Thursday, April 30, 2009

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.

Wednesday, April 29, 2009

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).

Tuesday, April 28, 2009

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.

Monday, April 27, 2009

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.)

Friday, April 24, 2009

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."

Wednesday, April 22, 2009

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.

Tuesday, April 21, 2009

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.

Monday, April 20, 2009

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.

Friday, April 17, 2009

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.

Thursday, April 16, 2009

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?

Wednesday, April 15, 2009

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.

Tuesday, April 14, 2009

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.

Monday, April 13, 2009

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.

Friday, April 10, 2009

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.

Thursday, April 9, 2009

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.

Wednesday, April 8, 2009

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.

Tuesday, April 7, 2009

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.

Monday, April 6, 2009

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?

Friday, April 3, 2009

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.

Thursday, April 2, 2009

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.

Wednesday, April 1, 2009

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).