netnet

The commentary on the changes/unrest in the Middle East has largely been not talked about the really big issue from an investor's perspective. What about Saudi Arabia? Regardless of whether or not unrest in Saudi Arabia is a low probability event (I don't think it's really that low) or whether the unrest leads to either an overthrow of the monarchy or cutting off oil,(probably low probability events) ANY unrest may send oil up by 25 to 75%. The protesting Shiites in Bahrain may spur their co-religious in the Eastern provinces of Saudi Arabia. So the question is: how to play it in one's portfolio as a whole and what specific securities will benefit from the tumult? I honestly do not know. (I really do not like ETF's and I am not that fond of shorting. Although given the technical issues with ETF's shorting the double short oil might be the way to go.)

Here is some amusing (but instructive psychological) "comedy" for your weekend reading: Brought to you by no other than Countrywide's Mozilo. As reported in the NY Times, Mozilo, founder of Countrywide and also payer of the largest assessed SEC sanction by a public company executive, said that he compared Countrywide to BH. He told the examiners of the Federal Inquiry Commission that Countrywide’s stock grew “25,000 percent over 25 years — a much better performance than Warren Buffett at Berkshire Hathaway. This is documented.” This is so ludicrous that is beyond belief. Needless to say, when it sold it wasn't beating BH. But what is instructive is what psychological factors are at work here? At a minimum, I have a lolapalooza of psychological tendencies: Dissonance: he thought he built a great company, but it went poof. Commitment: he has been the public face of the company most of his adult life. Defensive reaction to perceived threat All of which cause an inattentional blindness, i.e. when the company sold its return was alot less. The quote from the NY Times follows below: he compared Countrywide to Berkshire Hathaway, the conglomerate run by Warren E. Buffett. He told the examiners that Countrywide’s stock grew “25,000 percent over 25 years — a much better performance than Warren Buffett at Berkshire Hathaway. This is documented.” He is right, to a point. From 1982 to August 2007, Countrywide’s stock price gained nearly 25,000 percent, according to the research firm Thomson Reuters. Berkshire’s investors experienced similarly strong gains over the same period. But Mr. Mozilo failed to acknowledge what came next for shareholders. Countrywide plummeted more than 90 percent, to around $4, in February 2008. At the nudging of government officials, Bank of America bought the lender for $4 billion, or roughly $4.25 a share, in July 2008. Mr. Mozilo lauded the deal, telling the commission that the sale “did not cost the taxpayers a dime” and saved more than 50,000 jobs. (NY Times 2/17/11 Dealbook by Protess) Note that Bank of America is still paying for the deal!

Here is an interesting video with Alice Schroeder discussing an investment Buffett made in the 50's in the Mid-Continent Tab Card Company. He invested in company that made what I assume are punch cards for computers. They called them tab cards. The title of this thread is a bit of a come on, but only a bit; in today's lingo, this would have been somewhat of a late stage VC investment. Buffett would not invest at the start because of what Schroeder calls catastrophic risk, i.e. could they compete against IBM plus the lack of historical data, proving the viability of the business. The questions she said he asked were: Can this company compete in this high margin business against IBM? And can I (and the company) make 15% per year compounded To me, what is most important is Schroeder's discussion of his investment process--no (projected) earnings models rather sound business analysis plus historical data. One good quote or paraphrase: With a good margin of safety, you don't need an earning projection. I won't step on the punchline and tell you what he made on the investment. enjoy! Netnet

Do you have a link to Rule's discussion of Ram Power? thanks,

Did anyone catch any of the Daily Journal meeting?

Now that these have run up, what would be the best way to trade them now? Wait till after D day see how it shakes out and then trade a few days later?

that's a bad joke, speaking as a Californian.

I would have to disagree with you on this point. Although (I believe) leaps should only be used sparingly, there are a number of reasons to buy them. First of all, they could simply be mispriced. Buying a dollar for .50 is always the way to go, as long as you know that it isn't counterfeit, you are not passing up a .30 dollar, and your total risk profile is okay. The specific question on this topic is buying on an event. A binary event does not necessarily have to have a downside to make the leap useful. The math works the same without the downside. Note that your portfolio has to structured correctly for your actual risk and for the margin requirements, if you want leverage. (Personally, I would not buy a leap without a catalyst, but a few people on this board bought the mispriced FFH options when they were being dumped by the short sellers. For me the problem without an event type catalyst is that you could be right about the company but wrong on the timing.) I also find it interesting that you call the limited downside on leaps a put. That is an interesting way to conceptualize it. happy investing in 2011 Netnet

Aggressive marketing is not a problem, lax underwriting is!

In addition to providing liquidity for estate purposes, selling to BK gets you capital, if your business needs it. BK does not pay rock bottom prices for private companies. (Generally they pay a reasonable price, certainly not top dollar, but also not a distress price. It's a different game buying private companies than buying in the stock market. The private company market is not the manic depressive stock market.) Some business owners do not want the work of a lifetime, i.e. their business, to be (potentially) wrecked in a private equity deal. They want the business to be a legacy that lives. On the other hand, some owners just want top dollar.

This was a classic. I hadn't read it for a number of years. Great re-read. Also the Bibliography has the following citation: Business: What Lawyers Should Know by Charles Munger printed in the Dec. 21, 1997 edition of the Outstanding Investor Digest I can't find this anywhere. Has anyone seen it?

Thanks for all the suggestions. Happy Holidays, Nick (Netnet)

I happened to be at a holiday party with an executive who works for a private company that is just the sort of business that BRK buys. Does anyone have any suggestions as to how to introduce the company to Buffett? (I am actually about to join a small IB, but this company/transactions is way bigger than anything they have done. Further, neither I nor anyone has an engagement letter with the seller!) Clearly this is a shot in the dark, but well worth firing even blanks.

Well I concur with most of what has already been said. With the following caveats: Remember as I think you are hinting at, the point is building your circle of competence. So start with an industry you know and understand it thoroughly. Read the trades, the AR's, 10q's, 10k's and related filings of the company, its competitors, suppliers and customers. Figure out what structure of the industry is (viz. Michael Porter) Of course, you have to understand the rules of accounting, particularly as they relate to the industry in question. Find another industry, repeat One of the points of all this is to develop a feel for the industry and the history of the particular company and the management. Now remember that even this thorough approach has a draw back other than the time issue--suppose you pick a bad industry in which to invest. To be a buggy whip analyst or internet isp investor is not going to make you any money. Don't fall in love or (in hate with an industry, see the railroads 10 years ago. You need to stay flexible.) So you have to remember that you are still looking for 10 one foot hurdles not one 10 foot hurdle! Munger and Buffett hated railroads for years, but things changed. The flip side of the above is that reading the 10k's of a company in an industry you do not understand is not that productive, until you know the industry and the business. (Now, none of this really applies directly to special situation investing--arbitrage, bankruptcy, spinoffs, these have their own dynamics and you still need to try to get informational advantage etc.)

If my reading is correct, it's a non-issue. He moved it to a family trust. Netnet

I'm going to an accredited investor's conference in San Francisco this Wednesday, from 3 to 5:45. I don't know the presenters. (I am hoping it is not a sales job given that it is co-sponsored by a couple of Ivy League Alumni Clubs.) The first talk is an analysis of BRK's latest purchase and Combs, (which is why I'm going) It's free if you put in hcsf as the code. http://www.accreditedinvestorconference.com/agenda.htm Drop me a line if you are going.

precisely, short or get a put on a geared long bond ETF.

She is very smart; clearly, Buffett chose her for a reason. Interestingly, one could write an explanatory narrative about their relationship. They were great. Match made in heaven. Buffett thought he wanted her to write what she thought was the truth (magical thinking as she calls it) and boom she writes it; he is really upset and just cuts her off. She feels hurt. She went from an "intimate" of his to nothing. She lashes out a bit, blah, blah, blah... In any case, she is really smart; she knows Buffett better than any other author and she has interesting things to say. Well I had dismissed her completely as a "quasi-spurned lover" and I am now re-evaluating my opinion of her. She is worth reading even when she is a tad resentful at times, or so it seems to me.

James Altucher already wrote a book called Trade Like Warren Buffett . It covered some of his arbitrage deals.

Are the leaps historically mispriced or do you think that LUK is so cheap that it should be up in 2 years.

Scorpion was responding to the quote at the bottom of the post, that BRK out performed LUK. It did not. Thanks Scorp. I knew this was wrong; I knew that LUK had outperformed BRK over the years, but I was going to my fact checking over the weekend. Thanks. The points are: 1) Nullius in verba From the Royal Society, take nobody's word for it, i.e. do your own research! (from Mauboussin) 2) Just because you are less than 30, doesn't mean you should not have a 30 year investment horizon. Looking for, finding and investing in a 30 year compounding machine makes for a sweet retirement. 3) Some people have suggested BRK rather than LUK. Well LUK has the better record, younger managers, and a smaller capital base. On the original post, is the point the method of compounding, or the compounding itself that is most important? I would argue that LUK is unique, as is BRK etc. and the thing to do is find that compounding machine. Wrong, Wrong, Wrong

Really. I don't envy you that! Netnet

Interestingly, Warren Buffett calls his purchase of a controlling interest in Berkshire Hathaway as his "dumbest" stock purchase. He had originally bought the stock in an arbitrage play and had an agreement from the president of the company to tender at 11.50 and the president offered at 11.375. Buffett was incensed enough to accumulate a controlling interest and fire the guy. Had he not purchased BRK, he says that he and his investors would have been 200 billion dollars richer!! Talk about an little arbitrage position that goes bad. You have to love it. http://www.cnbc.com/id/39710609 (By the way, way back when I was able to ask Munger about buying BRK. I said I had looked at Berk and analyzed it and it seemed to me that buying it was a mistake. He looked at me as if I was a simpleton. Said yep and asked for the next question!) Netnet

A few points: In your analysis, you are specifically talking about the latter stages of Buffett's career. Remember none of us here has to deploy billions of dollars of capital. So, you might adopt his earlier style, which would be more appropriate; the earlier partnership activities included arbitrage. (See partnership letters) Apropos to what you wrote, remember management is critical to the "latter Buffett" investing style. Although, you might be implying it, specifically once you have assessed the intrinsic value, you need to have a margin of safety.

Why not just by Steam and Valve and ActiVision both? A common tech investment technique to buy a broader swath of an industry.