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.
Tuesday, March 31, 2009
Monday, March 30, 2009
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.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.
-- 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.
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.
Thursday, March 26, 2009
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:
For the rest, including a comment on efficient market theory, click here.
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.
Wednesday, March 25, 2009
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.
Tuesday, March 24, 2009
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.
Monday, March 23, 2009
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:
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.)
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...
Friday, March 20, 2009
They have some useful data on portfolio positions, show how much money of an invested portfolio is in a given industry, and a decent news feed. They also just added portfolio performance charts, which allow you to see what Warren Buffett or Ken Heebner or Bill Miller has done for investors lately. (For a good example, showing Berkshire's performance relative to the market, click here.)
One of the things that GuruFocus does well is show the activity of a lot of different managers with regards to a single stock (over a set amount of time). And, on the same screen, it will show whether insiders were selling or buying, or both, and in what numbers. This is good stuff--great stuff actually. So, if you have a single stock you're interested in, this is one of the best places to get a broad view of what others are thinking and doing with regards to it.
However, the growing lack of focus at the site can be as much a vice as it is a virtue. It really depends on what you are looking for, and how much time you have. I noted above that the news feed was just "decent" above, for example, because I really don't care about many of the articles linked to (written on lesser investors) and I definitely don't care to read some of the articles posted there (written by lesser investors).
The same that can be said about the news and articles feed, can be said about the site's forum. Some good discussions can be found there and a bunch of worthless one's as well (relative to what could be read elsewhere). I don't have the time to wade through the bad, or argue with it, in order to reach the good.
And, while I don't think it's necessarily wrong to do that, given other options I would not recommend it--especially for new investors. Far better to read everything the greats wrote, or good books on them, then start reading the letters of lesser investors, and so on down the chain.
GuruFocus is a great site, but because of the volume of managers and information, one should clearly define one's purpose in going to it, rather than mindlessly click around. If you do this latter, you will likely waste a lot of time and not learn a tenth as much as if you read a book or a handful of shareholder letters.
If, however, you use the site for getting a quick view of what managers are doing in general or with regards to a specific company you're focusing on, I think you'll find it very valuable. From there, you can judge for yourself the value of each passing news item or article.
Note: the site's forum contains a steady stream of articles cut and pasted from other writers or sites. That's a copyright infringement issue for the owners of that data or of the site itself to end, but I mention it here simply to say I was not referring to it above--when mentioning the good parts of the forum.
Thursday, March 19, 2009
Paulson, bought a stake in AngloGold Ashanti Ltd. (AU) from Anglo American Plc for $1.28 billion as hedge funds increase their gold holdings.
Paulson paid $32 a share for the 11.3 percent stake in the Johannesburg-based gold miner, Anglo American said today in a statement. The purchase makes Paulson the company’s second- largest shareholder, according to data compiled by Bloomberg. Paulson also owns a 4.1 percent stake in Kinross Gold Corp (KGC)., making the hedge fund the fourth-largest holder of the gold producer.
Hedge funds are turning to gold to mitigate potential inflation as governments around the world increase spending to stimulate their recession-bound economies. David Einhorn, founder of New York-based Greenlight Capital Inc., told investors in January that he is buying gold for the first time. Hayman Advisors LP’s Kyle Bass said investors are seeking precious metals as central banks print more money.
“Hard currency is coming to the fore, as evidenced by the investment choices of some of the world’s most seasoned investors,” AngloGold Ashanti Chief Executive Officer Mark Cutifani said today in an e-mailed statement.
Wednesday, March 18, 2009
Tuesday, March 17, 2009
Click the link to head to the Investopedia article.
Monday, March 16, 2009
Buffett and Munger routinely focus on the incentives that other companies have put in place, and that Berkshire needs to in order to achieve greater success going forward.
Buffett, chairman and chief executive officer of the Omaha, Neb., company, received a total of $175,000 in compensation in 2008, the same amount he received a year earlier, according to a regulatory filing made Friday.
Berkshire's chief financial officer, Marc Hamburg, earned the distinction as the highest- paid employee at company headquarters. But even his pay is almost certainly less than that of CEOs at some of Berkshire's subsidiaries, such as Geico, MidAmerican Energy and Berkshire Reinsurance. The salaries of executives at subsidiaries aren't disclosed.
Buffett's base salary remained at $100,000, the same level it's been for more than 25 years. He picked up $75,000 more for director's fees from some outside companies in which Berkshire has significant investments. That pay did not change from 2007.
Are the people running the companies that make up your portfolio paid in such a way that their interests align with yours? I don't know the answer to that question...but I do know it's a good question to ask.
Friday, March 13, 2009
Shares of Allied Capital Corp have been wiped out over the past year, but David Einhorn, the hedge fund manager who has famously shorted the business lender's stock, feels more vexed than vindicated.Allied stock is now around 97 percent lower from where Einhorn sold it short. Einhorn's comment above about how far more widespread the problem was than he realized is exactly correct. My review will show why--on a fundamental level--and, in doing so, show the fuller, true value of Fooling Some of the People.
That's because the past year's financial markets collapse has produced even more serious fall-out. From the demise of Lehman Brothers to Bernard Madoff's massive Ponzi scheme, the questionable accounting practices of a small lender was just one product of sleepy regulatory oversight, Einhorn told Reuters in an interview.
"What we've seen a year later is that Allied was the tip of an iceberg; that this kind of questionable ethic, philosophy and business practice was far more widespread than I recognized at the time," he said. "Our country, our economy, is paying a huge price for that."
Einhorn, head of the $5 billion hedge fund firm Greenlight Capital, made headlines in May 2002 when he told an audience he believed Allied's stock was overvalued. He argued Allied was slow to mark down depressed assets -- often equity stakes in small private companies -- and stretched accounting rules.
Greenlight shorted the stock, meaning it would profit if Allied's price fell. Einhorn also submitted what he considered red flags to the Securities and Exchange Commission, expecting that the agency would investigate.
Instead, what followed was a long public battle between Einhorn and Allied, which denied and continues to deny wrongdoing, as well as SEC scrutiny of the hedge fund manager's short-selling activities.
It was and is far more than simply a book about a single short case in a single company--telling what went wrong and why. For a more exact identification, stay tuned
Thursday, March 12, 2009
Wednesday, March 11, 2009
Given that Heebner was the value investor of the year --and has an exceptional, multi-decade track record--it's a shame that we only got started talking about his method of investing due to a post which (to put it nicely) attempted to forecast the manager's future returns by looking at factors which are probably not the most important to focus on. In that thread, I wrote the following:
I highlighted the word inductive because I think this is the key to Heebner's many brilliant calls--which many would refer to as top-down. In all actuality, though, I think we can say that his calls were proven correct so many times because they were made from the ground up, using a host of different, though very relevant facts.
With regards to Heebner, I think it's important to point out that he gets a view of the "big picture" from the bottom up, just as fundamental investors do about any big company.
His macro call on oil was a result of years of work talking with people in the field, looking at supply and demand--and not just on a removed basis (using statistics from sources that include various assumptions). He studied Ghawar, was talking with the experts on it, and so on.
I think Heebner's method of getting to the big picture is especially important for anyone wanting to improve. There's a false dichotomy in many people's minds now that you have to be bottoms up or top down. Some will argue that it pays to be both, but very few point out that any "big picture" analysis of value uses the same inductive method as is used by the greats in individual companies.
Heebner has made excellent macro calls because he approaches such questions with the same rigourous logic and voracious fact-gathering that he brings to the analysis of individual companies. He has excellent returns because his method and his work ethic are so good.
Later on in that thread, someone--I think DaveinHackensack--mentioned that Heebner's call on steel prices was due to him in part reading the China Metals Weekly. I can add to this since I remember an article years ago when Heebner became bullish on copper. The reason was partly supply and demand of course, but he noted that he became so bullish after talking with many people on the phone in Chile (the equivalent of Ghawar for copper) and noting that they had a real water problem down there which is only getting worse.
These sort of macro calls, from the ground up, are again more correct than not because they're made from the ground up, and with many of years of experience--which allows him to know what is relevant and what is not.
Buffett's circle of competence applies in every area one wants to invest. The calls should be differentiated from the person who looks at a past chart for a commodity (even one's that precede 1980!), or starts with an assumption about global growth and comes up with or deduces a conclusion from that. There's a very big difference in thinking, and as Heebner has shown, in results....
Tuesday, March 10, 2009
...There Einhorn argued that ROE is only a meaningful metric for capital-intensive businesses—like traditional manufacturing companies, distribution companies, most financial institutions, and retailers (4). For businesses that are not capital intensive—whose profits derive primarily from intellectual capital or human resources (e.g., pharmaceutical companies, software companies, etc.)—it is “irrelevant to worry about ROE” (4).More analysis at the blog. And, as usual, we recommend reading on. Just a quick comment of my own. What I enjoyed about reading this was seeing how Einhorn once again looks at the value of what others take as "general rules" and places it in the specific context where it is reliable, while noting where it is not.
Why? Because businesses that are not capital intensive do not generate substantial returns from retained earnings or capital expenditures.
For example, if you are an insurance agent, you will bring in much more business and profit by getting on the phone and meeting more potential clients, rather than tripling your office space, or adding that new water feature to the atrium, or buying that highly efficient “document station.”
In short, it’s not the “equity” which provides the retums, but the people, the brand, or the proprietary product—things which don’t show up on the balance sheet. ROE then is insignificant. For the most part.
Readers who want to see another example of Einhorn doing this contextually-based thinking, should read his comments on insider purchases that we blogged about here.
Monday, March 9, 2009
Doing so, or lowering their cost of capital, effectively rewards the short-sighted and the incompetent while punishing those who think long-term and have proven reputations as the greatest investors of our time.
It's an upside-down policy, that leads to an upside-down world. Warren Buffett provides the details in the latest letter:
Clayton’s lending operation, though not damaged by the performance of its borrowers, is nevertheless threatened by an element of the credit crisis. Funders that have access to any sort of government guarantee-–banks with FDIC-insured deposits, large entities with commercial paper now backed by the Federal Reserve, and others who are using imaginative methods (or lobbying skills) to come under the government’s umbrella--have money costs that are minimal.
Conversely, highly-rated companies, such as Berkshire, are experiencing borrowing costs that, in relation to Treasury rates, are at record levels. Moreover, funds are abundant for the government-guaranteed borrower but often scarce for others, no matter how creditworthy they may be.
This unprecedented “spread” in the cost of money makes it unprofitable for any lender who doesn’t enjoy government-guaranteed funds to go up against those with a favored status. Government is determining the “haves” and “have-nots.” That is why companies are rushing to convert to bank holding companies, not a course feasible for Berkshire.
Though Berkshire’s credit is pristine – we are one of only seven AAA corporations in the country – our cost of borrowing is now far higher than competitors with shaky balance sheets but government backing. At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.
Today’s extreme conditions may soon end. At worst, we believe we will find at least a partial solution that will allow us to continue much of Clayton’s lending. Clayton’s earnings, however, will surely suffer if we are forced to compete for long against government-favored lenders.
Friday, March 6, 2009
"With stocks you have to worry about the market," he says. "With debt I just have to understand the contract. If my analysis is right, I'll make money." By "contract," he means documents that spell out debt holders' rights. It also helps to own enough of a sickly company's debt to have a say in any reorganization.
While I haven't read Whitman's latest books, I can heartily recommend his first two--The Agressive Conservative Investor and Value Investing: A Balanced Approach.
In each of these, you will see Whitman's strategy explained clearly. You will see that he focuses primarily on what is as opposed to what will be--and as his record attests he has proven to be very good at doing this.
As the Forbes article shows, Whitman has had a tough three years, but this is where he should be expected to excel--given his past record, his strategy, and the type of deals being offered now.
Thursday, March 5, 2009
SPDR Gold Trust (GLD)
Allegheny Energy (AYE)
Market Vectors Gold Miners ETF (GDX)
MEMC Electronic Materials (WFR)
CF Industries (CF)
Dow Chemical (DOW)
Aspen Insurance (AHL)
Proshares Ultrashort Treasuries (TBT)
JA Solar (JASO)
Focus Media (FMCN)
Cadence Design (CDNS)
Patterson-Uti Energy (PTEN)
Carpenter Technology (CRS)
Foster Wheeler (FWLT)
Lawson Software (LWSN)
BondPatriot Coal (PCX)
Western Digital (WDC)
Cadence Design (CDNS)
BondEnsco International (ESV)
Colonial Properties (CLP)
Smithfield Foods (SFD)
Aercap Holdings (AER)
Duke Realty (DRE)
To see the old positions he's adding to, or those he's decreasing, click on the link.
Wednesday, March 4, 2009
"In June 2007, the Company invested $200,000,000 to acquire a 10% limited partnership interest in Pershing Square, a newly-formed private investment partnership whose investment decisions are at the sole discretion of Pershing Square's general partner. The stated objective of Pershing Square is to create significant capital appreciation by investing in Target Corporation (NYSE:TGT). The Company recorded losses under the equity method of accounting from this investment of $77,700,000 and $85,500,000 in 2008 and 2007, respectively, principally resulting from declines in the market value of Target Corporation's common stock. At December 31, 2008, the book value of the Company's investment in Pershing Square was $36,700,000."
(Hat tip: Wall St Nation)
Tuesday, March 3, 2009
To read the whole article, head to Bloomberg, and enjoy.
“Buffett gives a lot of autonomy to his managers, so he may not be the one who’s making those decisions,” Fuller said. Buffett didn’t respond to a request for comment left with spokeswoman Carrie Kizer.
Berkshire’s fourth-quarter net income fell 96 percent to $117 million, the firm said Feb. 28. Book value per share, a measure of assets minus liabilities, slipped 9.6 percent for all of 2008, the worst performance under Buffett’s watch, on the declining value of derivatives and the stock portfolio.
The number of employees at insurance subsidiaries slipped less than 1 percent to 28,188. MidAmerican Energy Co. employed 3,150 on Dec. 31, which is six fewer than a year earlier.
“We are fortunate that Berkshire’s two most important businesses - our insurance and utility groups - produce earnings that are not correlated to those of the general economy,” Buffett wrote. “Both businesses delivered outstanding results in 2008 and have excellent prospects.”
Buffett told shareholders that he and Geico CEO Tony Nicely feel like “two hungry mosquitoes in a nudist camp” because of opportunities to increase sales at the unit. The insurer set a monthly sales record in January, he said.
In his letter to shareholders, Buffett predicted that the economy and stocks will rebound, and the best days for the U.S. are ahead.
“Though the path has not been smooth, our economic system has worked extraordinarily well over time,” Buffett wrote. “It has unleashed human potential as no other system has, and it will continue to do so.”