Interesting Links

• Investing tips from Bruce Berkowitz of Fairholme Fund at The Motley Fool
• FINVIZ, a visual stock screener
• List of 100 – technique you can use to generate ideas at Litemind
• mindmeister, an online mind mapping tool
• My Value Idea, links to Peltz’s original letter to the board of Cadbury
• Goosh.org, a shell interface for Google
• Busines Pundit lists 10 Investing Books Recommended By Warren Buffett
• 37 Signals describes that difference between a fifty year old carpenter and a novice is that one with experience leaves room to make mistakes

2008 Berkshire Hathaway Shareholder Meeting: Detailed Notes

Reflections on Value Investing has posted some notes from the recent Berkshire Hathaway meeting. Below are some quotes that I noticed.

I started investing when I was 11. I believe in reading everything in sight. I wandered for 8 yrs with technical analysis. I read Intelligent Investor, chapters 8 and 20 I recommend, and if you absorb it you won’t be a lemming.

Our job is not to select great managers, our job is to retain them.

In business school the amount of time spent teaching option pricing is total nonsense. You only need 2 courses, how to value a business and how to think about stock market fluctuations.

We never want to trade reputation for money.

There is a lot I wouldn’t buy even if best management in world, as it doesn’t make much difference in a bad business.

We want a company with durable advantage, which we understand, can trust management, at a good price.

If I were working with small sums of money, it would open up thousands of possibilities. We found very mispriced bonds. We found them in Korea a few years ago. You made big returns but had to be small size. I wouldn’t be in currencies with small amount of money. I had a friend who used to buy tax liens. I’d look in small stocks or specialized bonds.

Several times I have had 75% of my non-Berkshire net worth in a situation. You will see things where it would be a mistake not to act. You won’t see them often, and the press and your friends won’t be talking about them.

We have lower due diligence expenses than anyone in America. I know of a place that pays over US$200m to its accountants every year, and I know we are safer because we think like engineers – we want margins of reliability.

A brand is a promise.

We waste a lot of time, but we waste it on things we want to waste it on.

Investment Portfolio

Readers of this blog may be familiar with, blogs like ControlledGreed.com, Gannon on Investing, Value Investing, and a Few Cigar Butts and Value Discipline.

I intend to follow their lead and start posting about potential investments. And keep track of the resulting portfolio.

The portfolio will be highly concentrated, following the example of Mohnish Parbrai with ten positions each making up roughly 10% of the portfolio.

Companies I am looking at include:

Sears - SHLD:

• Run by Eddie Lampart, and has Mohnish Parbrai, Bruce Berkowitz and Bill Ackman as investors. My Value Idea has a post about Sears: Sears Holdings is the hype real?. Which outlines why this may be a good investment.
• Value Investing, and a Few Cigar Butts has a 18% position in SHLD.

Winn Dixe - WINN

• US Supermarket chain that has come out of bankruptcy. The Tilson Focus fund have invested 13% of their portfolio in the company.
• Whitney Tilson writes about the investment in this article: Winn-Dixie Stores: A Turnaround in Progress at Seeking Alpha.

EchoStar - SATS

• Spin-off from EchoStar Communications (which has Bruce Berkowitz as an investor). The business makes set-top boxes for subscription TV, has seven satellites and US$1bn in cash.
• The idea came from a write up by vinlin1060 at Value Investor Club, which I was able to read with a free guest membership that lets you view posts more than 45 days old.

Office Depot - ODP

• Recent investment by Joel Greenblatt.
• Controlled Greed has a position.

Seth A. Klarman

gone to the dogs has a post featuring a speech by Seth A. Klarman (the author of Margin of Safety) at MIT. Here are a few quotes from the speech:

Seth Klarman makes the point that most investors lack a strategy that equips them to deal with a rise in volatility and declining markets.

Buying at a discount creates a margin of safety for the investor—room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies.

The best investors do not target return; they focus first on risk, and only then decide whether the projected return justifies taking each particular risk.

Recourse leverage changes this equation, as you can seemingly own all the investments you want simply by borrowing to buy them. There is no healthy portfolio discipline enforced by the desire to make new purchases or the anticipation that you may want to. There is also a bit of a slippery slope in that if a little leverage is good, why isn’t more leverage better? When do you stop?

Value investing, the strategy of buying stocks at an appreciable discount from the value of the underlying businesses, is one strategy that provides a road map to successfully navigate not only through good times but also through turmoil. Buying at a discount creates a margin of safety for the investor—room for imprecision, error, bad luck or the vicissitudes of volatile markets and economies. Following a value approach won’t be easy for everyone, especially in today’s media-dominated, short-term oriented markets, in that it requires deep reservoirs of patience and discipline. Yet it is the only truly risk averse strategy in a world where nearly all of us are, or should be, risk averse.

We’ve delivered great returns to our clients for a quarter century—a dollar invested at inception in our largest fund is now worth over 94 dollars, a 20% net compound return. We have achieved this not by incurring high risk as financial theory would suggest, but by deliberately avoiding or hedging the risks that we identified. In other words, there is a large gap between standard financial theory and real world practice.

Value investing involves the purchases of bargains, the proverbial dollars for fifty cents. Unlike speculators, who think of securities as pieces of paper that you trade, value investors evaluate securities as fractional ownership of, or debt claims on, real businesses.

Value investing lies at the intersection of economics and psychology. Economics is important because you need to understand what assets or businesses are worth. Psychology is equally important because price is the critically important component in the investment equation that determines the amount of risk and return available from any investment.

My firm’s approach is to seek situations where there is urgent, panicked or mindless selling. As Warren Buffett has said, “If you are at a poker table and can’t figure out who the patsy is, it’s you.” In investing, we never want to be the patsy. So rather than buy from smart, informed sellers, we want to buy from urgent, distressed or emotional sellers. This concept applies to just about any asset class: debt, real estate, private equity, as well as public equities.

The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.

http://bertfresno.tumblr.com

I have set up a tumblelog, this should aggregate all my blog posts and del.icio.us bookmarks.

From Wikipedia: a tumblelog or tlog is a variation of a blog, that favors short-form, mixed-media posts over the longer editorial posts frequently associated with blogging. Common post formats found on tumblelogs include links, photos, quotes, dialogues, and video.

Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor

Here are a few quotes from Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor by Seth A. Klarman. 

Seth Klarman is a value investor and Portfolio Manager of the investment partnership The Baupost Group. Founded in 1982, The Baupost Group now manages US$5.4 bn, his Baupost partnerships have averaged returns of nearly 20% annually since their inception [bio from GuruFocus]. 

Value investing is the strategy of investing in securities trading at an appreciable discount from their underlying value. 

Value investors have as a primary goal, the preservation of capital. 

Once you adopt a value-investment strategy any other investment behaviour starts to look like gambling. 

Value investors continually compare potential new investments with their current holdings in order to ensure that they own only the most undervalued opportunities available. 

Value investing is simple to understand but difficult to implement. 

The number of securities that should be owned to reduce portfolio risk to an acceptable level is not that great; as few as ten to fifteen different holdings usually suffice. 

My view is that an investor is better off knowing a lot about a few investments that knowing a little about each of a great number of holdings. 

Buying a partial position leaves reserves that permit investors to “average down” lowering their average cost per share, if prices decline. 

Here are a few links to other posts and an article about the book: 

• Value Investing: 3 Lessons from Seth Klarman’s “Margin of Safety”.. and 1 Value Investment Recommendation from Investing Tips & Opportunities.
• Margin of Safety by Seth Klarman from Value Vixen.
• Probabilistic Thinking from QUANTUM INVESTING LIFE.
• And a set of notes to Margin Of Safety by Ronald R. Redfield on The Motley Fool.

Never Type Up Another Existing Document Again

 

I was considering typing up a scanned presentation I had, but a quick search for some free OCR (optical character recognition) software put a stop to that.

Jon Galloway has a great post about his search for free OCR software which covers how to use Microsoft Office Document Imaging.

Scan the document then use Microsoft Office Document Imaging to send the document to Word. This will give you a word document, which you can freely format and edit.

This works even better if you have a scanner that will convert your entire scanned document to a PDF in one go (rather than page by page). Then just print the PDF to file as a TIFF file, then import into Microsoft Office Document Imaging and send to Word.

This works best when you have a hard copy of the original document but no soft copy (be that the original document or a PDF from which you can copy and paste text).

Investment Ideas

Here are some investment ideas from blogs I have been reading. 

Controlled Greed is buying American Eagle Outfitters (AEO) and Whirlpool (WHR), while an earlier investment in Foot Locker has had some insider buying.

An outline of Mohnish Pabrai’s investment in Pinnacle Airlines (PNCL).

While Seeking Alpha has a number of articles about investment ideas discussed at the Value Investing Conference 2007.

• Lowe’s Companies (LOW): long idea from Mark Sellers, Sellers Capital.
  • Valued at close to worst case scenario.
  • LOW is taking market share from Home Depot and still has growth opportunities.
  • Downside is $20 according to Sellers.
  • Kelly Formula suggests investing 500-600% of capital into LOW based on Sellers inputs.
  • Sellers has made LOW 25% of his portfolio.
• EMC stub: long idea, created by shorting VM Ware (VMW) and buying EMC (EMC) from T2 Partners’ Whitney Tilson and Glenn Tongue.
  • EMC trades at a very cheap relative value against its peers.
  • T2 believes EMC will eventually sell off entire VMW stake as the vast majority of parent companies that engage in spin-offs do.

The EMC opportunity looks similar to the arbitrage opportunity between Palm and 3com in 2000. The following quote is from an HBS article about the mispricing.

When the maker of these personal digital assistants went public on March 2, 2000, parent company 3Com owned 532 million shares, or 95 percent of the venture, a stash of stock worth $50.6 billion at the day’s closing price of $95.06. At the same time, 3Com had 351 million of its own shares outstanding, making its multibillion-dollar stake in Palm worth $144.08 per 3Com share. Yet 3Com closed the day at only $81.81. The stock market’s verdict was loud and clear. The way investors saw things that day, the rest of 3Com was worth negative $62.27 per share.

Post Your Picks

If you fancy your self as the next Warren Buffett there are a number of places on the web to demonstrate your investing ability.

• Gurufocus - lets you post what you think a company is worth.
• Marketocracy - lets you run your own mutual fund.
• Seeking Alpha - publishing network focused around investing and financial news.
• The Motley Fool CAPS - lets you post what you think a company is worth.
• Value Investors Club - more exclusive, you have to post an idea which may, or may not get you membership (limited to 250 people).
• Sharetrader - NZ based forum for discussing NZX and ASX investments.
• Stockpickr - lets you post about which shares you like and compare your picks to other investors.

Cameron Partners

Just came across the Cameron Partners website . The part that caught my attention was the news section with a series of presentations. The most recent is Food Industry Acquisitions Set to Continue, by Hugh Cotterill - November 2007 (pdf).

While Premia in New Zealand Takeover & Offer Proposals, by Paul Dougherty and Stephen Kaiser - October 2007 (pdf) states the median premium for control (think take over premium, or the extra price paid when someone looks to acquire a listed company) in New Zealand (whether successful or unsuccessful) is 23.6%.

Which leads nicely to another article titled Boards Should Act on Control Premiums, NBR 28 April 2006 , by Paul Dougherty (pdf). This explains the premium for control exists if someone thinks they can extract more value from the set of assets owned by the company with the current business plan and/or management team .

The two main sources of this extra value are stand-alone improvements (cost cutting, growing existing revenue, new products, asset sales or new technology) or synergies (typically cost savings from combining the business with another entity).

The business can have a different value to the purchaser with access to these gains than the existing shareholders with the current management team and business plan.

The article goes on to say a number of advisers suggest there is only one true or “fair” value for a company. While value is in fact different for different owners, depending on the improvements or synergies they can achieve.