The Economist has an article about the current infrastructure in America. The article contains some of the same figures which Sellers Capital use in their VMC investment thesis.

A few excerpts from the article:

In 2005 the American Society of Civil Engineers estimated that $1.6 trillion was needed over five years to bring just the existing infrastructure into good repair. This does not account for future needs.

The private sector is hungry to invest. In May Morgan Stanley raised $4 billion for its new infrastructure fund.

In January a national commission on transport policy recommended that the government should invest at least $225 billion each year for the next 50 years.

The article also outlines the underfunding of water infrastructure. Which is one the reasons behind Whitney Tilson picking MWA in July 2007, as mentioned in Kiplinger.

America’s ageing water infrastructure is sorely underfunded: the Environmental Protection Agency forecasts an $11 billion annual gap in meeting costs over the next 20 years.

Below is an excerpt about spinoff investments from Joel Greenblatt’s You Can Be A Stock Market Genius.

1. Spinoffs, in general, beat the market.
2. Picking your spots, within the spinoff universe can result in even better results than the average spinoff.
3. Certain characteristics point to an exceptional spinoff opportunity:

• Institutions don’t want the spinoff (and not because of the investment merits).
• Insiders want the spinoff.
• A previously hidden investment opportunity is uncovered by the spinoff transaction (e.g. a cheap stock, a great business, a leveraged risk/reward situation).

4. You can locate and analyse spinoff prospects by reading the business press and following up with the SEC filings.
5. Paying attention to “parents” can pay off handsomely.
6. Partial spinoffs and rights offerings create unique investment opportunities.
7. Keep an eye on the insiders.

This points are useful when looking at investment opportunites like EMC and SATS.

I have posted before about Magic Formula investing, with the help of Digital Look I have prepared a table of magic formula type shares in the UK.

I ranked companies by their ROCE, then by P/E, then combined the ranks giving a high rank to those with both a high ROCE and a low P/E.

The top 19 companies are:

I have just finished reading Good to Great by Jim Collins and was going to post a brief book summary. But a quick search reveals a mindmap of the book and WikiSummaries already has a chapter by chapter summary.

]]> http://bertfresno.wordpress.com/2008/06/16/good-to-great-by-jim-collins/feed/ http://bertfresno.wordpress.com/2008/06/16/seth-klarman-at-columbia-business-school/ http://bertfresno.wordpress.com/2008/06/16/seth-klarman-at-columbia-business-school/#comments Mon, 16 Jun 2008 10:43:34 +0000 bertfresno http://bertfresno.wordpress.com/?p=125

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
  

• 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

]]> http://bertfresno.wordpress.com/2008/06/12/interesting-links/feed/ http://bertfresno.wordpress.com/2008/06/04/getting-to-yes/ http://bertfresno.wordpress.com/2008/06/04/getting-to-yes/#comments Wed, 04 Jun 2008 11:48:50 +0000 bertfresno http://bertfresno.wordpress.com/?p=118

Below is a summary of the book Getting to Yes.

The book talks about principled negotiation. Which is looking for mutual gains and where interests conflict using some fair standard to solve the issue.

This contrasts with positional bargaining where people bargaining over positions (I offer $10, they want $20, I offer $12 etc), which can create incentives to stall and endangers the relationship.

Four main steps in using principled negotiation:

• People: separate the people from the problem.
  • Put yourself in their shoes.
  • One strategy is to listen quietly while they let off steam.
  • Communicating loudly and clearly things the over side wants to hear can be one of the best investment to make in a negotiation.
  • Agreement easier if both sides feel ownership of the ideas.
  • If you want the other side to accept a disagreeable conclusion then involve them from the start => so they feel ownership of the idea.
  • Avoid misunderstanding => interrupt with “Did I understand you correctly that you are saying … “.
  • Note that understanding is not agreeing.
  • Speak about yourself not them => “I feel let down… “.
  • Ben Franklin => asked to borrow a book off an adversary to make them more comfortable.
  • Try to structure negotiation as a side by side exercise.
• Interests: focus on interests, not positions.
  • Look at underlying positions.
  • Identify interests => ask why, and ask why not.
  • Each negotiator has a constituency to whose interests he is sensitive too.
  • Be hard on the problem, soft on the people.
  • Convert interests into concrete options => if they agrees tomorrow what do I now think I would like them to go along with.
  • Combination of support and attack works best, alone they are likely to be insufficient.
• Options: generate a variety of possibilities before deciding what to do.
  • A good negotiator is a creative at inventing options.
  • People see their job as narrowing the gap between the positions not broadening the options available.
  • Obstacles stopping people from inventing options: premature judgement, searching for the single answer, assumption of a fixed price, think that ‘solving’ the problem is their problem.
  • To create more options: separate the act of inventing options from judging them, broaden options available rather than look for a single answer, search for mutual gains and invent ways of making their decision easy.
  • Key to wise decision making is selecting from a great number and variety of options.
  • Invent agreements of different strengths => in case you need a weaker version, or can put forward a stronger version depending on the situation.
  • Look for mutual gains, both sides can always be worse off then they are now.
  • Always look for solutions that leave the other side satisfied as well, if the customer feels cheated in a purchase then the store owner has also failed.
  • Making their decision easy => however complex the other side’s decision process is look at it from the view of the person you are dealing with => what would strengthen that person’s hand or help them persuade others to go along.
  • People are strongly influenced by notions of legitimacy, one way to develop solutions easy for the other side to accept is to shape them so they appear legitimate.
  • Making threats is not enough, offers / warnings tend to be more effective.
  • Final test of an option is to write it out as a “yesable” proposition – a draft proposal to which the other side can respond with a single word “yes”.
• Criteria: insist that result be based on some objective standard.
  • Interesting concept of “one cuts, one chooses” for dividing up an object or entity.
  • Introduction of an objective standard or model to use can lead to the situation where no-one has to back down or appear weak – just reasonable.
  • Negotiating with objective criteria: frame each issue as a joint search for objective criteria, be open to which standards are most appropriate, never yield to pressure only principle.

But what if:

• They are more powerful:
  • Protect yourself by setting a bottom line (with some margin of safety) before starting the negotiation.
  • Generate the best possible BANTA: invent a list of actions you could take if no agreement is reached, improve some of the more promising ideas and convert them into practical alternatives, select the best option.
• They won’t play:
  • Three approaches to focusing their attention on the merits: concentrate on the merits hoping they will then follow your example, focus on what they can do (direct their attention to the merits, do not reject their position, just side step their attack and deflect it against the problem), use a third party to focus the discussion perhaps using the one-text tool.
  • One-text tool is an iterative process where each side can say yes or no part of the agreement one issue at a time, as the plan takes shape each side tends to raise only the issues that are most important.
  • This shifts the game away from positional bargaining as it simplifies the process of both inventing options and deciding jointly on one.

Here are some useful links to other blog posts that discuss the book:

• Litemind, which has a great graphic summarising the concepts of the book.
• Farnoosh’s Book Mania
• Y Samphy
• GigaOM

Vulcan Materials (VMC) produces construction aggregates and other construction materials. Sellers Capital thinks the company is worth US$85 a share, compared to a current share price of US$75 (compared to US$70 when the original analysis (pdf) was done).

The US$85 estimate is the expected value from three scenarios

1. Pessimistic: US$60 a share with 30% probability.
2. Most likely: US$90 a share with 55% probability.
3. Optimistic: US$105 a share with 15% probability.

Summary of their investment thesis:

• Aggregate is a wide moat business.
• America’s infrastructure is poor and needs a investment of US$1.6 trillion according to the Society of Civil Engineers.
• Worst case is flat growth for building infrastructure.
• Demand for aggregates not dependent on residential housing.
• The last three decades has seen growing volumes in aggregates.
• Scarcity = increased pricing.

Perceived Problem: Volumes will decrease due to lower public expenditures and bad housing and commercial markets, and prices will decline.

Sellers Capital View: Volumes will decline slightly, pricing will be stable to increasing.

• Magic Formula
• Yahoo Screener
• Gurufocus
• Stockpickr
• Seeking Alpha
• Pabrai Investment Funds - Mohnish Pabrai
• Pershing Square - Bill Ackman
• Fairholme Fund - Bruce Berkowitz
• Greenlight Capital - David Einhorn
• Tilson Investment Trust - Whitney Tilson
• Spencer Capital Management - Kenneth Shubin Stein

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.”