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.

Alex Cartoon

Today’s Alex cartoon about life in The City.

Getting Things Done

The key things I got from reading Getting Things Done by David Allen. 

• Date everything - notes, to-dos, lists etc.
• Document all open loops - projects, things to do, meetings, reviews etc.
• For all your to-do items, if it can be done under two minutes then do it, otherwise make it a project.
• Use buckets to categorise all the things you need to do.
  • Projects.
  • Project supporting material.
  • Calender for action items and information that will be needed on a certain date.
  • Next actions.
  • Waiting for list
  • Reference material.
  • Someday / maybe.
• All to-do items need to be expressed in the next action to take. For example hire another staff member, should be recorded as write a job description or make a call to a recruitment agent.
• Natural planning.
  • Define purpose and principles.
  • Outcome visioning.
  • Brainstorming.
  • Organising.
    • Identify significant pieces.
    • Sort by, components, sequences or priority then detail to the required level.
  • Identity the next action to take.
• The best checklists are often done after you have gone through a process. For example always review your interview checklist after going through the hiring process.
• Importance of a weekly review.
• Importance of tracking items (or next actions) by context. For example:
  • Errands.
  • At computer.
  • At office.
  • At home.
  • Calls.
  • Agendas.
  • Read / review.
  • Waiting for.
• Tickler file: series of folders numbered 1 to 31 for each day in the month. If you want a reminder about something on the 14th put it in the folder numbered 14. Then everyday empty the folder for today into your in tray. Then put the old folder to the back of the system, so now that folder is for the 14th of the next month.
• It ok to put just a single piece of paper in a folder.
• Reference file, just use a number of folders sorted alphabetically. Remember to purge old files that are no longer needed on a regular basis.

Key thing, always ask what the next action is and determine who is responsible for it.

Plain Talking

In scanning through this week’s The Economist I came across this article about the recent volatility in the financial markets, which included this quote:

If someone has staked all his wealth on a leveraged fixed-income hedge fund, then he is too stupid to deserve to be rich.

Market Cap vs Intrinsic Value (SKC, SKT, TRH, TTK, WHS)

Below are high level valuations for SKC, SKT, TRH, TTK and WHS. They compare the current market cap to my estimate of each companies’ intrinsic value. The list below also shows the growth expectation of the market.

For example I have assumed Teamtalk’s revenue continues to decline by 1% year, while the current market has priced in a revenue decline of 5% a year.

Company: Market cap / intrinsic value

• Sky City: 1.15
• Sky TV: 1.00
• Toll: 4.70
• Teamtalk: 0.63
• Warehouse: 1.88

Company: Revenue growth rate implied by current market cap

• Sky City: 14% to 3% over the next 10 years
• Sky TV: 12% to 3% over the next 10 years
• Toll: 14% each year till 2016
• Teamtalk: -5% each year till 2016
• Warehouse: 11% each year till 2016

Assumptions:

• Valuation based on a 10 year DCF model.
• Historical revenue growth assumed to move toward long term growth rate assumption over ten years.
• Forecast EBTIDA margins historical rates.
• Deprecation and capital expenditure based on historical levels, but forecast to grow with revenue.
• Discount rate and asset betas from PwC Cost of Capital report (pdf).
• Long term growth rate of 3%.