Latticework Investor

I have started a new blog Latticework Investor.

From now on any new blog posts will be found there.

Pershing Square Letter to Investors

Scribd has a copy of Bill Ackerman’s letter to investors. It is a good read with details about specific investments, their attitude to investing and how they operate their fund.

Here are a few excerpts:

Current market

We are currently witnessing the greatest deleveraging event in history.
…
These actions have led to forced and indiscriminate selling in security markets around the world, which in turn has caused other investors to panic or simply to sell, to get out of the way of other forced sellers.
…
As such, it may be reasonable to conclude that the forced liquidation that is now taking place may not be a prolonged process.

Strategy

Our strategy is to seek to identify businesses and occasionally collections of assets which trade in the public markets for which we can predict with a high degree of confidence their future cash flows – not precisely, but within a reasonable band of outcomes. We seek to identify companies which offer a high degree of predictability in their businesses and are relatively immune to extrinsic factors like fluctuations in commodity prices, interest rates, and the economic cycle. Often, we are not capable of predicting a business’ earnings power over an extended period of time. These investments typically end up in the “Don’t Know” pile.

Risk management

Our simple approach to investing also allows us to avoid complicated approaches to risk management. Our investment strategy does not require us to open offices all over the globe. As such, we don’t need traders working around the clock. We can go to sleep at night and sleep. Our weekends are largely our own (Ok. I admit it. I am writing this letter in the office on Sunday.) Our risk management approach is to: (1) put our eggs in a few very sturdy baskets, (2) store those baskets in very safe places where they cannot be taken away from us and sold at precisely the wrong time due to margin calls, and (3) to know and track those baskets and their contents very carefully. We call this approach the sleep-at-night approach to risk management. If I can’t, we won’t.

Greenlight Capital’s Letter To Investors

Dealbreaker has posted four investor letters from prominent hedge funds, the letter from Greenlight Capital (pdf) grabbed my attention.

It contains lots of great investment ideas, following this post I will share what I think are the two best ideas mentioned.

Portfolio

My forth investment is:

• A full position (10% of my portfolio) in Winn Dixe at a share price of US$13.52.

Portfolio

My third investment is:

• A full position (10% of my portfolio) in Echostar at a share price of US$28.77.

Portfolio

As I have mentioned previously, I am going to use this blog to track investments that I make.

The first two investments I made on Tuesday are:

• A full position (10% of my portfolio) in Sears at a share price of US$92.34.
• A full position in American Express at US$40.63 a share.

I plan to post my investment thesis, along with what I believe each company’s intrinsic value is in the next week or so.

Seth Klarman at Columbia Business School

Highlights of Seth Klarman’s speech at the Columbia Business School courtesy of Alex Bossert’s Thoughts on Value Investing.

Rule #1: Don’t lose money. Rule #2: Never forgot Rule #1.

Baupost always looks for catalysts in its investments. If you find a stock trading for 50% of what you think it’s worth you want there to be something that will trigger it to reach fair value.

Baupost will always sell an investment as soon as it near their estimate of fair value.

Baupost has analysts focused around the type of opportunity; spinoff analyst, index fund deletion analyst, post bankruptcy analyst, distressed debt analyst and an analyst looking at companies that are depressed because of a bad earnings announcement.

Baupost invests in: Both public and private distressed debt, Real estate (Baupost has done over 200 real estate deals including biding on RTC auctions), U.S. and foreign equities, LBO’s and Derivatives.

Baupost looks at every merger, rights offering, privatization of government business, spin off, major share repurchase, dutch auction tender, thrift conversions or anything else that could cause mispricings.

Baupost does best when there is high uncertainty and little information.

Sometimes the market doesn’t assess risk correctly by relying on volatility (beta).

Baupost’s three investment principles:

1. Focus on risk before return.

2. Focus on absolute returns.

3. Only focuses on bottom up investing.

On a side note I have posted a few other times about Seth Klarman and these posts are among the most popular by number of pages views.

• Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
• Seth A. Klarman
  

Influence

Summary of Influence: Science and Practise by Robert Cialdini material from an HBR article. Wikipedia also has a similar summary under Robert Cialdini.

Liking: People like those like them, who like them.

• At Tupperware parties, guests’ fondness for their host influences purchase decisions twice as much as regard for the products.
• To influence people, win friends, through: Similarity: Create early bonds with new peers, bosses, and direct reports by informally discovering common interests – you’ll establish goodwill and trustworthiness. Praise: Charm and disarm. Make positive remarks about others – you’ll generate more willing compliance.

Reciprocity: People repay in kind.

• When the Disabled American Veterans enclosed free personalized address labels in donation-request envelopes, response rate doubled.
• Give what you want to receive. Lend a staff member to a colleague who needs help; you’ll get his help later.

Social Proof: People follow the lead of similar others.

• More New York City residents tried returning a lost wallet after learning that other New Yorkers had tried.
• Use peer power to influence horizontally, not vertically; e.g., ask an esteemed “old timer” to support your new initiative if other veterans resist.

Consistency: People fulfil written, public, and voluntary commitments.

• 92% of residents of an apartment complex who signed a petition supporting a new recreation center later donated money to the cause.
• Make others’ commitments active, public, and voluntary. If you supervise an employee who should submit reports on time, get that understanding in writing (a memo); make the commitment public (note colleagues’ agreement with the memo); and link the commitment to the employee’s values (the impact of timely reports on team spirit).

Authority: People defer to experts who provide shortcuts to decisions requiring specialized information.

• A single New York Times expert-opinion news story aired on TV generates a 4% shift in U.S. public opinion.
• Don’t assume your expertise is self-evident. Instead, establish your expertise before doing business with new colleagues or partners; e.g., in conversations before an important meeting, describe how you solved a problem similar to the one on the agenda.

Scarcity: People value what’s scarce.

• Wholesale beef buyers’ orders jumped 600% when they alone received information on a possible beef shortage.
• Use exclusive information to persuade. Influence and rivet key players’ attention by saying, for example:“…Just got this information today. It won’t be distributed until next week.”

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.

Ray Ozzie on Web Services

Techcrunch have an article about a memo from Microsoft’s chief software architect Ray Ozzie about the web and their services strategy.

A few quotes:

3Cs – content, commerce and community have expanded … and become intermixed and mutually reinforcing.

Head retailers such as Amazon utilise community extensively for recommendations, reviews and wish lists. Tail websites such as Craigslist utilise community extensively for conversation around local products.

Guiding Principles:

1. The web is a hub of our social mesh and our device mesh. The web is first and foremost a mesh of people.
2. The power of choice as business moves to embrace the cloud.
3. Small pieces loosely joined for developers, within the cloud and across a world of devices.