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.
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!
Atlantic Southern Bank, based in Macon, Georgia, finally failed. Here is the FDIC’s news release:
CertusBank, National Association, Easley, South Carolina, acquired the banking operations, including all the deposits, of Atlantic Southern Bank, Macon, Georgia, and First Georgia Banking Company, Franklin, Georgia. The two banks were closed today by the Georgia Department of Banking and Finance, which appointed the FDIC as receiver for each institution. To protect depositors, the Federal Deposit Insurance Corporation (FDIC) entered into purchase and assumption agreements with CertusBank, N.A.
All 26 branches of the two closed banks will reopen during their normal business hours beginning Saturday as branches of CertusBank, N.A. Depositors of the two failed banks will automatically become depositors of CertusBank, N.A. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage up to applicable limits. Atlantic Southern Bank had 16 branches, and First Georgia Banking Company had 10 branches.
These two were the 41st and 42nd to fail this year and the 11th and 12th of Georgia banks to fail…
I predicted way back in the summer of 2009 that it was only a matter of time before Atlantic Southern failed—take a look at my collective posts on Atlantic. It took somewhat longer than expected, but it feels good the situation has finally been resolved! Hopefully the new owners will be able to right the wrongs that took place there and will be able to turn the bank around.
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.
Bank of America recently agreed to pay Assured Guaranty (AGO) $1.1 billion in cash to settle AGO’s claims related to rep and warranty breaches on RMBS deals AGO insured. The deal also includes a loss-sharing agreement worth about $470 million to AGO. AGO received $850 million yesterday, which is worth about $4.62 to AGO. AGO’s shares are up over 25% on this news. And there is still another $720 million in value that is due to AGO, or another $3.92 in value.
Like I’ve said before, it is just a matter time before other banks settle with AGO. However, headline risk still remains in regards to the fiscal problems of cities and municipalities and will likely stick around for another year or maybe two, which means the price of AGO will likely remain volatile. But again, it is just a matter of time before these problems are solved. At current prices, AGO might be an even better bargain due to the increased likelihood of additional, positive legal outcomes.
I used to be a cyclist until I got to Atlanta. I am now back to being a runner. Last year I finished a half-marathon in 1:32:45 at a 7:04 pace. I took 61st out of 2,800+.
This year I’ve started training much, much earlier with the goal of making this my first full, competitive running season since high school. I’m already on my second week of 35+ miles. I fully intend on dropping at least 4 minutes from my half-marathon time and finishing in the top 40 in this year’s race.
I had to write this down because I feel really good right now and very excited about what I think I am capable of doing. I also hope by making my goal public that the odds of me following through will increase.
From April’s Harvard Business Review:
In this article we argue that success can breed failure by hindering learning at both the individual and the organizational level. We all know that learning from failure is one of the most important capacities for people and companies to develop. Yet surprisingly, learning from success can present even greater challenges. To illuminate those challenges—and identify approaches for overcoming them—we will draw from our research and from the work of other scholars in the field of behavioral decision making, and focus on three interrelated impediments to learning.
The first is the inclination to make what psychologists call fundamental attribution errors. When we succeed, we’re likely to conclude that our talents and our current model or strategy are the reasons. We also give short shrift to the part that environmental factors and random events may have played.
The second impediment is overconfidence bias: Success increases our self-assurance. Faith in ourselves is a good thing, of course, but too much of it can make us believe we don’t need to change anything.
The third impediment is the failure-to-ask-why syndrome—the tendency not to investigate the causes of good performance systematically. When executives and their teams suffer from this syndrome, they don’t ask the tough questions that would help them expand their knowledge or alter their assumptions about how the world works.
Stories like this are one of the reasons I love reading history. I found the excerpt below in volume 46 of The Banker’s Magazine and Statistical Register for the period of July 1891 to June 1892:
The following banking incident is extracted from the Sandusky (O.) Journal. It was related by Mr. Hackerdorn, attorney for the N. Y., Lake Erie & W. Railroad. In former days gold was in demand, and it was a hard matter to have script redeemed in this coin, for, if the banks went to dealing in script, it meant their ruin, and it was a hard matter to find a bank willing to redeem the paper, if it could be avoided in any possible manner. In fact, when there was any script offered for redemption, the banks never could be found. It appears that an express company had $10,000 worth of script in its possession, which it wanted redeemed. The company’s officials learned that there was a bank at Jonesville, Ind., and immediately dispatched a messenger for that place on horseback, to secure gold for paper. The messenger drove around through the country for several days, searching for the town of Jonesville. No one appeared to know where it was, neither had any one ever heard of the Jonesville Bank. Finally the messenger came up to a man whom he met along the road, and made further inquiry as to the town of Jonesville and the Jonesville bank. The man told him that that place was Jonesville, and that the bank was at the corner, pointing out a dingy looking little blacksmith shop at the intersection of two country roadways. The messenger approached the shop with a look of astonishment, and on entering inquired of the smithy: “Is this the Jonesville Bank?” “Yes, sir,” was the reply; “got some of that ‘ere script, I suppose.” “Yes; can you redeem it?” “How much is it?” “$10,000.” “Yes, I guess I can; I’ve got the money in the safe.” “Well, where’s the safe?” “Over there in the corner,” said the blacksmith banker, and he at once proceeded to dump out a barrel of potatoes. In the bottom of the barrel was $30,000 in gold, and he redeemed the $10,000 worth of script.
Back in August when shares of SeaBright Holdings tanked due to the need for reserve strengthening, I reflected that shareholders were most likely overreacting and that the company was likely a bargain at $7 per share. Well, since then shares have climbed back up to $10 per share. That’s an annualized return of 64%. It also turned out that other intelligent investors saw the same opportunity—the very capable investors at Alleghany (Y) added to the shares of SBX they had purchased in the first quarter of 2010.
Another company that is currently being hit hard is Flagstone Reinsurance (FSR). The company has published several press releases that have contributed to a very large sell-off in the stock:
- February 28, 2011. $60-$80 million in loss events due to flooding and storms in Australia. Plus, there was the 6.3 magnitude earthquake in Christchurch, New Zealand, for which the company has not yet provided loss estimates.
- March 15, 2011. The company reports preliminary loss estimates related to the New Zealand earthquake to be between $60-$90 million.
- March 21, 2011. FSR reports that Moody’s has placed the ratings of the company under review.
So prior to the Japan earthquake, FSR was set for losses of $120-$170 million. Now, the market appears to be worried whether Flagstone will need to strengthen reserves after the Japan earthquake. In FSR’s 10-k, the company said it does “a significant amount of catastrophe business in Japan.”
I have no idea whether FSR is a good reinsurer or not. They’ve only been public for four years. Management of any insurance company can set reserves to really anything they want, whether its prudent or not, so when investing in the insurance arena, you have assure yourself that management is trustworthy and as conservative about underwriting and reserving as they claim to be.
But with FSR trading at half its book value, it seems that the market is overreacting (once again). Even if it turns out FSR management was not so good, the stock price will likely rebound after all this bad news fades away and the company starts to book new business at more favorable rates.
MBIA recently posted online the CEO’s letter to shareholders. MBIA’s current problem stems from the overhang of legal problems stemming from the company’s transformation in 2009, which essentially split the company into a good part and a bad part. This occurred near the height of the financial meltdown and needless to say, all the big banks did not like this and I’m sure most of them felt MBIA was insolvent at the time and the transformation was just an attempt on the company’s part to avoid paying claims. I believe this is the primary reason why the big banks banded together to sue MBIA to reverse the transformation.
However, now its two years later and MBIA is still around and still making payments to claimsholders. In fact, in the last quarter of 2010, over one third of the original bank plaintiffs have withdrawn their claims against MBIA. It’s my belief that these banks know they do not have a good case because their argument that MBIA is insolvent is now moot.
Right now, MBIA stock is trading back at where it was prior to the flurry of announcements that banks like JPMorgan had withdrawn their claims. I believe its just a matter of time before this issue is finally resolved in MBIA’s favor. After this, MBIA the ratings agencies will likely upgrade MBIA and MBIA will be able to start insuring muni bonds again. This won’t happen this year, but most likely next year.
MBIA is also still progressing with its fraud lawsuits against the financial institutions. There will be a trial in the Bank of America/Countrywide case late this year, followed by a trial in the Ally Bank case in 2012. I believe the defendants in both these cases will settle a day or two before trial, if not on the footsteps of the courthouse on the day of. The underwriting standards of these financial institutions were just egregious. And if the banks did not lie to MBIA and other bond insurers, then they were totally negligent. I do not see how a jury could favor the side of the banks. I do not know why these financial institutions would want to air even more of their dirty laundry.
Some have likened value investing to time arbitrage—from the point after you purchase an undervalued security up to the point where it reaches intrinsic value, time elapses. Patient, confident investors with long time horizons are able to take advantage of this time arbitrage. This is one of the main reasons why value investors outperform the indexes. Companies like MBIA or AGO I think are perfect examples of time arbitrage—I am confident its only a matter of time before both companies recover, and when they do, shareholders will have earned outsized returns.
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