Expedia Tender Offer

Expedia, Inc. (EXPE) has announced a tender offer for 25 M shares between $27.50 and $30.00. The offer expires August 8 and includes odd lot preference. Shareholders with less than 100 shares will be tendered first. For more details go here [SEC Filing]. With shares going for approximately $26.15 today, I made several orders for 99 shares in the separate accounts that I manage. This implies a 5-15% return, and I expect it to close within a month. One caveat is that brokers can charge steep fees ($40-50) to tender shares.

My first experience with odd lot tender offers was AutoNation, Inc. (AN) last spring and I was pleased with those results. This arbitrage is about as riskless as it gets.

Mid-Year Review

Reading the early Buffett Partnership letters has inspired me to do some introspection and writing on my portfolio performance. Year to date, my fund has returned 18.5% while the S&P500 has returned 10.6% including dividends. Working at the Fund-of-Funds has increased my sensitivity to benchmarking and performance attribution. With that said, the S&P 500 is not necessarily the most accurate candidate, but does enjoy the benefits of representativeness and notoriety.

Negligible margin has been used, although there is currently a large short position hedged by some options in order to arbitrage an unnaturally wide spread. From time to time, options are also utilized in order to magnify some short-term mispricings. There are 8 positions ranging in size from 5% up to 40%, focused in the microcap arena with an average-weighted cap of 144 M. As a result, trading in this arena is more similar to "fishing" for shares than rapid-fire trading. Gracefully entering and exiting positions takes time in order to minimize market impact as well as the cost of steep bid/ask spreads. The chart shows large spikes and swings in my performance (red), artifacts of both a concentrated and illiquid portfolio. This means that any one position has the power to significantly affect the portfolio, and in addition, any sizable investor changing their minds about one of my stocks has the power to upset the market price.

Despite these structural disadvantages, I feel confident that they are more detrimental to others than they are to myself, due to the small amount of capital under management. This also explains the reason why I look for 100% minimum gain (i.e. 50% margin of safety) when looking at prospective investments. 20% prospective gains remain within the range of noise and can easily be lost coming and going. Approximately one third of my positions have done extremely well, while the rest have languished. I am comfortable with the portfolio makeup, however I have been having trouble with idea flow to replace the one third as they approach fair value.

Idea flow has mostly been distracted by numerous career-related activities and ventures. Once I finish with the Buffett trip and post-graduation plans, I expect mental focus to return to normal levels. On the other hand, continual exposure to the portfolio this summer has increased my temptation for activity and the possibility of doing something stupid. This temptation has been quieted mostly through online poker, simultaneously forcing patience and satisfying the animal instincts to gamble. I am proud to say that I have won a handful of 300+ person tournaments.

If returns continue at a similar absolute and relative pace, I will be quite pleased with 2007 results. I am mindful of the incredibly small number of samples on which to base this judgment (position-wise and temporally) and hope to continue to submit similar results. I would like to close with classic quotes by Jerry Yang, this year's winner of the World Series of Poker and "Puggy" Pearson, one of poker's greats.

"I've seen the miracles of God with my own eyes. I also did a lot of bluffing."

-- Jerry Yang

"Ain't only three things to gambling: knowing the 60-40 end of the proposition, money management, and knowing yourself. Even a donkey knows that."

-- "Puggy" Pearson

Footsteps of the Master

One of a my planned summer projects has been to chronologically retrace Buffett's ideas and development by going through his partnership letters and Berkshire annual reports. Not only will this serve as a great primer for the upcoming trip, but it is a classic rite of passage performed by other investment greats such as Eddie Lampert and Mohnish Pabrai. As I go through each year, I will try to summarize the philosophies and examples in each. Enjoy!