Macquarie Group

April 24, 2008

The Economist has an article about Macquarie Group, talking about their business model and if they can continue their sucess.

Here is a good quote about how they manage their staff:

For some, this optimism is based on an aspect of the Macquarie model that is hard to pin down: its people. Much of Mr Moss’s (current CEO) 30-year experience has been on the trading floor, which has taught him to be adventurous—within limits. The trick, he says, is to encourage employees to come up with fresh ideas, back them if they are good, and award big bonuses if they are successful, and, importantly, contain losses.

Ray Ozzie on Web Services

April 23, 2008

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.

Investment Portfolio

April 21, 2008

Readers of this blog may be familiar with, blogs like, 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:

Winn Dixe – WINN

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

A Thought About Valuation and Multiples

April 16, 2008

A multiple is just someone else’s discounted cash flow – with all the messy maths and assumptions hidden behind a single number.

Market multiples (be it a price earnings, revenue or EBIT multiple) are just single number that hides the assumptions the market is making about that company’s expected future cash flow (and the level of risk associated with that cash flow).

Transaction multiples just hide the acquirers assumptions around the expected cash the asset will produce under their ownership / capital structure / management etc.

Seth A. Klarman

April 16, 2008

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.

Berkshire Hathaway

April 16, 2008

Few highlights from Berkshire Hathaway’s 2007 annual report.

Charlie and I look for companies that have:

  • a business we understand
  • favorable long-term economics
  • able and trustworthy management; and
  • a sensible price tag.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great.

There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so.

[Talking about investments in different types of companies] To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

[On buying Dexter, a shoe business with Berkshire stock] In essence, I gave away 1.6% of a wonderful business – one now valued at $220 billion – to buy a worthless business.

[On buying Amazon bonds at 57% of par] Yes, Virginia, you can occasionally find markets that are ridiculously inefficient – or at least you can find them anywhere except at the finance departments of some leading business schools.