tag:blogger.com,1999:blog-40050425566184330542024-03-06T01:04:49.170-05:00Underground ValueDang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-4005042556618433054.post-20381562512629287042009-03-12T12:04:00.002-05:002009-03-12T12:12:28.248-05:00Notes From Buffett Meeting 2/6/2009Note: Students from Emory and 5 other business schools were invited to come visit Mr. Buffett for a Q&A session. These notes were reproduced to the best of my ability as I heard and as I could recall them from a collection of mine and other students' notes. There is no guarantee that this was exactly what was said, but the intent was to preserve the spirit of the message. Enjoy.<br /><br /><span style="font-weight: bold;">Buffett</span>:<br />Did you hear they called off the Wall Street Christmas Pageant this year? They had trouble finding three wise men…and a virgin. There are many opportunities right now. The markets are very inefficient at times, and this is one of those times.<br /><br /><span style="font-weight: bold;">Kansas:</span> <br />Berkshire has invested in several insurance companies, would you go into the health insurance business?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />No. Health insurance is so ingrained into national policy that it is a tough business. It’s pretty adversarial. I’m not really that excited about it from a business perspective. I don’t want to write policies with high loan loss ratios. That being said, I would buy the stock of an undervalued healthcare insurer. <br /><br />Insurance is an interesting business. You know, we underwrote a two year life insurance policy on Mike Tyson. I wanted an exclusion against women shooting him, but they wouldn’t let me.<br /><br /><span style="font-weight: bold;">South Dakota:</span><br />You’ve recently invested in Goldman Sachs and GE. Is the financial sector a good buy right now?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />No sector is a good buy unless you understand the business. However, I do believe that there is good value and great opportunity now in the financial sector because it is extremely unpopular. Sector’s themselves don’t make good buys, companies that are undervalued make good buys. You know how to value a business, you project the future cash flows discounted to present and buy with a margin of safety. The earnings prospects need to be greater than the current value. Anything that is unpopular is always great to look at. If I was getting out of school right now, I would take a look.<br /><br /><span style="font-weight: bold;">Creighton:</span><br />How much and how does risk factor into your investment decisions? Would you invest in emerging markets?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />In general, emerging markets are not great for me because I need to put a lot of money to work. Risk does not equal beta. Risk comes around because you don’t understand things, not because of beta. There are normally 10 filters or so that I go through when I hear an idea. The first is can I understand the business and understand the downside not just today but five to ten years from now. There have been very few times that I’ve lost 1% of my net worth. I might be risk averse but I am not action adverse. Mrs. B saved $500 over the course of 16 years to start and build Nebraska Furniture Mart. Tom Watson Sr of IBM said, “I’m smart in spots and I stay in those spots.” I just stay within my circle of confidence. When I bought Nebraska Furniture Mart in 1983, Mrs. B took cash and not Berkshire stock. Why? She didn’t understand the value of stock. She understood cash and that is what she took. I need only need to be right a few times and can let thousands of ideas go by. <br /><br />Ted Williams, who wrote the “Science of Hitting,” broke the strike zone into 92 ball shaped sections. He knew, if hit in his sweet spot, he’d hit 430, a little further out, and he’d hit 350. You have to know your sweet spot. The beautiful thing about investing is that it’s a “No called strike game” where unlike baseball the only strikes in investing are when you swing. I don’t have to swing. <br /><br />When I do invest, I don’t care if the stock price goes from $10 to $2 but I do care about if the value went from $10 to $2. Avoid debt. I decided early on that I never wanted to owe more than 25% of my net worth, and I haven’t… exept for in the very beginning. I like to play from a position of strength. I always try to have the odds in my favor. When I go to Vegas, I don’t go around putting $5 dollars on the blackjack tables. If someone wants to come to my room and put $5 on my bed, well that’s fine. I like those odds better.<br /><br /><span style="font-weight: bold;">Emory:</span><br />How do you think about value?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />The formula for value was handed down from 600 BC by a guy named Aesop. A bird in the hand is worth two in the bush. Investing is about laying out a bird now to get two or more out of the bush. The keys are to only look at the bushes you like and identify how long it will take to get them out. When interest rates are 20%, you need to get it out right now. When rates are 1%, you have 10 years. Think about what the asset will produce. Look at the asset, not the beta. I don’t really care about volatility. Stock price is not that important to me, it just gives you the opportunity to buy at a great price. I don’t care if they close the NYSE for 5 years. I care more about the business than I do about events. I care about if there’s price flexibility and whether the company can gain more market share. I care about people drinking more Coke. <br /><br />I bought a farm from the FDIC 20 years ago for $600 per acre. Now I don’t know anything about farming but my son does. I asked him, how much it cost to buy corn, plow the field, harvest, how much an acre will yield, what price to expect. I haven’t gotten a quote on that farm in 20 years.<br /><br />If I were running a business school I would only have 2 courses. The first would obviously be an investing class about how to value a business. The second would be how to think about the stock market and how to deal with the volatility. The stock market is funny. You have no compulsion to act and a bunch of silly people setting prices all the time, it is great odds. I want the market to be like a manic depressive drunk. Graham’s Ch. 8, in the book Intelligent Investor, on Mr. Market is the most important thing I have ever read. Now think about the NYSE. You have thousands of companies to choose from. For me, that universe has shrunk because I need to put large dollar amounts to work. Attitude is much more important than IQ. You can really get into trouble with a high IQ, i.e. Long-Term Capital. You need to have the right philosophical temperament.<br /><br /><span style="font-weight: bold;">Penn State:</span><br />Why did you invest in Harley-Davidson?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />I like the 15%. I measured that 15% against other credits and it looked attractive on both a relative basis and an absolute basis. Also, we have to have a certain amount of the portfolio go to debt. Lately, the government has become the guarantor for some companies but not for others and the “haves” and “have-nots” determined by certainty of government assistance rather than the credit quality. These finance companies have a problem getting funded, not with their customers. Any company where you can get your customers to tattoo your name on their body has quite a strong brand. For this investment I had to think what is the probability that they will not pay me back and would I want to own the company if they did not, basically that the equity isn’t worth zero. Risk premiums in the corporate bond market went from real low to real high. Right now, they’re out of whack. The flip side is that governments are overpriced. We have a bubble in governments. T-bills actually had a negative interest rate. I never thought I’d see that. A mattress is a better investment than the US 10 Year. Buying corporates and shorting the 10-year is a great idea and smart guys went broke doing it because even if you’re right, you need to be able to play out your hand. I always think about what I would do if a nuclear bomb went off or if Bernanke ran off with Paris Hilton to South America.<br /><br /><span style="font-weight: bold;">Texas:</span><br />Do you feel that the might of America has changed?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />You can bet against the dollar, but I would never bet against America. The system in the U.S. has allowed the country to unleash more for the world than any other country. Since 1776, the U.S. had a different system than the rest of the world and that system unleashed the human potential. We were not the smartest nor did we have the best resources. This is the same system we have in place today with people of similar intelligence. I have and would bet against the U.S. currency, stocks, etc. but the United States prevails over time. There are all kinds of rocky roads but we have rule of law, equality of opportunity, and a meritocracy. We have a market system and people apply energies and imagination to come up with things someone would want. Everyone in this room is working far below his/her potential. <br /><br /><span style="font-weight: bold;">Kansas:</span><br />We know that you are a big bridge player. Do you think that bridge correlates to investing? Are there any traits or characteristics that might carry over from one to the other?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />Bridge is the best game there is. You’re drawing inferences from every bid and play of a card, and every card that is or isn’t played. It teaches you about partnership and other human skills. In bridge, you draw inferences from everything and that carries over well into investing. In bridge, similar to in life, you’ll never get the same hand twice but the past does have a meaning. The past does not make the future definitive but you can draw from those experiences. I think the partnership aspect of bridge is a great lesson for life. If I’m going into battle, I want to partner with the best. I was playing with a world champion and we were playing against my sister and her husband. We lost, so I took the scorepad and I ate it. <br /><br /><span style="font-weight: bold;">South Dakota:</span><br />What are your views on derivatives and how do you think they have affected the global market?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />In my 2002 letter to shareholders I referred to them as “weapons of mass destruction.” Derivatives are really just a way to create a product with a very long fuse, for example, 100 years, as opposed to stocks which settle in 3 days. That kind of system allows claims to be built up. AIG called me in September and told me they were about to get downgraded which would have required higher posting requirements. Now this is an enterprise that has been built up over decades and was effectively destroyed in 48 hours by these products. With derivatives, you’re exposed to counterparties and thus reliant on others. These claims built up over time to the tune of billions of dollars and when one falls, the whole system falls. Derivatives are not evil by themselves but rather everyone needs to be able to handle them. System wide, they’re rat poison. Berkshire holds many derivatives but we always hold the money at Berkshire. <br /><br /><span style="font-weight: bold;">Creighton:</span><br />What do you think about the stimulus package? Would you rather see tax cuts or government spending?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />We obviously have a problem, but we’ll come out of this just fine. The idea of a stimulus is to do things that will have an impact quickly and the current proposal won’t do that. When dealing with situations like this, you can’t do just one thing but always need to ask yourself what is the next question. We have utilized monetary policy and guaranteed everything in sight. It’s a standard Keynesian prescription. Tax cuts benefit people differently in the short term. We are basically saying, we’re not going to pay for what we’re doing in terms of government spending and that we’ll just mail you some money but it’s better than doing nothing. In the end, you should buy stock in a business that any idiot could run because someday, one will. You know, our country is similar.<br /><br /><span style="font-weight: bold;">Emory:</span><br />How do you think differently today than you did twenty years ago? Where do you expect to see the greatest differences in 2030?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />The fundamental things about investing that I learned when I was younger haven’t changed. I am lucky to have picked up a book at 19, The Intelligent Investor, that gave structure to investing and investment decisions. Over time, I learned different ways to apply it. I have learned what it is outside my circle of confidence. I bought See’s in 1972 and I think understanding the value of brand helped drive the decision to buy Coca-Cola in 1988. Through experience, I have gotten smarter on predicting and evaluating human behavior. My wife put me together in terms of human behavior. I really enjoy doing what I do and I get to do what I want. I enjoy talking to groups like these. Irv and Ron Blumkin are some of my best friends and I continue to add friends by buying businesses. I don’t want a boat or 12 houses. I’m almost fully depreciated, down to my residual value. Age doesn’t affect my ability to my job though, as opposed to Arnold Palmer, he can’t play his game.<br /><br /><span style="font-weight: bold;">Penn State:</span><br />What advice would you give the average person in the U.S.?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />It’s hard to give advice to someone who might lose their job. My Dad went to work on August 13, 1931 to find out the bank where he worked and held all our money had closed. He had no job and no money and two kids. You want to be as prepared as you can and you just don’t want to have debt. Medical problems cause a lot of the grief and lots of credit card debt. Credit cards are poison. If you make a dollar, only spend 95 cents, not $1.05. You should be ahead of the game all the time rather than behind as it is harder to work your way out of a hole. You want to play the game from strength, and you have to think ahead. People don’t always want to hear advice when things are going well. People risked everything they had and needed for something they didn’t have or need. Charlie once said, “The problem isn’t getting rich, it’s staying sane.<br /><br /><span style="font-weight: bold;">Texas:</span><br />What are the biggest challenges that this country faces?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />The biggest problem is probably weapons of mass destruction. We have always had people who were ill-fitted to society and wished harm on others. In 1945 we unlocked the atom, and that changed everything. The human animal hasn’t changed, you still have the same percentage that are maladjusted. The problem is knowledge, materials, and deliverability. What you could do with the wrong kind of infectious disease is incredible. You can transmit things much faster today. Governments, individuals and organizations can’t control security. It’s what I would spend all of my money on if I could fix it. Everyone here in this room won what I call the ovarian lottery. You were born at the right time and we were all very, very lucky. We are in the luckiest 1% of humanity. <br /><br /><span style="font-weight: bold;">Kansas:</span><br />What are some of the mistakes that Secretary Paulson made during the sub-prime crisis?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />Hank is a great guy and great friend. He’s extremely smart about markets but not so smart about politics. I sympathize with Hank. Hank Paulson was not the supreme commander. He had to work through at least 535 people with different incentives. The whole situation has developed faster and at an extreme pace, more than anyone thought. The first TARP program got voted down, which changed the dynamic. All variables affect other variables. Congress did not appreciate how severe the problem was. I call it an “Economic Pearl Harbor” in September. FDR essentially had a blank check and that what people think is important and believing it makes it so. He restored confidence in the banking system. Paulson’s job may have been almost impossible given the circumstances. He was used to operating in a sphere that did not require consensus (Goldman Sachs). People that take that on [public service jobs] are laying themselves open to be unfairly attacked, criticized and scrutinized. In hindsight, letting Lehman fail was probably not the right thing but it was difficult to tell at the time. It created trust problems as money market funds fell apart soon thereafter. When people start to worry about the money in money markets, it’s a problem. People want to be led at this point, but fall back into old habits very easily. When you think that Citi or Lehman is just a house of cards… I mean who would have even believed you. It’s like Noah before the flood, building his ark. Can you imagine the reaction he got?<br /><br /><span style="font-weight: bold;">South Dakota:</span><br />What do you think about the U.S. trade deficit?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />I talked to Barack back in August, and said: “I have good news and bad news. The good news is that the economy will be terrible, so you’ll definitely get elected. The bad news is that the economy will be even worse at inauguration.” He asked, “Do you think it’s too late to throw the election?” The trade situation is there and it causes problem and could exacerbate the situation. However, all issues go on the back burner until we solve the big problem.<br /><br />We create sovereign wealth funds, buying more goods and services than everyone else in the world. The decline in the oil price has helped the trade deficit but nothing will get better until everyone feels better. Every day, we buy $2 billion of goods and service more than we produce and export. We give the exporting nations USD. The trade deficit creates claims on the United States. Sometimes we’re a little hypocritical. For example, three years ago, the Chinese wanted to buy Unocal (a small oil company in California) and Congress wanted to condemn China for wanting to buy the oil company with the money we gave them (through U.S. imports). That’s a little disingenuous. The trade deficit creates a situation because we give people claim checks, then we get upset when they want to use them. The Japanese bought Rockefeller Center in the 80’s. Did we think they were going to move it? It’s not useful to fan those flames in a nuclear world, and that’s what’s wrong with “Buy America.” The trade deficit will come up big time when we get past the current problems.<br /><br /><span style="font-weight: bold;">Creighton:</span><br />Why do you live the way that you do?<br /><br />Buffett:<br />Do you mean, why am I frugal? You can’t buy health and you can’t buy love. I’m a member of every golf club that I want to be a member of. I’m the highest handicap member of Augusta National. I’d rather play golf here with people I like than at the fanciest golf course in the world. I can do anything that I want, and I do. I buy everything I want to have. I’m not interested in cars and my goal is not to make people envious. Don’t confuse the cost of living with the standard of living. Bella Eidenberg was a Polish Jew who was at Auschwitz and some of her family didn’t make it. Twenty years ago she said she was slow to make friends, and that the real question in her mind was always, “Would they hide me?” If you have a lot of people that would hide you, you’ve had a very successful life. That can’t be bought. I know people that have billions of dollars and their children would say, “he’s in the attic.” <br /><br />I estimate that I live on $100,000 per year, except for my plane which costs me about $1 to $1.5 million. I like the plane, it improves my life. My computer and my airplane changed my life in a big way and I’m not sure, if I had to choose, which one I’d give up. Anything beyond $50 Million doesn’t improve my life. If I took out $3 billion of Berkshire stock, I could have paid 30,000 people $100,000 per year to paint my portrait every day. I could have paid 50,000 people $60,000 per year to dress in loin cloths and haul rocks to create the Buffett tomb. That’s not me. I believe in giving my kids enough so they can do anything, but not so much that they can do nothing.<br /><br /><span style="font-weight: bold;">Penn State:</span><br />What do you think of the good bank, bad bank idea?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />It is tough to do but if it were done well, it could do a lot. Call the bad bank an “Aggregator Bank.” There is a lot to be said in cleaning out past problems. There are 7,000 banks in the U.S. with such varying degrees of conditions so it is tough to provide a sweeping overhaul. The biggest thing they’re wrestling with is pricing what goes into the aggregator bank. These are smart, well-intentioned people working enormously hard on this.<br /><br /><span style="font-weight: bold;">Emory:</span><br />You take great pride in keeping your schedule wide open. Do you believe that corporate America is overscheduled and overstretched?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />[Showed his blank schedule book]. Bill Gates is overscheduled. I am extremely lucky and I can say no to anything because there isn’t an entity that can use economic pressure to make me do something. A lot of CEOs get into a lot of the rituals that are part of the job. I would rather deliver papers than be the CEO of GE. They have too much stuff to do that is a big pain. Don’t get me wrong, CEOs have it pretty good. I’d imagine that every CEO in the Fortune 500 would be willing to take the job for half of the money. The 76 or so CEOs that run companies at Berkshire don’t have to deal with bankers or lawyers. At Berkshire, we’ve never had a meeting for all of them anywhere. There are no presentations and no committees. They can be more productive, and it makes it attractive when they can do what they like to do best. <br /><br /><span style="font-weight: bold;">Kansas:</span><br />What are three traits of successful managers?<br /><br /><span style="font-weight: bold;">Buffett:</span><br />Passion is the number one thing that I look for in a manager. IQ is not really that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I’d say intelligence, energy, integrity. If you don’t have the last one, the first two will kill you. All you have is a crook who works hard. If a person doesn’t have integrity, you want them dumb and lazy.<br /><br />If you could put 10% of your future earnings on one of your classmates, you would pick the one that’s most effective at working with people. These are qualities that are elective. If you could pick one to sell short, it would be the person that no one wants to work with. You can elect to be the kind of person you want to be. Look at those qualities of the two people you’ve selected (one long and one short). They’re all qualities that you possess. It’s like marriage. If you want a marriage that’s going to last, look for someone with low expectations. Don’t keep score. Keeping score doesn’t build organizations, homes, etc. I have never had one fight with Charlie. When I took over Solomon I had to pick the best person to run it. I interviewed 12 people for 15 minutes each and I asked myself, “Who would I go into a foxhole with?” I never look at grades or where you went to school. When I picked Deryck Maughan, he never asked me about pay or options or indemnity. He went to work. <br /><br />Chains of habit are too light to be felt until they’re too heavy to be broken. In terms of picking people how do you lead your life in a way that I’d pick you?Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com4tag:blogger.com,1999:blog-4005042556618433054.post-42276379435785593492009-01-08T13:51:00.002-05:002009-01-08T14:00:14.028-05:00Top 10 Value Investing News Stories of 2008Greetings!<br /><br />I'm not dead. I've just been swamped with several projects as well as the daily minutiae. I'm proud to announce that we've made the #1 spot of value investing news stories at George's site.<br /><a href="http://www.fatpitchfinancials.com/1295/top-10-value-investing-news-stories-of-2008/">More Details Here...</a><br /><br />Our account of our February 15th meeting with Warren Buffett was a very popular item on this blog, garnering close to 70K hits within a few weeks and landing it on the top links at digg.com and other link network sites.<br /><br />I'll provide more details on current projects as we gain clarity, but Emory University has been invited back to visit Mr. Buffett this year. I'll do my best to ask insightful questions and post the results here. I'm also working on setting up a small fund of sorts, focusing on arbitrage and workout situations. You can check out our initial site here.<br /><a href="http://www.dnlcapitalmanagement.com/">DNL Capital</a>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-46261842575681969942008-08-05T02:26:00.001-05:002008-08-05T02:29:56.821-05:00A Conversation With Charlie MungerCharlie Munger is the founding partner of the Los Angeles law firm Munger, Tolles & Olson, which he left in 1965 to focus on investing. He has been Berkshire Hathaway's vice chairman since 1979, and is also chairman and CEO of Berkshire subsidiary Wesco Financial Corp., based in Pasadena.<br /><br />Mr. Munger will be joined on stage in conversation by Dr. Thomas A. Tombrello, Chairman of the Division of Physics, Math and Astronomy, the William R. Kenan, Jr., Professor and Professor of Physics at Caltech.<p style="text-align: center;"><a style="font-weight: bold;" href="http://today.caltech.edu/theater/30623_bb.ram">Video Link</a><br /></p><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPe3DiGdTPjK5-29PF4q5nrk6qE0QZvu6rjjWWlclJcwi2Bzc03G9yHOafRtXqn9WiUMciQaE8UqoDv49LlP-mg0kcgCkCiP6jwwW2Oud2C87gB4TFcm4lXqJF3MIZGRYU8jnDcIsRUyDa/s1600-h/meandmungerhoriz.bmp"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhPe3DiGdTPjK5-29PF4q5nrk6qE0QZvu6rjjWWlclJcwi2Bzc03G9yHOafRtXqn9WiUMciQaE8UqoDv49LlP-mg0kcgCkCiP6jwwW2Oud2C87gB4TFcm4lXqJF3MIZGRYU8jnDcIsRUyDa/s400/meandmungerhoriz.bmp" alt="" id="BLOGGER_PHOTO_ID_5178886332117610978" border="0" /></a>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-18323291716886438192008-07-10T11:56:00.002-05:002008-07-10T13:21:47.014-05:00"Psychology of Leadership " Guest Lecturer Seth KlarmanI found this video online from a May 2006 guest lecture at Harvard's "Psychology of Leadership" course. Seth Klarman heads the Baupost Group and his out-of-print book "Margin of Safety" is a much sought after tome of value investing.<br /><br /><embed id="VideoPlayback" style="width:400px;height:326px" allowFullScreen="true" src="http://video.google.com/googleplayer.swf?docid=3933071013675141897&hl=en&fs=true" type="application/x-shockwave-flash"> </embed>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-19642241597040885192008-03-23T23:25:00.002-05:002008-03-23T23:26:26.092-05:00Charlie Munger Notes PostponedHey Everyone<br /><br />Sorry for the delays. I'm awaiting approval from higher powers before I make the notes available. Thanks for your patience and stay tuned.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com3tag:blogger.com,1999:blog-4005042556618433054.post-22520980361461777632008-03-14T01:29:00.004-05:002008-03-16T14:37:51.665-05:00CuriousJust a short note since I'm stuck at the airport. The notes from "<a href="http://events.caltech.edu/events/event-5241.html">A Conversation with Charlie Munger</a>" 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.<br /><br />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.<br /><br />For more info:<br /><a href="http://www.thirteen.org/curious/">http://www.thirteen.org/curious/</a><br /><a href="http://mr.caltech.edu/media/Press_Releases/PR13040.html">http://mr.caltech.edu/media/Press_Releases/PR13040.html</a>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com4tag:blogger.com,1999:blog-4005042556618433054.post-76373434528017431082008-03-06T16:07:00.004-05:002008-03-06T16:30:14.409-05:00Introducing Charlie MungerI'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.<br /><br />Here are some great resources to further explore:<br /><br /><b>Essays</b><br /><br /><a href="http://valuestocklplus2.googlepages.com/ArtofStockPicking-CharlieMunger.pdf">"The Art of Stock Picking"</a><br /><br /><a href="http://vinvesting.com/docs/munger/Munger_UCSBspeech.pdf">"Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs"</a><br /><br /><b>Books</b><br /><br /><a href="http://www.amazon.com/gp/product/157864366X?ie=UTF8&tag=undervalue-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=157864366X"><img src="http://www.poorcharliesalmanack.com/img/cover2nd.gif" border="0" /></a><img src="http://www.assoc-amazon.com/e/ir?t=undervalue-20&l=as2&o=1&a=157864366X" alt="" style="border: medium none ! important; margin: 0px ! important;" border="0" height="1" width="1" /><br /><br />"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.<br /><br /><a href="http://www.amazon.com/gp/product/0471446912?ie=UTF8&tag=undervalue-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0471446912"><img src="http://images.amazon.com/images/P/0471446912.01._AA_SCMZZZZZZZ_V50627269_.jpg" border="0" /></a><img src="http://www.assoc-amazon.com/e/ir?t=undervalue-20&l=as2&o=1&a=0471446912" alt="" style="border: medium none ! important; margin: 0px ! important;" border="0" height="1" width="1" /><br /><br />"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.<br /><br /><blockquote style="font-style: italic;">"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?'<br />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."</blockquote><div style="text-align: center;">-- Charlie Munger<br /></div><br /><blockquote></blockquote>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com2tag:blogger.com,1999:blog-4005042556618433054.post-90717927540641429152008-03-04T16:06:00.009-05:002008-03-08T16:59:44.852-05:00Recent Thoughts on FTARI 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.<br /><br />For the price of $90 M, you get the shoe department operator for Kmart. The interesting twist is the Kmart Agreement, which stipulates that this contract will end in 2008. Afterwards, we consider a liquidation scenario and an ongoing-concern scenario.<br /><br />As of Q3 2007, here is how I would judge the tangible book value to shareholders ($M)<br /><br />Cash.............................16<br />Receivables......................9<br />Inventory......................107<br />PP&E............................22<br /><u>Assets.........................154</u><br /><br />Liabilities.....................113<br /><br /><u>Tangible SE....................41</u><br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZlVMVIoMX6D3dV9hEN7xJBF93xksRb1VJSmVLTzZk2eeBuuU7pTUMDamWBZN_5Y1dXrTLUleL1vb-YKCT1LhIjXN7V0F3p7ZHA1xTM-N0Mrr8RLykDLBI_o553l1JBL7NU8IqOYb_my5a/s1600-h/Recap.bmp"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZlVMVIoMX6D3dV9hEN7xJBF93xksRb1VJSmVLTzZk2eeBuuU7pTUMDamWBZN_5Y1dXrTLUleL1vb-YKCT1LhIjXN7V0F3p7ZHA1xTM-N0Mrr8RLykDLBI_o553l1JBL7NU8IqOYb_my5a/s400/Recap.bmp" alt="" id="BLOGGER_PHOTO_ID_5174004213814180770" border="0" /></a><br />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.<br /><blockquote><span style="font-style: italic;">"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.”</span><br /><br /><div style="text-align: center;"> -- Seth Klarman, "Margin of Safety"<br /></div><blockquote></blockquote></blockquote>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-62810089207514058572008-02-29T09:41:00.004-05:002008-02-29T12:22:36.922-05:00Buffett UpdateThanks everyone for all the support. I never expected the Buffett notes would garner such attention. I just wanted to provide a few resources for newly-minted Buffett neophytes and veterans alike.<br /><br /><span style="font-weight: bold;">Annual Reports & Shareholder's Letters</span><br />The latest report should be released after close of market today. In addition, past letters are a treasure trove of information and philosophy.<br />http://www.berkshirehathaway.com/letters/letters.html<br /><br /><span style="font-weight: bold;">CNBC Squawk Box</span><br />On Monday, March 3, Buffett will answer questions submitted via email. More information here:<br />http://www.cnbc.com/id/23359277<br /><br /><span style="font-weight: bold;">Books</span><br /><div style="float: left; margin-left: 0px;"><br /><a href="http://www.amazon.com/gp/product/0966446119?ie=UTF8&tag=undervalue-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0966446119"><img src="http://images.amazon.com/images/P/0966446119.01._AA_SCMZZZZZZZ_.jpg" border="0" /></a><img src="http://www.assoc-amazon.com/e/ir?t=undervalue-20&l=as2&o=1&a=0966446119" alt="" style="border: medium none ! important; margin: 0px ! important;" border="0" height="1" width="1" /><br /></div><br /><div style="float: left; margin-left: 10px;">The Essays of Warren Buffett : Lessons for Corporate America<br />This is a collection of business and investing philosophy, full with gems of wisdom. I value what I learned here more than my MBA education.</div><br /><br /><div style="float: left; margin-left: 0px;"><br /><a href="http://www.amazon.com/gp/product/0385484917?ie=UTF8&tag=undervalue-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0385484917"><img src="http://ecx.images-amazon.com/images/I/21BmFlIhXmL._AA_SL160_.jpg" border="0" /></a><img src="http://www.assoc-amazon.com/e/ir?t=undervalue-20&l=as2&o=1&a=0385484917" alt="" style="border: medium none ! important; margin: 0px ! important;" border="0" height="1" width="1" /><br /></div><br /><div style="float: left; margin-left: 10px;">Buffett: The Making of an American Capitalist<br />This book provides plenty of background and color into the life of Warren Buffett. Provides a great view of his motivations and rise to wealth.</div><br /><br /><div style="float: left; margin-left: 0px;"><br /><a href="http://www.amazon.com/gp/product/0553805096?ie=UTF8&tag=undervalue-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=0553805096"><img src="http://ecx.images-amazon.com/images/I/21bN46CLSuL._AA_SL160_.jpg" border="0" /></a><img src="http://www.assoc-amazon.com/e/ir?t=undervalue-20&l=as2&o=1&a=0553805096" alt="" style="border: medium none ! important; margin: 0px ! important;" border="0" height="1" width="1" /><br /></div><br /><div style="float: left; margin-left: 10px;">The Snowball: Warren Buffett and the Business of Life<br />Set to be released September 29, 2008, this is the OFFICIAL memoir.</div>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-78628656576920972932008-02-23T14:38:00.001-05:002008-08-14T22:49:22.296-05:00Notes From Buffett Meeting 2/15/2008Note: Students from Emory's Goizueta Business School and McCombs School of Business at UT Austin were invited to come visit Mr. Buffett for a Q&A session. These notes were reproduced to the best of my ability as I heard and as I could recall them from a collection of mine and other students' notes. There is no guarantee that this was exactly what was said, but the intent was to preserve the spirit of the message. Enjoy.<span style="font-weight: bold;"><br /><br /></span><p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">With the popularity of "<a href="http://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1218772034&sr=8-1&tag=undervalue-20">Fortune's Formula</a>" and the Kelly Criterion, there seems to be a lot of debate in the value community regarding diversification vs. concentration. I know where you side in that discussion, but was curious if you could tell us more about your process for position sizing or averaging down.<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it’s not your game, participate in total diversification. The economy will do fine over time. Make sure you don’t buy at the wrong price or the wrong time. That’s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you’re liable to be really dumb.</p> <p class="MsoNormal" style="text-indent: 0.5in;">If it’s your game, diversification doesn’t make sense. It’s crazy to put money into your 20<sup>th</sup> choice rather than your 1<sup>st</sup> choice. “Lebron James” analogy. If you have Lebron James on your team, don’t take him out of the game just to make room for someone else. If you have a harem of 40 women, you never really get to know any of them well.</p> <p class="MsoNormal" style="text-indent: 0.5in;">Charlie and I operated mostly with 5 positions. If I were running 50, 100, 200 million, I would have 80% in 5 positions, with 25% for the largest. In 1964 I found a position I was willing to go heavier into, up to 40%. I told investors they could pull their money out. None did. The position was American Express after the Salad Oil Scandal. In 1951 I put the bulk of my net worth into GEICO. Later in 1998, LTCM was in trouble. With the spread between the on-the-run versus off-the-run 30 year Treasury bonds, I would have been willing to put 75% of my portfolio into it. There were various times I would have gone up to 75%, even in the past few years. If it’s your game and you really know your business, you can load up.</p> <p class="MsoNormal" style="text-indent: 0.5in;">Over the past 50-60 years, Charlie and I have never permanently lost more than 2% of our personal worth on a position. We’ve suffered quotational loss, 50% movements. That’s why you should never borrow money. We don’t want to get into situations where anyone can pull the rug out from under our feet.</p> <p class="MsoNormal" style="text-indent: 0.5in;">In stocks, it’s the only place where when things go on sale, people get unhappy. If I like a business, then it makes sense to buy more at 20 than at 30. If McDonalds reduces the price of hamburgers, I think it’s great.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">What industry will be the next growth driver in the 21st century and what do you see that supports that?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">We don’t worry too much about that. If you’d look at the 1930s, nobody could have predicted how much the automobile and airplane would transform the world. There were 2000 car companies, but now only 3 left in the <st1:country-region><st1:place>US</st1:place></st1:country-region> and they are hanging on barely. It was tremendous for society, but horrible for investors. Investors would have had to not only identify the right companies, but also identify the right time. The net wealth creation in airlines since Orville Wright has been next to zero. If a capitalist had been at <st1:place>Kitty Hawk</st1:place> and shot him down, would have done us a huge favor. Or look at TV manufacturers. There are hundreds of millions of TV’s, RCA & GE used to produce them, but now there are no American manufacturers left.</p> <p class="MsoNormal" style="text-indent: 0.5in;">If you want a great business, take Coca-Cola. The product is unchanged, they sell 1.5 billion 8 ounce servings per day 122 years later. They have a moat; if you have a castle, someone’s going to come after you.</p> <p class="MsoNormal" style="text-indent: 0.5in;">Gillette accounts for 70% of razor sales at 80% gross margins and it is the same over time. Men don’t change much. Shaving might be the only creative thing they do, like painting the Sistine Chapel.</p> <p class="MsoNormal" style="text-indent: 0.5in;">Snickers has been the #1 candy bar for the past 40 years. If you gave me $1 billion to knock off Snickers, I can’t do it. That’s the test of a good business. You don’t knock off Coke or Gilette. Richard Branson is a marketing genius. He came in with Virgin Cola, we’re not sure what the name means, perhaps it turns you back into one, but he couldn’t knock off Coke. We look for wide moats around great economic castles. Growth is good too, but we prefer strong economics. In the upcoming annual report I have a section titled “The Great, the Good, and the Gruesome” where I talk about these.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">How do you define happiness and what about your life makes you most happy? When you make good on an investment, do you allow yourself to enjoy that success by getting excited - and on the flip-side, when an investment turns down, do you find yourself equally disappointed - or do you try to remove emotion from your work, as much as possible?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I enjoy what I do, I tap dance to work every day. I work with people I love, doing what I love. The only thing I would pay to get rid of is firing people. I spend my time thinking about the future, not the past. The future is exciting. As Bertrand Russell says, “Success is getting what you want, happiness is wanting what you get.” I won the ovarian lottery the day I was born and so did all of you. We’re all successful, intelligent, educated. To focus on what you don’t have is a terrible mistake. With the gifts all of us have, if you are unhappy, it’s your own fault.</p> <p class="MsoNormal" style="text-indent: 0.5in;">I know a woman in her 80’s, a Polish Jew woman forced into a concentration camp with her family but not all of them came out. She says, “I am slow to make friends because when I look at people, I have one question in mind; would they hide me?” If you get to be my age, or younger for that matter, and have a lot of people that would hide you, then you can feel pretty good about how you’ve lived your life. I know people on the Forbes 400 list whose children would not hide them. “He’s in the attic, he’s in the attic.” Some of them keep compensating by joining board seats or getting honorary degrees, but it doesn’t change the fact that no one will give a damn when they are gone. The most powerful force in the world is unconditional love. To horde it is a terrible mistake in life. The more you try to give it away, the more you get it back. At an individual level, it’s important to make sure that for the people that count to you, you count to them.</p> <p class="MsoNormal"><span style=""> </span>What if you could buy 10% of one of your classmates and their future earnings? You wouldn’t buy the ones with the highest IQ, the best grades, etc, but the most effective. You like people who are generous, go out of their way, straight shooters. Now imagine that you could short 10% of one of your classmates. This part is usually more fun as you start looking around the room. You wouldn’t choose the ones with the poorest grades. Look for people nobody wants to be around, that are obnoxious or like to take all the credit. If you have a 500 HP engine and only get 50 HP out of it, you’ll be beat by someone else that has a 300 HP engine but gets 250 HP output. The difference between potential and output comes from human qualities. You can make a list of the qualities you admire and those you despise. To turn the tables, think if this is the way I react to the qualities on the list, which is the way the world will react to me. You can learn to turn on those qualities you want and turn off those qualities you wish to avoid. The chains of habit are too light to be felt until they are too heavy to be broken. You can’t change at 60; the time to look at that list is now.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Why do you think that despite making your methods publicly available, that relatively few people have been able to emulate your success?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I asked Graham the same question. Everyone took his class at <st1:place><st1:placename>Columbia</st1:placename> <st1:placename>Business</st1:placename> <st1:placetype>School</st1:placetype></st1:place>. He used current examples, and by the end of the semester you would have a portfolio that would’ve made you money. Graham lived a life of sharing. He may have had more money hoarding, but lived happier because of it. The money’s just a figure in the paper, perhaps he would’ve died with 86 million instead of 42 million, but it doesn’t really matter. 90% of the people that took his class ended up doing something else.</p> <p class="MsoNormal" style="text-indent: 0.5in;">At age 11 I started investing, purchasing three shares of Cities Service Preferred. I had read every book on investing in the <st1:city><st1:place>Omaha</st1:place></st1:city> library. I was really into charting and technical analysis. I loved it, but didn’t make any money from it. At 19 I read Graham’s “The Intelligent Investor” and it changed my world. Did Ben lose because I read his book? Maybe we competed and he made less money, but it didn’t matter to Graham.</p> <p class="MsoNormal" style="text-indent: 0.5in;">The philosophy either takes immediately or it doesn’t at all. The reason gets down to temperament. People want to make money fast, but it doesn’t happen that way. Graham’s philosophy doesn’t promise enough for many people. You don’t know when it will happen, but you just wait for the fat pitches within your circle of competence. It’s not as exciting as guessing whether the stock price will go up the next day. Most investors in internet companies didn’t know the market cap. They were buying because they thought the stock would move, but if you asked them to write “I would buy XYZ company for $6 billion because”, they wouldn’t get halfway through the sentence. It’s the classic tortoise versus hare, bound to work over time. Charlie and I have educated competitors. Most don’t compete with us, though. It’s fine, we have more than enough money.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">What qualities in managers set them apart as great leaders, in essence, where do you find the right balance between "hard" and "soft" skills?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">We have 45 managers. Some of them we communicate with once a year, some once a month, some everyday. I usually have dinner with the Blumkins every month, and we go on vacation, because we’re friends. What we look for in managers is a passion for the business. They usually come to us. I’ve never bought from a financial seller. We can’t run the business so I am counting on them to behave well; we have very little in the form of contracts. The business needs to continue just the same after I hand them the check as before. My big question is whether he will still get up at <st1:time minute="0" hour="6">6 AM</st1:time> just the same with $500 million, and continue to send money to <st1:city><st1:place>Omaha</st1:place></st1:city>. I have to look them in the eye and decide whether they love the business or they love the money. It’s fine if they love the money, but they have to love the business more. Why do I come in at 7 every morning, can’t wait to get to work. It’s because I get to paint my own painting and I like applause.</p> <p class="MsoNormal"><span style=""> </span>We bought a jeweler, <st1:place><st1:placename>Ben</st1:placename> <st1:placename>Bridge</st1:placename></st1:place>. It was a 4<sup>th</sup> generation company, with over 100 stores. They were only interested in selling to us. The family didn’t want to sell to others, the employees didn’t want it. I never met him. He didn’t want to sell either, but the family needed it.</p> <p class="MsoNormal"><span style=""> </span>At Borsheims we have a woman from <st1:country-region><st1:place>Zimbabwe</st1:place></st1:country-region>. She didn’t even have the benefit of an MBA. We didn’t look at a resume, or grades, or HR recommendations, but were looking for passion and we’ll pay fairly because we don’t want the resent that comes with unfairness. We want people that will work regardless.</p> <p class="MsoNormal"><span style=""> </span>I got a fax from Pete at <st1:place><st1:placetype>Forest</st1:placetype> <st1:placetype>River</st1:placetype></st1:place> saying this is the type of business you would like to own. He didn’t want to worry about if he died tomorrow, and left his wife and daughter behind. After we made the deal, we had dinner and I brought up the topic of salary. I told him to name whatever number he wanted and I would sign the check. He asked me what I made. I told him $100,000 and he said he didn’t want to make more than me, so we settled on $100,000. Pete called yesterday, and said he wanted to make an offer for another business. We talked for five minutes, I gave him some advice, but I really give them a lot of freedom. I’ve spent $1.7 billion and I’ve never even been to the company, at least I hope it’s there.</p> <p class="MsoNormal"><span style=""> </span>I can’t look at this group and tell you which 3 are going to be great managers. I can see it after they’ve been doing it for a while. Look at Mrs. B. She had one son involved in the business and 3 daughters not involved. She wanted a way to fairly distribute the proceeds of the business and this solved her problem. She worked until she was 103, and died at 104. She lived two blocks from the store. She left price tags on the furniture at her home because it made her feel more comfortable, like she was in the store. She left <st1:country-region><st1:place>Russia</st1:place></st1:country-region> and landed in <st1:place><st1:city>Fort Dodge</st1:city>, <st1:state>Iowa</st1:state></st1:place>. She saved $500 for 16 years to start this business that has the top 2 furniture stores in the nation. You can’t hire those kinds of people, no matter what you pay them. We’ve been lucky that we’ve never lost a manager to competitors since 1965. Some retire, some were fired, but we give them the opportunity to paint their own canvas.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">If you could have lunch with one person you have never met, who would it be and why?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I would have to say Isaac Newton or Benjamin Franklin. I’ve met a lot of interesting people and some uninteresting ones, too. The two men had a bigger grasp of the world they lived in. But I don’t think I would pass up an opportunity with Sophia Loren.</p> <span style=";font-family:";font-size:12;" ><br /></span> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Mr. Buffett, do you believe that the Federal Reserve is fostering moral hazard thereby leading to the misallocation of capital and subsequent asset bubbles?<span style=""> </span>If so, what are the long term risks?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">There is always some introduction of moral hazard when government decides to act in favor of the common good versus letting someone fail. There was moral hazard with the bailout of LTCM and there is some aspect of that with the current situation. But it’s hard to measure because the consequences are 15-20 years out. During the 1987 market crash, Greenspan was new to the job and unsure of what would happen. The specialist system got hit, most of them operated on very little capital and were broke. The Fed provided them with more capital. Will that change future behavior? Maybe, but at the time it was the right call. It’s also resulted in the “Too Big to Fail” doctrine. The big banks, Freddie Mac, and Fannie Mae figured the US Government wouldn’t allow them to fail and the managements of those companies knew that. I would be disinclined to second guess the Fed, they have more information and are trying to do what’s right.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Given your business success, your immense fortune, and your celebrity status, how do you stay so down to earth and humble? Are there specific people or lessons you have learned throughout your life that enable you to maintain this outlook?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. One of your most important jobs in life will be raising your children. They will learn more from you than they will in graduate school. My father was a huge influence, and later on Graham came along. I was also never let down by my heroes.</p> <p class="MsoNormal" style="text-indent: 0.5in;">I had nothing to do with my own success. My father was a securities broker and after the Great Crash, he had no one to call. Consequently, I was born in 1930 in the <st1:country-region><st1:place>United States</st1:place></st1:country-region> during the time of one of the greatest capital markets. I was born with the wiring for capital asset allocation. I had the right wiring at the right time. Temperament is a large part of my wiring. I was naturally good at it, and I used some feedback to develop it better. There is nothing to be arrogant about. Gates says if I had been born earlier, I would’ve been some animal’s lunch. I can’t run, I can’t climb. I’d be talking about allocating capital and the animal would think, “Those are the kind that taste the best.” You have all won the ovarian lottery. There is no reason to feel guilty about it. </p> <p class="MsoNormal" style="text-indent: 0.5in;">I have never given away a dime that has any meaning on how I live. There are people that go to church and they put money in the offering plate that truly makes a difference in how they will live their lives, what they will eat, what presents they will buy for their children. There’s no reason to get puffed up over things you didn’t control.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Due to the credit crisis and consequently large write-downs, banks have made it more difficult to lend healthy businesses capital for increasing efficiency, expansion, new projects, etc., thereby potentially becoming the primary agents restricting growth. What are your thoughts on liquidity in the marketplace and the possibly of it contributing to a recession? Also, do you see a potential for financial institutions not currently in the lending business stepping in to take advantage of the reduced supply of capital?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">What we are seeing is a huge repricing and evaluation of risk, correcting for problems of the past. I don’t know of good credit propositions that are going unfulfilled. There’s lots of cheap credit for sensible deals, which I don’t define as anything that happened over the last 12, 18 months. A lot of things that didn’t make sense are being washed out of the system. It is painful for bad decisions. Comparatively, this is not a credit crunch. In 1982 the prime rate was 22% and money was very expensive. In the late 60’s, we made a sound deal there wasn’t any money to be had. That’s not the case now. The Fed has opened the window, and rates are down. It doesn’t mean there won’t be a major recession.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">What are some of your biggest mistakes or regrets?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">We’ve made lots of mistakes, but they don’t bother me. We’ve had no regrets. We are in the business of making many decisions and there are bound to be mistakes. There are $10 billion mistakes of omission that no one knows about; they don’t show up in the accounting. In 1994 we paid $400 worth of <st1:place>Berkshire</st1:place> stock for a shoe company. The company is now worth 0, but the stock is worth $3.5 billion. So now, I’m happy to see <st1:place>Berkshire</st1:place> go down since it reduces the size of my mistake. In 1973 Tom Murphy offered us NBC for $35 million, but we turned it down. That was a huge mistake of omission. </p> <p class="MsoNormal" style="text-indent: 0.5in;">In my personal life, there are always things I could’ve done differently. But so many good things have happened. It just doesn’t pay to dwell on the bad things. Finding the right spouse is 90% of it. If you are lucky on health and lucky on your spouse, you are a long way home. Getting turned down by HBS was one of the best things that could have happened to me, bad luck can turn out to be good.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Could you comment on the current rise of sovereign wealth funds from the <st1:place>Middle East</st1:place> and <st1:place>Asia</st1:place> and how they are playing an increasing role in how corporations raise capital. Is competition from these sources for the cash flows of corporations affecting your investment strategies or opportunities?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Any competition is competition. The situation of sovereign wealth funds is interesting. A lot of it is <st1:country-region><st1:place>China</st1:place></st1:country-region> bashing, OPEC bashing and plays right into politician’s hands. Today, the <st1:country-region><st1:place>US</st1:place></st1:country-region> will buy $2 billion more from the world than they buy from us. In exchange we give them little pieces of paper and they have to buy assets. As long as we consume more than we produce we have to let the rest of the world invest in us. We created sovereign wealth funds and that $2 billion gains interest. <st1:country-region><st1:place>US</st1:place></st1:country-region> funds feel they can get the best terms from these foreign investors and lately, enticed them into buying equity. <st1:country-region><st1:place>China</st1:place></st1:country-region> wanted to buy Unocal, a 3<sup>rd</sup> rate oil producer with production overseas in places like <st1:country-region><st1:place>India</st1:place></st1:country-region>. US Congress went ape and 395 representatives signed an anti-Chinese resolution to block the deal. For 100 years the <st1:country-region><st1:place>US</st1:place></st1:country-region> companies went around buying the world’s assets and bribing officials, but told <st1:country-region><st1:place>China</st1:place></st1:country-region> they couldn’t buy Unocal. The Chinese took it, but they didn’t like it. It doesn’t make sense that we are buying foreign assets, and giving them pieces of paper and then telling them what they can’t do with that money. We have created them and I have no objection to them. I recommend an index fund for these sovereign wealth funds. It gives them exposure to the <st1:country-region><st1:place>US</st1:place></st1:country-region> market, but they won’t get taken by salespeople with bad deals. In economics you always want to say “And then what?”</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Is the individual investor even capable of assessing the riskiness of securities given the large number of institutions/hedge funds in the market?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I don’t think there is much being overlooked now, but I’m forced to look at big things. That’s the advantage you have over me. A few years ago a friend of mine mentioned that I should look at <st1:country-region><st1:place>Korea</st1:place></st1:country-region>. We bought Posco for 3-4 times post-tax earnings. I found 20 other companies selling at 2-3 times earnings and strong balance sheets. I diversified because I didn’t know the Korean market as well. We are looking for the very unusual. Occasionally things will happen in a securities market that are extraordinary. I like shooting fish in a barrel, but I like to make sure the water’s drained out.</p> <p class="MsoNormal"><span style=""> </span>We had that situation a few years ago with the 30 year versus 29 ½ year Treasury bonds. Because of less liquidity, the off-the-run bonds were selling for 30 basis points less, which translates into 3% of principal value. LTCM entered the trade at 10 basis points originally, but they overleveraged and were forced to unwind the position. If you went long/short you could make money really quickly.</p> <p class="MsoNormal"><span style=""> </span>Markets are efficient most of the time about most things. But for these opportunities, nobody will tell you about them. They won’t be on <st1:stockticker>CNBC</st1:stockticker> and they won’t be in brokerage reports. You have to go find them yourself. In 1951, after I graduated from school, I used Moody’s and S&P manuals as my sources of information. I went through them page by page. I was like a basketball coach looking for 7-footers. I still have to find out if he’s coordinated, and can stay in school. But if someone comes up to me that’s 5’6” and says, “Wait ‘til you see me handle the ball”, I say “No thanks”. On page 1443 of Moody’s, I found Western Insurance Securities. It had earned $21.66 per share 2 years ago, and earned $29.09 last year. Over the past year the stock was selling for between $3 and $13 per share. I still had to do the work to make sure the earnings were valid. The markets will get it right eventually. But they are there. You don’t have to find too many. Finding 10 of these opportunities in your lifetime will make you so rich. But you can’t be wrong. You can’t have any zeroes. A list of big numbers multiplied by zero will equal zero. You can’t go back to “Go”.</p> <span style=";font-family:";font-size:12;" ><br /></span> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">What do you think of aggregate infrastructure investment to stimulate the economy?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I think the best way to stimulate the economy is to give money to the poor. They will spend it. Don’t give it to guys like me. Infrastructure investment makes sense, but we haven’t done it in a while and it won’t do anything for the next 6-12 months. Infrastructure is not big relative to <st1:stockticker>GDP</st1:stockticker>. We are a consumer-driven society, spending 106% of production.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Who do you think will be one of the next greatest investors and are you partial to favoring someone with a similar investment style as yours?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">We just finished looking for someone. The Board has 3 candidates to replace me as CEO and 4 candidates to replace me as investor. They are all doing fine where they are, but they would be willing to come over to <st1:place>Berkshire</st1:place> for less pay.</p> <p class="MsoNormal"><span style=""> </span>In 1969, I wound up my partnership and I had to help people find someone to manage their money. I recommended Bill Ruane of Sequoia Fund, Sandy Gottesman, who is currently on the board at <st1:place>Berkshire</st1:place>, and Walter Schloss, who I wrote about in “The Superinvestors of Graham and Dodds-ville”. There’s no way they could miss.</p> <p class="MsoNormal"><span style=""> </span>But I don’t know many of the newer investors, they’re not my contemporaries. It’s not enough to just look at track records. They aren’t predictive and there will always be a few people that do well. I know guys who can make 50% a year with $5 million, but not with $1 billion. The problem with guys that do well is they attract so much money that it neutralizes their advantage. It’s hard to identify them, and even harder to make a deal to keep them from attracting other capital. It’s like betting on a 12 year old horse that won at 3 years old. It’s also important to avoid managers who use leverage. It’s the reason that investors with 160 IQs flame out.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">At the Wesco annual meeting last year, Charlie said, "The best way to get success is to deserve success". Do you recall anything from your experience which best demonstrates how you were able to position yourself to deserve success, and do you have any advice for students on how they can position themselves to deserve success as well?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Behaving decent is a large part of it. Out of school I offered to work for Graham for free and he said I was overpriced. I tried to be useful and visible to him. I gave him stock tips and kept up with him. Almost always good things come from good behavior. Don’t keep score in life. Tom Murphy does not keep score. He keeps doing 20 things for me and I can only hope to return the favor. Keeping score is terrible in marriage and terrible in business. I put myself in the seller’s shoes. With most humans there is a great desire to reciprocate. If you do something for them, they will do 2X for you. How rare is it to work during lunch hours and be the first one there in the morning. You’ll get noticed if you do something extra. It’s good to have a willingness to pitch in when you aren’t going to get credit for it. Charlie and I partnered up in 1959. We always both think we’re right. We disagree but we’ve never fought. And we’ve never held past mistakes over each other’s heads. I recommend reading “Poor Charlie’s Almanack”. It’s amazing, has sold 50,000 copies and it’s still sold independently.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Have there been instances in your career where you have been tempted to deviate from your strategy and if so, how did you handle that?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I’m not that type. I’m not disciplined. I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405 foot boat just because someone else has a 400 foot boat. Some of my friends have big boats where 55 people are serving 14. Of those 55, some will be stealing from you, some will be sleeping with each other, and I just don’t want to deal with that. My friends have the boats, so I’m the ultimate freeloader. I don’t need multiple houses. If I wanted to do something wild & crazy I could do it, but Anna Nicole Smith is gone. Reminds me of the story of the 60 year old man that got a 25 year old to marry him. When his friends asked how he did it, he replied, “I told her I was 90.”</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><b>Emory</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">It seems that the worldwide trend is towards lower corporate tax rates. Do you think that the <st1:country-region><st1:place>US</st1:place></st1:country-region> risks becoming less competitive if it maintains its current corporate tax rate?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">Relative to <st1:stockticker>GDP</st1:stockticker>, government taxation is 18.5% and spending is 20%, so we borrow the balance. The national debt should not be a scary topic and the fact that it’s gone up is fine as long as it’s proportional to <st1:stockticker>GDP</st1:stockticker>. Where do we get that 18.5%? There’s 2.7 trillion in government revenues. 2.2 trillion comes from individuals, and less than 1% of that comes from the estate tax. 1.1 trillion comes from income taxes, with payroll taxes consisting of 900 billion, but it’s capped at the first $100,000 of salary. We want a tax system that encourages greater prosperity, but it needs to take care of the family.</p> <p class="MsoNormal" style="text-indent: 0.5in;">We did an informal office survey by looking at the total tax footprint versus the total income. I earned 46 million and paid a tax rate of 17.5%. My rate was the lowest, the average was 33%, and my cleaning lady paid 40%. The system is tilted towards the rich. The Forbes 400 total net worth has gone from 220 billion to 1.54 trillion, an increase of 7-to-1. You see in legislature that there is lobbying carried on by the powerful over issues such as the estate tax and carried interest for private equity investments. We need to flatten income and payroll taxes, and those making under $30,000 shouldn’t be bothered.</p> <p class="MsoNormal" style="text-indent: 0.5in;">Let’s imagine that 24 hours before you are born, a genie comes to you and tells you devise a social and economic system. The only catch is that after you designed the system, you would choose a paper from a barrel which would determine your demographics. What objectives would you want? You need to devise a system that creates prosperity. It needs to be a meritocracy, to put the right people in the right place. It needs to have a strong education system, and throw off lots of goods and services. It also needs to not discriminate against women or minorities. Even though the per capita <st1:stockticker>GDP</st1:stockticker> is $47,000, 20% of the population makes less than $20,000. We need to eliminate that fear of sickness or old age. A tax code is the codification of a country’s values. But you can’t kill the golden goose of prosperity.</p> <p class="MsoNormal"><b><o:p> </o:p></b></p> <p class="MsoNormal"><st1:city><st1:place><b>Austin</b></st1:place></st1:city>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">There is always mention that some of your success could be attributed to not buying in to the Wall Street mania b/c you are in <st1:city><st1:place>Omaha</st1:place></st1:city>—what importance do you give to balance as it pertains to work and life and what do you do to maintain your appropriate balance?<br /><br /><b>Buffett</b>:</p> <p class="MsoNormal" style="text-indent: 0.5in;">I have so much fun that it’s not work. I get to do what I want, where I want – on a boat, wherever. My wife was responsible for bringing up the children. Neither of us had problems with that arrangement, and it made sense from an Adam Smith “division of labor” perspective. It will be a much tougher choice for women, and always be somewhat unequal. In my own life I did virtually no social functions or meetings that I didn’t want to do. In my adult business life I have never had to make a choice of trading between professional and personal. I have simple pleasures. I play bridge online for 12 hours a week. Bill and I play, he’s “chalengr” and I’m “tbone”.</p> <p class="MsoNormal"><span style=""> </span>After a talk at Harvard, I told them to work for who they admired the most, so they all become self-employed. It’s important to go to work for someone or some organization you admire. I’ve not seen many males having to make tough choices. But women are the ones who have tough situations.</p>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com63tag:blogger.com,1999:blog-4005042556618433054.post-29791036664029477442008-02-20T11:38:00.002-05:002008-02-20T11:40:02.720-05:00Pics from Buffett TripI just got back from our class trip to visit Warren Buffett. Here are some pics, so enjoy. I'm currently working on compiling the notes and will post those soon.<br /><br /><a href="http://picasaweb.google.com/emorybuffetttrip/BuffettTrip">Emory Buffett Trip</a>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-8769786419733399702007-10-14T11:23:00.000-05:002007-10-14T21:20:49.292-05:00Thrift Conversion Results<a href="http://rbcoweb.ryanbeck.com/rbeck/pdfs/RO-551.pdf">Background paper here.</a><br /><br />Before 1988 thrift conversions were done in a single step, leading to the earlier mentioned <a href="http://undergroundvalue.blogspot.com/2007/09/thrift-conversions.html">Lynch scenario of the free envelopes of money</a>. Post 1988, two-step conversions were being performed. First steps would involve issuance of a minority stake of equity to the public, with the majority being held by the mutual holding company (MHC). In the second steps, additional offerings would distribute the remaining MHC shares to the public, raising additional cash and dissolving the MHC.<br /><br />The published ratios for these firms are generally calculated on total shares outstanding, even though the MHC shares are not public and represent an overhang of untapped shareholder value. Also, when dividends are issued by these firms, MHC's generally waive their rights to the dividends which is an additional plus.<br /><br />In attempting an extremely rough-cut valuation of these firms, I wanted to look at the post second-step offering scenario. One recently completed conversion was <a href="http://finance.google.com/finance?q=abbc">Abington Bancorp, Inc. (ABBC)</a>. As this <a href="http://biz.yahoo.com/iw/070626/0271333.html">press release</a> states, 14.0M new shares were issued at approximately $10, and 10.5M shares were issued to existing shareholders. As of now, the bank trades at approximately 1.0 P/B ratio, which is cheap for a financial institution, but which we will use as our conservative estimate.<br /><br />We assume a post second-step P/B ratio of 1.0 and fixed number of public and MHC shares to solve for the final share price.<br /><br />1.0 P/B = (?? Price * Total Shares) / [ Shareholders Equity + (MHC Shares * ?? Price) ]<br /><br />The numerator is the second-step market cap, assuming all shares are floated. The denominator is the current equity plus the proceeds raised from issuing the MHC shares. Rearranging for the ?? Price, we get the following equation.<br /><br />?? Price = (1.0 P/B * Shareholders Equity) / [ Total Shares - (1.0 P/B * MHC Shares) ]<br /><br />Using this rough guage for value, I analyzed 40+ current thrifts and published the results here: <a href="http://spreadsheets.google.com/pub?key=pgqi3dFoN3DygTQDrMOx2Cw">Thrifts Simplified</a>. (BTW, Google Docs includes tools to automatically pull in information such as stock price) As you can see, 40-60% discounts can be found although the larger discounts are more prevalent in the nanocap space. If I had more capital under management, I might be tempted to make a Buffett control play. As a caveat, this is extremely rudimentary and there are no provisions made for earnings quality or growth, etc. I would, however, pay attention to those companies performing stock buybacks or issuing dividends. Given my inexperience with this strategy, I have diversified the allocation for a normal position into 8 separate positions.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com7tag:blogger.com,1999:blog-4005042556618433054.post-73066439292168001552007-10-11T23:49:00.000-05:002007-10-14T10:49:18.889-05:00Going Private Transaction: CNFLUPDATE:<br /><br />CNFL has received an <a href="http://biz.yahoo.com/prnews/071011/clth088.html?.v=68">SEC Notice</a> for having an insufficient number of public shares. They have until Oct. 24 to submit a plan to regain compliance. The company "believes that the proposed Going-private Transaction represents "good cause" for which Nasdaq Staff may extend the October 24, 2007 cure period."<br /><br />In my opinion, this is a slight complication, but does not violate the original thesis. Even in the case where CNFL shares are delisted, that does not preclude the GPT.<br /><br />ORIGINAL:<br /><br /><a href="http://finance.google.com/finance?q=NASDAQ:CNFL">CNFL</a><br /><br />SEC Filings<br /><br /><a href="http://www.sec.gov/Archives/edgar/data/887136/000114036107019274/0001140361-07-019274-index.htm">10/04/2007</a><br /><a href="http://www.sec.gov/Archives/edgar/data/887136/000114036107014413/0001140361-07-014413-index.htm">07/19/2007</a><br /><br />The company will execute a 1-for-250 reverse stock split in order to go private. Shareholders who own fractional shares will receive $7.25 per share, effective Nov. 13. If you can pick up shares today for $6.75 (last trade, I picked up my shares weeks ago at better prices), that should give you a 7% return within a one-month turnaround, for a 137% annualized return.<span style="display: inline;font-family:Times New Roman;font-size:10;" ><strong></strong></span>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com4tag:blogger.com,1999:blog-4005042556618433054.post-39213646160514321042007-10-06T00:29:00.000-05:002007-10-06T00:41:17.309-05:00Current Positions UpdatedAs you can see, it's been a busy few weeks. Despite my insistence on a focus portfolio, the number of ideas have proliferated. Lately I've realized that having a focused portfolio does not necessarily preclude a larger number of positions. Contrast the early Buffett focused portfolio of 20-30 positions, with single positions taking up to 30% of the entire portfolio, with Pabrai's 10 core positions or Greenblatt's 3-5 positions. Plus I suffer from <a href="http://www.approvedarticles.com/Article/Rhinophobia--Fear-of-Cash---A-Bad-Disease-for-an-Investor/3385">rhinophobia</a>, which I need to learn to control in order to improve my portfolio returns. I will do a brief synopsis on each later.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-7903525942964329332007-09-19T23:49:00.000-05:002007-09-19T23:59:13.421-05:00Thrift ConversionsThis topic has lately caught my eye. <a href="http://www.haas.berkeley.edu/groups/finance/WP/rpf283.pdf">This paper</a> provides some good background material on the subject, although it first came to my attention through "Beating the Street" by Peter Lynch. I have about a dozen candidates to research and will post results as soon as I can. An excerpt:<br /><blockquote><span style="font-style: italic;">Imagine buying a house and then discovering that the former owners have cashed your check for the down payment and left the money in an envelope in a kitchen drawer, along with a note that reads: "Keep this, it belonged to you in the first place." You've got the house and it hasn't cost you a thing.<br /><br />Say your local thrift has $10 million in book value before it went public. Then it sold $10 million worth of stock in the offering - 1 million shares at $10 apiece. When this $10 million from the stock sale returns to the vault, the book value of this company has just doubled. A company with a $20 book value is now selling for $10 a share<br /></span></blockquote>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-6773133569457343282007-09-04T18:37:00.000-05:002007-09-04T18:40:06.175-05:00Tender Offer: ISYShttp://biz.yahoo.com/ap/070814/integral_systems_stock_offer.html?.v=1<br /><br />Shares are being purchased for $27, expiring midnight September 11th, includes odd lot preference. I purchased shares today for $24.30, for an approximately 11.1% spread.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com2tag:blogger.com,1999:blog-4005042556618433054.post-91664195264472507252007-08-23T00:04:00.000-05:002007-08-23T00:05:08.779-05:00Market Reaction and Portfolio ConcentrationI was talking with my coworker the other day about the differences between arithmetic and geometric means. Arithmetic means are the averages that we are familiar with, whereas geometric means come into play in the compounding of returns. For example, let's say one of our stocks went up 2X in Year 1, and 4.5X in Year 2. The geometric return would be 3x ( square root [ 2 * 4.5 ] ). Equivalently, we could have had another stock with the same geometric returns and achieved the same results over two years (3 * 3 = 2 * 4.5).<br /><br />With that being said, the differences between the two types of means differs greatly and changes with how we construct our portfolios. For the sake of simplification, let's assume that all financial assets consist of numerous fair independent coinflips that occur daily, with a 50% positive return for heads, and a 40% loss for tails. Although we can allocate our portfolio into any number of these assets, we must remain fully allocated and play everyday. What is the optimal strategy?<br /><br />If we compute the two means, we see they differ greatly. The arithmetic mean is +5% ( [+50 - 40] / 2), whereas the geometric mean is -5.1% ( sqrt[ 1.5 * .6 ] ). To achieve the arithmetic mean, we would divide our bankroll into as many bets as possible, so that our sample means would converge to the population mean. This is the so-called <a href="http://en.wikipedia.org/wiki/Diversification_%28finance%29">"free lunch" of diversification</a>. To achieve the geometric mean, we would place all of our bankroll on a single bet, and continually parlay the results of those coinflips into more coinflips, so that over a long enough series of days, our returns would approach the geometric mean. So is there ever a scenario where we would not want to diversify?<br /><br />I got the idea that "it depends" from reading <a href="http://www.vinvesting.com/we_made_some_mistakes_miller_says_of_streaks_end">Bill Miller's Q4 2006 Letter to Investors</a>. In it, he explains the reason why his streak of beating the S&P 500 was finally broken, and his mistakes of overly concentrating the portfolio at the wrong time.<br /><br />If we go back to our earlier example, let us now assume that instead of numerous similar bets, there are different classes of coinflips we can make, and that they are limited in number. Class A coins offer +100% returns for heads, -60% returns for tails, and there are only 2 of them. Class B coins offer +20% returns for heads, -10% returns for tails, and there are 40 of them. Doing the math, we see that Class A has an arithmetic mean of +20% and a geometric mean of -10.6%. Class B has an arithmetic mean of +5% and a geometric mean of +3.9%. The arithmetic means of Class A clearly surpass those of Class B, but there aren't enough of them to properly achieve the population average.<br /><br />So now the question of diversification / concentration is largely a function of opportunity diversity and becomes a conversation of tradeoffs between diversifying to achieve the geometric return, versus striving to achieve a higher arithmetic return through concentrating in rare "good bets". If your ideas are mostly similar and no ideas are clearly better than others, then diversify as much as possible.<br /><br />The recent market events have introduced greater variability in the risk / returns profiles of my ideas, which has manifested in some positions being untouched whereas others have become hammered. Given an assumption of unchanged fundamental business value, I think now is the time to concentrate the portfolio, increasing positions in those ideas that seem 70+% undervalued (ie multi-bagger prospects) and exiting positions with only 30-40% undervaluations. Although this will almost necessarily introduce greater volatility in portfolio returns, I am confident that these actions will bear fruit 1-3 years hence.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-10301642247710788992007-08-15T20:36:00.000-05:002007-09-10T20:56:47.006-05:00Notable Quotes"All life demands struggle. Those who have everything given to them become lazy, selfish, and insensitive to the real values of life. The very striving and hard work that we so constantly try to avoid is the major building block in the person we are today."<br />-- Ralph Ransom<br /><br />"Restlessness and discontent are the first necessities of progress."<br />-- Thomas Edison<br /><br />"All progress is based upon a universal, innate desire on the part of every organism to live beyond its income."<br />-- Samuel Butler<br /><br />"Humanity has advanced, when it has advanced, not because it has been sober, responsible, and cautious, but because it has been playful, rebellious, and immature."<br />-- Tom Robbins<br /><br />"Progress is made by lazy men looking for easier ways to do things."<br />-- Robert Heinlein<br /><br />"Thinkin of a master plan, Cuz ain't nuthin but sweat inside my hand"<br />-- Rakim<br /><br />"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."<br />-- "Puggy" Pearson<br /><br />"Things may come to those who wait, but only the things left by those who hustle."<br />-- Abraham Lincoln<br /><br />"Go confidently in the direction of your dreams."<br />-- Henry David Thoreau<br /><br />"Nothing focuses the mind better than the constant sight of a competitor who wants to wipe you off the map."<br />-- Wayne Calloway<br /><br />"We are not here merely to make a living. We are here to enrich the world, and we impoverish ourselves if we forget this errand."<br />-- Woodrow Wilson<br /><br />"The Longer I live, the more I realize the impact of attitude on life. Attitude, to me, is more important than facts. It is more important than the past, than education, than money, than circumstances, than failures, than successes, than what other people think or say or do. It is more important than appearance, giftedness or skill. It will make or break a company, a church, a home, or a chorus. The remarkable thing is we have a choice everyday regarding the attitude we will embrace for that day. We cannot change our past, we cannot change the fact that people will act in a certain way. We cannot change the inevitable. The only thing we can do is play on the one string we have, and that is our attitude. I am conviced that life is 10% what happens to me and 90% how I react to it. And so it is with you, we are in charge of our attitudes."<br />-- Charles Swindol<br /><br />"Empty pockets never held anyone back.<br />Only empty heads and empty hearts can do that."<br />-- Norman Vincent Peale<br /><br />"Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, Who am I to be brilliant, gorgeous, talented, fabulous? Actually, who are you not to be? You are a child of God. Your playing small does not serve the world. There is nothing enlightened about shrinking so that other people won't feel insecure around you. We are all meant to shine, as children do. We were born to make manifest the glory of God that is within us. It is not just in some of us; it is in everyone. And as we let our own light shine,we unconsciously give other people permission to do the same. As we are liberated from our own fear, our presence automatically liberates others."<br />-- Marianne Williamson<br /><br />"I've never been poor, only broke. Being poor is a frame of mind.<br />Being broke is only a temporary situation."<br />-- Mike Todd<br /><br />"Wait for a miracle and it will never come. Take responsibility and you'll invite a miracle."<br />-- Laura Berman Fortgang<br /><br />"The mind once stretched by a new idea, never returns to its original dimension."<br />-- Oliver Wendell Holmes<br /><br />"Making mistakes simply means you are learning faster."<br />--Weston H. Agor<br /><br />"If you really want to do something, you'll find a way; if you don't, you'll find an excuse."<br />-- Unknown<br /><br />"A gem cannot be polished without friction, nor a person perfected without trials."<br />-- Chinese proverb<br /><br />"Ignorance is the night of the mind, but a night without moon and star."<br />-- Confuscious<br /><br />"Better a diamond with a flaw than a pebble without."<br />-- Confucius<br /><br />"You can't lose what you don't put in the middle...But you can't win much either."<br />-- Mike McDermott (Rounders)<br /><br />"Circumstance does not make the man, it reveals him to himself. Men do not attract that which they want, but that which they are. Man is manacled only by himself."<br />-- James Allen<br /><br />"The stock market is filled with individuals who know the price of everything, but the value of nothing."<br />-- Philip Fisher<br /><br />"Conversation enriches the understanding, but solitude is the school of genius."<br />-- Edward Gibbon<br /><br />"It is your work in life that is the ultimate seduction."<br />-- Pablo Picasso<br /><br />"In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time - none, zero."<br />-- Charlie Munger<br /><br />"It had long since come to my attention that people of accomplishment rarely sat back and let things happen to them. They went out and happened to things."<br />--Elinor Smith<br /><br />"High aims form high characters, and great objects bring out great minds."<br />--Tryon Edwards<br /><br />"True happiness is not made in getting something. True happiness is becoming something. This can be done by being committed to lofty goals. We cannot become something without commitment."<br />--Marvin J. Ashton<br /><br />"There is a close connection between getting up in the world and getting up in the morning."<br />--Anonymous<br /><br />"The man who is born with a talent which he is meant to use finds his greatest happiness in using it."<br />--Johann von Goethe<br /><br />"An individual who doesn't consciously select his goals is not really in control of his life. He is controlled. Without really knowing it, he is controlled by goals imposed by outside pressures (the expectation of other), or by habits (procrastination), or by desires (the longing to be honored and admired) and so on."<br />-- Anonymous<br /><br />"Beaten paths are for beaten men."<br />--Eric Johnston<br /><br />"The world turns aside to let any man pass who knows whither he is going."<br />--David Starr Jordan<br /><br />"First, the only certainty is that there is no certainty. Second, every decision as a consequence is a matter of weighing probabilities. Third, despite uncertainty we must decide and we must act. And lastly we need to judge decisions not only on the results, but how those decisions were made."<br />-- Robert Rubin<br /><br />"We cannot promise to beat the market or even to match the market. But we can promise that nobody will care more about your money and work harder than the team that we have assembled."<br />-- Bill Miller<br /><br />"When we think about the future of the world, we always have in mind its being where it would be if it continued to move as we see it moving now. We do not realize that it moves not in a straight line… and that its direction changes constantly."<br />-- Ludwig Wittgenstein<br /><br />"The thoughts of others<br />Were light and fleeting,<br />Of lovers' meeting<br />Or luck or fame.<br />Mine were of trouble,<br />And mine were steady,<br />So I was ready<br />When trouble came."<br />-- A.E. Housman<br /><br />"Entrepreneurship is not a civilized joust. It is streetfighting."<br />-- James Hong<br /><br />"Pray not for lighter burdens but for stronger backs."<br />--Theodore Roosevelt.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-37371246736938977332007-08-12T16:26:00.000-05:002007-08-12T16:55:36.438-05:00Fish or Cut BaitIn light of recent events, this post seemed appropriate. I used to read the <a href="http://boards.fool.com/">Motley Fool Message Boards</a> (mostly Berkshire posts) everyday for a year or two, and it was instrumental in my education. They've reopened for free on an invitation-only basis. Let me know if you would like one by leaving a comment. There was mostly chatter on this board, but from time to time there were some really inspired posts. I've reposted it here for those without access. Special thanks to <a href="http://boards.fool.com/Profile.asp?uid=47694026">hartmanbirge</a>, go here for the <a href="http://boards.fool.com/Message.asp?mid=24202623">original post</a>.<br /><br /><span style="font-style: italic;">A lot has happened the last two months or so and at least to me the world is a far clearer, more exhilarating picture. I've had some time to do some thinking and I was struck by several themes. Bottom Line Up Front (or BLUF as we call it): An investor, an Army officer, a corporate CEO, a surgeon, a lawyer….you name the profession… if you're a professional then your purpose in life is not to manage – your purpose is to lead (people, change, emotions, whatever..). I've heard it said that a true professional is someone dedicated to their craft and someone who possesses a certain professional ethos. I think that should be taken one step further. Though professions vary greatly in what they represent I think it fair to say that all true professionals have a competitive drive (more with themselves than anything else) to prove themselves in great difficulty. They dedicate their lives to learning as much as they can about their circles of competence. And I also think it fair to say that the true professionals thrive best when chaos surrounds them… when “all others are losing their heads” as Buffett once said. I am convinced that there is a certain type who actually looks forward to chaos – it's where they're most comfortable. It's where they THRIVE. They've spent years and years studying and acquiring knowledge so that they can APPLY what they've learned and practiced upon a chaotic situation and get the exhilaration of a “win” - however “winning” is defined in their circle. They run with gusto to the sound of the guns. In order to do this there are several pre-conditions which must be met in order for our hero to do his or her thing:</span><br /><span style="font-style: italic;">1. They have to have a thirst to learn the craft and apply themselves to this quest voraciously – done during the “boring” times of status quo. </span><br /><span style="font-style: italic;">2. The above most likely requires an inner competitive drive – most likely with a high internalized set of standards</span><br /><span style="font-style: italic;">3. They need to have a “detached ego” which allows them to execute rationally rather than emotionally. (Recommend watching movie classic 12 O'Clock High with Gregory Peck)</span><br /><span style="font-style: italic;">4. They're beholden to none and have a personal center of gravity based on principles and values rather than external things </span><br /><span style="font-style: italic;">5. But ultimately they thirst for a set of external conditions that allow them to apply the above</span><br /><br /><span style="font-style: italic;">In reading about George Marshall (the ultimate rational being) I note that he suffered in long obscure silence for decades (34 years) – plugging away…acting with integrity and honor…avoiding the limelight… doing the right thing. There was a time when he thought of leaving the Army. A Major at the time, his salary was just over the American average of $750. External opportunity arrived in the form of a job offer from a partner at JP Morgan – salary $30,000. Marshall was severely tempted. In the end of course he turned down the job offer that was pushing 40 times his pay. Why? I spent a few weeks mulling over that question. My only conclusion is that Marshall saw what was looming on the geo-political scene. He had already made a name for himself in WWI and had a wealth of knowledge and experience. He knew the craft so to speak. It is my conclusion that he thirsted for the chance to rationally apply it upon a chaotic scene and missing the chance would be the worst form of hell on earth. He had a deep sense of obligation and duty and due to his gifts to manage the chaos he had a duty. Because he had a grounding of values and principles, no amount of money or family riches could pry him from this. So he turned it down and waited patiently for opportunity – not financial – but the chance to apply his learned rationality upon chaos. Material possessions (to include money) as a central focus would have been a hollow outcome. Once given power as Army Chief of Staff he basically ripped the existing Army careerist culture to shreds and built a wartime Army full of mission oriented leaders who embraced extreme difficulty – (not at all unlike what's happening today I might add).</span><br /><br /><span style="font-style: italic;">What's this have to do with investing? A lot I think. The above “rules” are the same no matter what the profession. Professionals are built for chaos, ambiguity, uncertainty, and extreme difficulty. Good times and relative “ease” though sometimes a welcome respite ultimately become the definition of a living HELL. Ask yourself if you ever felt any satisfaction getting an A on a test or a paper if the entire class did. No. Maximum satisfaction comes when you're the only one to get an A. There's a standard. There's a great difficulty that has been mastered and overcome. There is stratification. There are winners and losers. There is “justice” – those who took the easy way out and didn't study get “punished” by their poor grade. Grade inflation in a sophomore class or its stock market equivalent where all equities perform well (or fund managers) is the worst form of hell (Socialism might do well to learn this truth). To the master of the craft - There is a desperate NEED (and secret “want”) for external difficulty in order to apply the expertise acquired through internal drive. When Katrina hit New Orleans I noted two very distinct reactive differences. One type (with a need for external calm and status quo) was devastated (career bureaucrats). The second type I think saw the chaos as a challenge and call to perform (LTG Honore). The difference in response between the two was startling… </span><br /><br /><span style="font-style: italic;">And what of now? I think that any professional money manager (or dedicated individual investor who gets turned on by the game) who gets a sense of “fear” or trepidation or worry on what is I think shaping up to be a chaotic situation in the not too distant future is in the wrong profession or passionate hobby. I think there should almost be a CRAVING for financial chaos, markets run amok, and a slew of distraught Wall Street hedge fund narcissists searching for answers that never materialize. Finally, at long last…. After two decades where the whole damn class got A's on their term papers (individual stock analysis) there looks to be coming a day where the true craft and sound tested principles of rationality can be applied. Where the rising tide can't lift all the boats anymore. Perhaps it sounds callous to be seen as “cheering” for chaos but that's not it at all. The chaos is going to come with or without anyone's cheering. Equilibrium theory tells us that good times will be followed by bad (the longer and greater the good times then the inverse) – it's going to come. The only difference is in how it's rationally dealt with on a very individualized level. </span><br /><br /><span style="font-style: italic;">This is no different to the “competitive destruction” thread – where the thesis that chaos affords an environment of stratification with winners and losers. And much to my satisfaction take a look at what's happening in the reinsurance market where others are running for the hills – leaving Berkshire almost alone to take on the risk and get enormous premiums (what was it? Half the potential insured loss? Amazing)… That's what Berkshire Hathaway was built and designed for. It wasn't built for the whole damn class getting an A…. it was built for a real bitch of a final exam… Higher inflation? Higher interest rates? Rapidly falling dollar? Dollar's precarious position as world's reserve currency? Crashing emerging markets? Exploding ARM debt servicing? Falling housing market? Automatized sell orders on market ETFs which bring everything down? Tons of conflicting “activity” in options and futures markets? Confused messages from new Fed Chairman? Threats by Iran to strangle global oil supply? Exploding oil prices? Mass restated earnings at Fannie Mae? Corporate corruption in executive suite and on the passive boards? Narcissistic CEO at Home Depot? Predictions of huge hurricane seasons for at least next decade? Trade deficits? Rising protectionism? Nationalization of oil infrastructures in South America? Rise of socialist and populist impulses (windfall oil tax anyone?) in America? American manufacturing sector on brink of destruction? Pension calamities across American industrial base? The tapped out and hyper-indebted American consumer who essentially is pulling the rest of the world on his shoulders? Things that are supposed to be non-correlated are all moving down? Alas…Derivatives meltdown potential? Al Qaida and their threat to our way of life, social harmony and stability (who would have thought that peaceful Canada would be major target)? I think that about covers it for the questions posed on this final exam taught in this hypothetical yet very real 401 class of reality that the world is teaching us. To put ourselves in the right frame of mind perhaps the movie Cinderella Man is a good primer….</span><br /><br /><span style="font-style: italic;">Either the above and where it might lead turns one on…. or perhaps fills one with 1) serious doubts bordering on panic or 2) apathy bordering on denial (the most prone to actually panic if and when the time comes). Not at all unlike New Orleans - (You bet those levees will hold! Up to a CAT 3 for sure). Not a darn thing any of us can do to change the reality. All we can do is to properly define it and prepare as best we can. Perhaps this brewing storm never materializes – certainly that's possible – but then we probably muddle along an eternity with stagflation which may just be a worse outcome. A booming stock market? Heck we just had that – not very likely to happen again anytime soon. One might ask oneself how might you feel if your portfolio drops 50% and your purchasing power drops another 30%? Not possible? Hmmmmm… I think if one can come to real grips with that possibility now, or something even more dire – with a serious dose of self honesty – then you're built for leading through the worst of the potential chaos and in fact may even be looking forward to the “test.”</span>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-90368972947559237892007-08-10T12:57:00.000-05:002007-08-10T13:11:31.452-05:00Farmers Capital Bank Corporation Tender OfferI was scanning some of the SEC feeds that I receive and this notice caught my eye.<br />[<a href="http://www.sec.gov/Archives/edgar/data/713095/000119380507001874/e602370_ex99-a1i.txt">SEC Filing</a>]<br />[<a href="http://biz.yahoo.com/prnews/070719/clth052.html?.v=101">Press Release</a>]<br /><br /><span style="font-style: italic;">"Farmers Capital Bank Corporation (Nasdaq: </span><a style="font-style: italic;" href="http://finance.google.com/finance?q=FFKT">FFKT</a><span style="font-style: italic;">; "Farmers Capital") announced today the commencement of a modified "Dutch Auction" tender offer, approved by its Board of Directors, to repurchase up to 550,000 shares of its common stock (representing approximately 6.97% of its outstanding common stock) at a price not greater than $35.00 and not less than $31.00 per share. ... The tender offer is expected to commence on July 19, 2007 and to expire, unless extended, at 12:01 a.m. (Eastern Daylight Savings Time) on August 16, 2007."</span><br /><br />With shares available for approximately $29.90, this deal offers a return of 3.7-17.1% for an approximately 3 week holding period. Since this offer includes an odd-lot preference I purchased 99 shares today and immediately tendered them. This kind of arb provides some stability in today's volatile markets, although I did leave some money on the table with the <a href="http://biz.yahoo.com/ap/070809/expedia_share_buyback.html?.v=1">EXPE deal</a> ($29 tender price, exited for $27.70).Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-53414663493378434032007-07-26T13:58:00.000-05:002007-07-26T14:09:03.216-05:00Expedia Tender OfferExpedia, Inc. (<a href="http://finance.google.com/finance?q=EXPE">EXPE</a>) has announced a tender offer for 25 M shares between $27.50 and $30.00. The offer expires August 8 and includes <span style="font-weight: bold;">odd lot preference</span>. Shareholders with less than 100 shares will be tendered first. For more details go here [<a href="http://www.sec.gov/Archives/edgar/data/1324424/000095013407015803/0000950134-07-015803-index.htm">SEC Filing]</a>. 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.<br /><br />My first experience with odd lot tender offers was AutoNation, Inc. (<a href="http://finance.google.com/finance?q=AN">AN</a>) last spring and I was pleased with those results. This arbitrage is about as riskless as it gets.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-45997420658466502392007-07-19T20:14:00.000-05:002007-07-19T23:51:28.406-05:00Mid-Year ReviewReading 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.<br /><br /><div style="text-align: center;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="http://farm2.static.flickr.com/1289/855579461_ffb61f3070.jpg"><img style="cursor: pointer; width: 406px; height: 276px;" src="http://farm2.static.flickr.com/1289/855579461_ffb61f3070.jpg" alt="" border="0" /></a><br /><br /><div style="text-align: left;">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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><blockquote><span style="font-style: italic;">"I've seen the miracles of God with my own eyes. I also did a lot of bluffing."<br /><br /></span><div style="text-align: right;"><div style="text-align: center;">-- Jerry Yang<span style="font-style: italic;"></span><br /></div><span style="font-style: italic;"></span></div></blockquote><blockquote></blockquote><blockquote><span style="font-style: italic;">"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."</span><br /><br /><span style="font-style: italic;"></span><div style="text-align: center;">-- "Puggy" Pearson<span style="font-style: italic;"><br /></span><span style="font-style: italic;"></span><span style="font-style: italic;"></span></div></blockquote></div></div>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-33984656460501007952007-07-03T07:35:00.000-05:002007-07-03T07:46:04.541-05:00Footsteps of the MasterOne 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!Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1tag:blogger.com,1999:blog-4005042556618433054.post-60531491005251114952007-06-18T22:53:00.000-05:002007-06-18T23:05:43.624-05:00Premier Exhibition Joins the Big LeaguesPremier Exhibitions To Join Russell 3000 Index & Russell Microcap Index<br /><br />The information has been available since June 15, but the news release was today. PRXI has steadily marched upward since the end of May, which coincides with the Russell evaluation period. Russell prides itself on the objective measures for index membership. Also, membership is evaluated annually so stocks get to hang around for a while. To view other changes go here: <a href="http://www.russell.com/Indexes/membership/us/reconstitution/reconstitution_central.asp?wt.mc_id=sitenavRecon">Russell Reconstitution Central</a><br /><br />In some ways this is positive reinforcement and validation of PRXI's prospects as a company. But more importantly, I look forward to all those index funds forced to buyin. The buying should be pretty violent too (if it hasn't been already), as most of them want to reduce tracking error. Makes me curious if any hedgies or traders would make plays around index changes as this creates a forced structural change in valuation, as opposed to a fundamental change.Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com0tag:blogger.com,1999:blog-4005042556618433054.post-2458359128164588752007-06-13T10:57:00.001-05:002007-06-13T10:58:20.035-05:00CNBC "Fast Money"Hey gang<br /><br />In case you are interested, I will be on CNBC this Friday at 8 PM during the show "Fast Money". I will be part of a segment called "Grade the Trade" where students from various b-schools explain how they would respond to hypothetical situations. Check out the link for a clip of a previous episode:<br /><a href="http://www.youtube.com/watch?v=8D2xK694MN8"><br />http://www.youtube.com/watch?v=8D2xK694MN8</a>Dang Lehttp://www.blogger.com/profile/02619540878842380413noreply@blogger.com1