the stocks trading at less than what he paid when he last added their shares to the holdings of his Berkshire Hathaway.

The man heralded as the "Oracle of Omaha" tells acolytes he evaluates companies based on their stability, their competitive advantage and what he thinks they will be worth years into the future, instead of trying to find the moment when their stocks are at their lowest. The declines in his recent equity purchases suggest he could have waited before taking the plunge.

We agree Buffett bought too early--as value investors almost always do--but we think it is both interesting and important to point out a difference in focus.

The relatively poor journalists in all these articles focus on the outcome of a decision (measured over the short-term) while the world's richest man is focused on his investing method (which looks at the value of a company over the long-term).

Wednesday, February 11, 2009

Heebner on Margin Calls

A recent article in Kiplinger's noted that Buffett is buying then asked why other fund managers aren't following suit. The answer was instructive:
Many fund managers likely agree with Buffett's sentiments. And at today's prices, they wish they could be like Buffett and buy stocks. However, due to a panicked investing populace, that's simply not possible.

You see, when individual investors elect to withdraw their money from a mutual fund, the fund manager must quickly come up with the cash to redeem those investors. In 2008, equity investors withdrew over $215 billion from mutual funds, spurring a wave of selling by fund managers--even though those managers likely still believed in the prospects of the stocks they were selling!

As Morningstar Director of Equity Research Pat Dorsey explained in a recent video, these stock sales had "nothing to do with fundamentals, nothing to do with the underpinnings of our economy ... no matter what the stocks are, no matter how attractive those assets may be, [fund managers] have to sell them because they need to raise the cash to send those checks out" to their investors.

And that $215 billion doesn't even include hedge fund managers who are forced to sell stocks because of investor redemptions and margin calls!

As master money manager Ken Heebner--skipper of the CGM Focus fund--told USA TODAY, "The reason for the sharp decline is massive selling from hedge funds, not because they want to, but because they have to reduce their leverage ... it's the biggest margin call since 1929."

Tuesday, February 10, 2009

Third Avenue Real Estate Value

A recent article in Kiplingers, authored by Steven T. Goldberg, mentioned one of the real estate funds run by Michael Winer--under the Third Avenue Value umbrella of funds.

Personally, I prefer another fund, Third Avenue Real Estate Value (TAREX). The main reason: Less than half of its assets are in REITs. Manager Mike Winer, who spent many years in the real estate industry before becoming a professional investor, likes the freedom that real estate operating companies have to deploy their earnings.

They don't make the huge payouts to shareholders that REITs must. In today's market, where cash is king, operating companies often have much bigger cash troves than REITs do.

Third Avenue is quirky. It yields just 2.9%--low for a real estate fund. Expenses are higher than I'd like to see them, at 1.1%. Plus, Winer can--and does--invest anywhere; more than 60% of the fund's assets are in foreign stocks.

But returns have been solid. The fund gained 8.5% annualized over the past ten years. Winer is a disciple of Third Avenue founder Marty Whitman's "safe and cheap" school of investing. (Note that the fund has a $10,000 initial minimum, although many discount brokers let you in for less.)

Read the full article at the link above for more information. We'll just add that the article nailed one of the main characteristics of the real estate fund run by Winer: it's emphasis on real-estate operating companies over the trusts.

Monday, February 9, 2009

Following Buffett

In a post at Forbes.Com titled, "Has Buffett Lost His Touch", an important distinction is made between what Buffett is buying and what you can buy:
In our Investor Team discussion, Ronald Sloan, a fund manager with Invesco AIM, and Marc Lowlicht of Further Lane Asset Management both point out that Buffett has commanded preferred terms for many of his recent investments, so nvestors looking to copy him have to watch out. When making big investments recently, Buffett has purchased preferred shares that pay high dividends and have limited risk of depreciation.
They also point out the obvious, that the famed investor is not infallible (noting in particular his investment in US Airways). What I found interesting, however, was this excerpt--which compares what Buffett wrote in his 1989 shareholder letter with the more recent preferred purchases:
The preferred stocks structures we have negotiated with provide a mediocre return for us if industry economics hinder the performance of our investees, but will produce reasonably attractive results for us if they can earn a return comparable to that of American industry in general," Buffett and Munger wrote.

They then explained that: "Under almost any conditions, we expect these preferreds to return us our money plus dividends. If that is all we get though, the result will be disappointing , because we will have given up flexibility and consequently will have missed some significant opportunities that are bound to present themselves during the decade."

It ends with a call to other investors to follow Berkshire's lead: "[W]e believe Berkshire's investment will also help and that other shareholders of each investee will profit over the years ahead from our preferred stock purchase. The help will come from the fact that each company now has a major, stable and interested stockholder whose chairman and vice chairman have, through Berkshire's own investments, indirectly committed a very large amount of their own money to these undertakings."

Buffett and Munger could easily rewrite that 1989 letter and do little else but change company references to Harley, Goldman and GE.
Read the rest of the article at the link provided above. I didn't excerpt all the good stuff by any means! Even Whitman gets a mention--along with another fund manager they recommend for those who want money invested in a Buffett-like fashion.

Friday, February 6, 2009

Klarman Joins Einhorn--in Gold

We already mentioned here that Einhorn was buying gold. This article mentions that and adds that another great investor is acting on the same concerns.

Klarman, head of The Baupost Group, told investors in October that the firm had built a "sizable position in low-cost inflation protection for the next three to five years."

"The extraordinary and unpaid-for financial market bailout should add to inflationary pressures over time," he added. "The dollar will likely weaken over time, perhaps in a hurry, and gold may further strengthen."

Thursday, February 5, 2009

Buffett to Lend Swiss Re Billions

As reported by Bloomberg, billionaire Warren Buffett plans to inject 2.6 billion (USD) into the re-insurance company Swiss Re.

The investment may give Berkshire a stake of more than 20 percent as Swiss Re struggles to keep its AA credit rating. The Zurich-based company said today it expects to report a 2008 loss of about 1 billion francs because of credit-market writedowns. Swiss Re fell as much as 18 percent in Zurich trading after the insurer said it plans to cut its dividend, disband part of the asset- management unit, and may seek another 2 billion francs of capital.

“We are disappointed with our overall results,” Chief Executive Officer Jacques Aigrain said in a statement. “Warren Buffett’s agreement to invest in Swiss Re is a testament to the strength of our franchise.”

Swiss Re is abandoning Aigrain’s strategy of trying to increase profit by trading and selling securities such as credit- default swaps. The foray led to market writedowns of 6 billion francs last year, contributed to a depletion in shareholder equity and took two-thirds off the company’s market value in the past 12 months.

He will not be buying common shares.

The Berkshire Hathaway investment will be in the form of a convertible instrument with a 12 percent coupon, Swiss Re said. Berkshire has the option to convert it into Swiss Re shares after three years at a price of 25 francs per share.

As we pointed out here already--rightly or wrongly--Berkshire's image of being a business partner (and a "non-flipper") probably helped him negotiate a better deal than otherwise.

Wednesday, February 4, 2009

Einhorn's Portfolio and Latest Letter

Just for those that missed the post, or haven't read the letter, SeekingAlpha lists Einhorn's positions. For the full article, go to the site; for the good stuff, read on:

...Greenlight Capital's top five long equity positions were Allegheny Energy (AYE), Arkema (ARKAY.PK), Criteria Caixa, Österreichische Post, and URS Corp.(URS), and that it had an average exposure of 76% long and 37% short.

During the last quarter, it sold out of its long position in Ameriprise Financial. Additionally, it covered the following short positions: American Reprographics (ARP), Aurelian Resources (AUREF.PK)(Canadian), Equinix (EQIX), Great Atlantic & Pacific Tea (GAJ), Itron (ITRI), Macquarie Airports (MQRSF.PK)(Australian), and McGraw-Hill (MHP).

It also added some new long positions in the last quarter. These additions include Allegheny Energy (AYE), Commscope (CTV), MEMC Electronic Materials (WFR), gold and an index of gold miners (GDX), and the Japanese Yen.

Additionally, Greenlight also mentions that it was buying bank debt, high yield bonds, convertible bonds, gold, select foreign currencies, and equities. It’s also interesting to note that Greenlight was short Volkswagen and got caught up in the massive short squeeze...

As for Einhorn's latest letter, which I strongly recomend reading, click here. (An older letter, is online at the Dealbreaker site.)

Tuesday, February 3, 2009

The Non-Flippers

In the comments section of a recent post, fellow blogger Dave in Hackensack points out a number of times Buffett held on to stocks that have since declined markedly.

He owned 20% of Moody's while it was slapping triple-A ratings on CDOs comprised of subprime mortgages; he has ridden down a number of his holdings (both wholly-owned and publicly-traded) that are linked to housing; he didn't seem to suspect the mess BofA was taking on with its acquisitions of CountryWide and Merrill Lynch (or, if he did, he held on to his BofA stock anyway), etc.
He then poses a question about Buffett's strategy and goes a good way towards answering it himself.

While I won't argue with those reasons here I would emphasize a different point. I think the reason Buffett and Munger didn't sell these companies--even though they might have known they'd be better off in a short-term financial sense--is the result of an explicitly-stated aversion to being seen as churners. Quoting Munger at last year's Wesco financial meeting:
We tend not to sell operating businesses. That is a lifestyle choice. We have bought well. We have a few which would be better if we sold them. But net we do better if we don’t do gin rummy management, churning our portfolio. We want reputation as not being churners and flippers. Competitive advantage is being not a churner.
There are a few arguable things about using this quote here. For one, the quote is taken from a slightly different context--one involving operating businesses--but I would say Munger and Buffett apply the same thinking (even if to a lesser degree) in their stock portfolio. And for the same reasons.

Not being seen as churners--and earning their reputation as solid business partners--allows them to get many of the deals that they have gotten (and will get in the future).

The long-term effects of such a strategy are of course harder to point to than horrible-looking charts, and few people have thought to do so as a result, but this I think is one of their main reasons for staying in positions (even if they might find them overvalued at some point after they've been bought).

It's also a good example that in investing, as in economics, you have to look at what is seen and what is not.

Monday, February 2, 2009

NYT: Einhorn's Book Required Reading

A recent two-page article in the New York Times says that "Fooling Some of the People" should be "required reading for Mary L. Shapiro, the new chairwoman of the S.E.C." We fully agree. Here is the introduction:
TWO events occurred last week that seem unrelated. But, as often occurs in our interwoven world, connecting the dots is revealing.

First was Linda Chatman Thomsen’s testimony last Tuesday before the Senate Banking Committee. Ms. Thomsen, the director of enforcement at the Securities and Exchange Commission, offered her take on how the nation’s top securities cop missed the Ponzi scheme Bernard Madoff is said to have run for decades, noting how aassiduously the S.E.C. chases tips it receives.

“Without fear or favor,” she said.

The next day, shares in Allied Capital, a business development company that invests in small to midsize concerns, plummeted almost 50 percent. Allied, whose stock was favored by small investors for its rich dividend, said it was trying to renegotiate its own loans amid the credit crisis. Dividend in danger, Allied’s stock closed at $1.56 on Friday; last September, the shares touched $16.

The two events are linked by this: Just as the S.E.C. failed Mr. Madoff’s investors as tipsters told the agency he might be up to no good, it also seems to have let down Allied’s shareholders by ignoring analyses of aggressive accounting at the company.
The article goes on to re-cap the book's theme and its main points. If you find the rest interesting, buy the book. It's good.