Marty Whitman Defines Risk

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

Heebner: CGM Focus Redemptions

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

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

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

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

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

Berkowitz Sticks with Leucadia

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

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

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

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

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

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

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

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

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

Buffett: The Sleuth Investor

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

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

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

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

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

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

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

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

Ira Sohn Research Conference

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

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

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

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

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

Buffett on Analyzing People

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

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

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

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

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

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

When will the Recession End?

From the most recent Leucadia shareholder report:

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

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

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

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

Review of Buffett's Letters

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

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

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

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

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

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