Sorry for the delays. I'm awaiting approval from higher powers before I make the notes available. Thanks for your patience and stay tuned.
Sunday, March 23, 2008
Friday, March 14, 2008
Just a short note since I'm stuck at the airport. The notes from "A Conversation with Charlie Munger" should be available this weekend. As part of the event, Peter Kaufman graciously provided audience members with a copy of the DVD "Curious", a PBS special which profiles some of the research being done at Caltech.
I just finished watching it and it's incredibly interesting, from a scientific viewpoint as well as from a broader viewpoint. There are people in this video that are curing cancer and trying to solve the world's energy needs. That really puts a lot of things in perspective. I may at times think of myself as a reasonably intelligent and ambitious person, but at the end of the day, I'm only endeavoring to turn piles of money into larger piles of money. When you get that call from the doctor, it won't really matter how much money you have. These people are really saving lives and changing the world, and they certainly deserve my respects. I can only hope to support their efforts by properly allocating capital towards useful human enterprise.
For more info:
Thursday, March 6, 2008
I'll be flying out next week to hear Charlie Munger speak, and will be certain to post the notes as soon as I get back. For those who don't know, he is Buffett's business partner, and a success and mental giant in his own right. His speeches and books have been instrumental in my intellectual development as an investor and as a person.
Here are some great resources to further explore:
"The Art of Stock Picking"
"Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs"
"Poor Charlie's Alamanack" - This book is one of my top 5 favorite investing books, although it covers a much wider range of topics. Covers many episodes and quotes from Munger's life as well as 10 of his speeches.
"Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger " - This is the biography of Charlie Munger. It gives more insight into his personal life and experiences with law, and real estate development before transitioning to investing.
"We get these questions a lot from the enterprising young. It's a very intelligent question: You look at some old guy who's rich and you ask, 'How can I become like you, except faster?'
Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts... Slug it out one inch at a time, day by day, at the end of the day -- if you live long enough -- most people get what they deserve."
Tuesday, March 4, 2008
I had to present an investment idea for class today, and I didn't have one readily available so I decided to update one of my current ideas that I am waiting to play out. Not much has changed with the overall thesis, but it's always good to revisit.
For the price of $90 M, you get the shoe department operator for Kmart. The interesting twist is the Kmart Agreement, which stipulates that this contract will end in 2008. Afterwards, we consider a liquidation scenario and an ongoing-concern scenario.
As of Q3 2007, here is how I would judge the tangible book value to shareholders ($M)
As part of the earlier Agreement, Kmart has agreed to purchase FTAR's inventory at book value at the end of 2008, so I count that as good as cash. The PP&E consists mostly of their NJ headquarters building, so I feel that there should not be heavy discounting in its value. Their Annual Report should be out sometime soon, but in absence of that, I estimate their earnings will be $20 M for Q4 2007 and $40 M for FY 2008. Adding that all up, they should be worth approximately $100 M at the end of this year. Very little upside, but good downside protection.
The interesting twist is if they renew their contract with Kmart. I'd assume $40 M annual earnings, and with a conservative 10X multiple, they could be worth $400 M. I don't know how to ascertain the probability of that happening, but we basically have a free option on that scenario.
I was originally attracted to the sizable cash position of this company, trading at a 10-20% premium to net cash. However, last year they elected to do the right thing and declare a special $5 dividend, which effectively took my money off the table. I thought about it some more and actually decided that the company became more attractive post-dividend as opposed to pre-dividend.
The reason being is that declaration of the dividend served effectively as a recapitalization of the company, and levered the possible returns. It's very similar to the risk-reward situation of buying at-the-the money calls versus deep in-the-money calls.
As we can see in this diagram, in the 1st situation we buy an asset for $15 with the belief that it is worth $20. That gives us $5 of upside, which translates into a 33% gain. If that company were to shed $10 of excess assets, cash, etc., and we retained the original upside, then we would have a $5 asset with $5 of upside, for a 100% gain. Our benefit is derived from reducing the amount of initial committed capital.
"Are stocks pieces of paper to be endlessly traded back and forth, or are they proportional interests in underlying businesses? A liquidation settles this debate, distributing to owners of pieces of paper the actual cash proceeds resulting from the sale of corporate assets to the highest bidder.”-- Seth Klarman, "Margin of Safety"