Archive for the 'Investing' Category

Berkowitz Makes the Case for Two Investments

Posted on February 6, 2012, 10:51 pm. Closed

Last year was horrible for Berkowitz due to his oversize investments in financial companies. However, that’s just one year, an arbitrary time period in which the earth makes one revolution. Berkowitz has virtually all his money invested in these companies and I think its very likely he will once again have outsized returns once time horizon stretches to five+ years.

So Berkowitz has released two case studies, and the investment theses are very simple. Both begin with some simple and similar points:

  • trades at less than half or less than a third of book value
  • fortress balance sheet
  • leaders in respective markets
  • potential for 20% return on investment

So with those simple facts would you take a serious look at investing in one or both of these companies?

See Case Study I and Case Study II.

New Article About Ray Dalio

Posted on December 22, 2011, 7:32 am. Closed

This article asks if Ray Dalio is the Steve Jobs of investing. If you’re already familiar with Dalio, there is nothing terribly new or insightful here, just some added color to the man and his philosophy.

An Interview with Seth Klarman and Charlie Rose

Posted on November 28, 2011, 1:40 pm. Closed

This is a recent interview of Seth Klarman by Charlie Rose. It is well worth watching.

Assured Files Suit Against Credit Suisse: Will There Soon Be Another Settlement?

Posted on October 25, 2011, 9:47 am. Closed

Assured Guaranty (AGO) filed suit against Credit Suisse (CS) last week. Here is a copy of the complaint. AGO wants CS to repurchase $1.8 billion in defective mortgage loans. The underwriting standards for these loans were just as egregious as what we’ve seen with the likes of Countrywide and WaMu. Approximately 93 percent of the 7,918 mortgage loans that Assured has reviewed breached one or more of the Mortgage Representations.

In the court filing there are lots of great examples of the lack of underwriting standards. One example of CS failing to fully investigate the borrower’s existing debt obligations: a re-underwriting of a $269,500 mortgage loan revealed that the borrower opened six mortgages totaling $1.7 million within 30 days of the subject mortgage loan’s closing date—a recalculation of the debt to income ratio yielded 135% which exceeds the max allowable DTI ratio of 60%.

Another excellent example is in regards to a failure to verify income. One borrower obtained a $479,900 mortgage loan claiming to be the owner of a maintenance and painting business with income of $358,800 per year. It turns out the actual income was $46,959 which gives a DTI ratio of 327%, exceeding the max allowable ratio of 60%—over 5 times the limit!

I suspect in the next 6–12 months there will be a settlement very similar in structure to the recent Bank of America/Countrywide settlement, meaning that AGO will likely receive about $1 billion in cash up front and another several hundred million later on along with some type of reinsurance or indemnity agreement.

Magic: The Gathering and Investing

Posted on September 21, 2011, 8:01 am. 1 Comment

This 3.5-year-old article describes Jon Finkel, who was once one of the best Magic: The Gathering players in the world. He was introduced to the game at a fairly early age and seemed to have developed a passion for it that very few people in the world could match. Indeed, it seems that Finkel turned Magic into a science and was relentless in analyzing his mistakes in order to improve his game.

I also used to play Magic a lot—I even came in 3rd place in a local tournament one time. Despite playing more than most people, I still did not approach it with quite the same amount of passion or seriousness as Finkel, and I eventually stopped playing to pursue other interests (and to save some money). But I think I developed some skills in a small way, such as improving my ability to pay attention to the details, gaining an understanding of how to weigh odds, and inadvertently learning about game theory.

What’s most interesting about Finkel is that he now is a partner in a hedge fund and I think the skills he developed as a Magic player have most likely helped give him an edge. When asked in an online forum about the links between Magic/gambling and the hedge fund, Finkel responded, “It’s a pretty natural progression really. They’re all advantage games that require logical thinking, discipline, and a willingness to take risks.”

I believe Finkel is correct. I also think everyone who is interested in improving their “game” should take Finkel’s advice to heart:

  • Divorce your sense of self from your play. The key is to examine what you’ve done, in an unbiased way and critically, but not make yourself feel bad emotionally or crappy. Obviously, this is easier said than done.
  • With anything in the world, find people who are better than you, but don’t forget the people who aren’t as good as you. Michael Jordan had a lot to learn from Phil Jackson, but he also had a lot to learn from Steve Kerr about shooting jump shots.
  • Accept that if you want to be really good at something, you will need to do a lot of work. You look at people who are really good at Magic, they did it a real, real, real lot of times. They cared about it a lot, and they studied it a lot.

Bank of America and the Power of Buffett

Posted on August 25, 2011, 8:45 am. Closed

Since the beginning of the year, Bank of America’s (BAC) stock price has declined in concurrence with multiple negative events. There have been humongous losses, large settlements, and multiple lawsuits. The public perception of BAC got so bad, that several weeks ago, Bruce Berkowitz of the Fairholme fund, held a conference call with Brian Moynihan and several other BAC execs to answer the “toughest questions” from Fairholme and BAC shareholders. The performance of Berkowitz’s fund has been horrible so far this year, and I feel like Berkowitz was forced into this conference call to qualm fears and help stanch the outflow of money from his fund. You can download the transcript of the conference call here.

Even more recently, some financial analysts have journalists (namely Blodget, who I think made some utterly ridiculous claims) have suggested the need for BAC to raise more capital. Some have pointed out that another capital raise was imminent just by looking at the stock price.

Throughout this mess, I held no strong opinion about BAC. I felt that was and still is the weakest and most poorly run of the remaining big banks, but I have not felt that it needs another capital raise. I also felt that this pessimism was reaching an apex, and somehow there would be some event that make the shortsellers and naysayers reverse course.

And lo and behold, we have news today of Warren Buffett’s $5 billion investment in newly-issued BAC preferred shares. BAC stock is up about 18% as I write.

This brings me to the power of Buffett. It never ceases to amaze me the power Buffett can have over the stock price of a single company just by making an investment. There is little doubt this investment will work out great for Buffett. The terms of the investment are not as great as the Goldman Sachs and GE investments, but that is understandable. Those investments were made during a time of real financial crisis and when an investment from Buffett probably helped save those companies. The situation at BAC is not as dire, and thus the terms for Buffett’s investment are somewhat relaxed. Kudos to Buffett for another opportunistic investment.

Now is the Time to Buy, Not to Bail

Posted on August 8, 2011, 9:50 pm. 1 Comment

It’s somewhat mystifying to me that the market had such a broad sell-off today after the announcement by S&P on Friday of their downgrade of U.S. debt. If you’re an investment professional who pays attention, S&P has broadcasted the possibility of a downgrade for several months. So I ask myself, “Why is now  a great time to sell stocks?” I have trouble coming up with a good reason.

Currently, there are lots of companies out there selling at bargain prices. I’ve written about Berkshire Hathaway (BRK-A) several months ago. I thought it was a good bargain then and now its an even better bargain. The stock is trading at a mere 4% above book value. It’s trading at a mere 7.7 times free cash flow (I annualized the past 6 months of FCF)—that’s a FCF yield 13%!

Or you can look at Markel (MKL), which is also trading at a mere 4% above book value. This is a company that has grown book value at an annualized rate of 10.93% over the past 11.5 years.

You could look at Ensco, a deep sea drilling company, which is trading below book value and which now has a dividend yield of 3.46%.

I could go on and on with a long list of companies trading at a large discount to intrinsic value. Though it feels awful to see your current holdings down over 10% these past several weeks, now is the time to buy, NOT the time to bail out.

First GoodHaven Semi-Annual Report Released

Posted on July 18, 2011, 10:10 am. Closed

The GoodHaven Fund is the new mutual fund run by Larry Pitkowsky and Keith Trauner, two guys that worked with Bruce Berkowitz for many years at Fairholme. This is their first semi-annual report.

Thoughts on Berkshire

Posted on June 10, 2011, 7:43 am. 3 Comments

Berkshire Hathaway is trading at a price to book multiple that is one of the lowest in its history. This is despite the fact that it owns the Burlington Northern, one of the nation’s largest railroads with over 32,000 route miles, that shipped over 9.2 million car loads of goods and had earned $4.4 billion in operating cash flows in 2010. Then you have the huge insurance operations and MidAmerican and all their other businesses.

Berkshire had a total of $17.9 billion in operating cash flows last year. The Lubrizol acquisition will likely add another $650 million to the mix. Within a year or so, Berkshire will likely announce another mid-size or perhaps even a large acquisition. I estimate Berkshire will have about $18.9 billion in operating cash flows for 2011. At current prices, you can buy Berkshire at less than 10 times my estimate for 2011 cash flows.

To me, the price Berkshire is trading at is just crazy given the quality of the company. I think its just a matter of time before the stock price makes a new all time high. It might be two or three years and it might only happen when unemployment gets back down to seven or eight percent, but it will eventually happen. And in the meantime you have the world’s best capital allocators investing billions of cash flows for you. What a great situation!

Eight Months Since the Last Down Month

Posted on May 7, 2011, 4:06 pm. Closed

August 2010 was the last month the market had a negative return for that month. So we’ve had eight months in a row of positive monthly returns. It really seems likely that we might have some down months coming up.

I’ve also noticed that the cumulative return for my retirement portfolio, which I started managing in November 2009, crossed 50% a week or two ago, which is just crushing the market returns and also the returns of many value investors I hold in high regard. I often ask myself if this is the product of mostly skill or mostly luck—I think its the former, but I’ll give myself another three years to so that I have a sufficient track record.

I always try to stay humble and I always try to remain wary of risk. I am always asking myself if there is anything that I’m missing with any stock I’m considering. I look forward to to what my results will be in another three years.