manualofideas

Miguel Barbosa's interview is phenomenal, and he deserves a ton of credit for making it happen. I do have an issue with Alice Schroeder because it seems she is now trying to make herself the "anti-Buffett/Munger" commentator. So, whenever the media wants an opinion on Buffett/Munger, they can turn to one of hundreds of people to give one side of the coin -- and then there's Alice to give the other. It seems like good business for her. I especially found her recent Bloomberg piece on Munger disingenuous. Anyone who listened to Munger's two-hour interview with Becky Quick would have gotten an appreciation for how much Munger actually cares about improving America and society in general. He is NOT a mean rich guy, as Schroeder seemed to portray him. Schroeder's approach to Buffett/Munger reminds me of the person who thinks that something should be rated 8 out of 10. But four people have already rated it a 10, so instead of rating it 8 and causing the average rating to be 9.6, she rates it 0 in order to get the average rating to go to 8. Schroeder seems to have decided to amplify any slight negatives she can find about Buffett/Munger. I have a problem with this because she is writing about two of the most ethical people in American business who have done enormous amounts for both capitalism and society at large.

People do all kinds of dumb things. It's sort of interesting that the doomsayers like gold. What are you going to do with it when doomsday comes? Eat it? Heat your cave with it? Then I'd much rather own a farm and plant my own fruits and vegetables. If you own gold, you are basically relying on other people to accept it in exchange for goods and services. So, you are again relying on what OTHER PEOPLE do. Gold is not safe, and it won't help you if doomsday comes. What do you think would happen to the "smart" investors who hoard gold if the economy does unravel and we have unrest. What would the revolting masses do with those who have the gold? Simply accept it and say, you are rich and we are poor? No, they would take your gold and put you in jail or worse. If you think you can escape the country and go somewhere else with your gold, good luck with that too. It ain't going to happen. So, the bottom line, as always: Listen to Buffett.

My guess is that yes, you knew it without looking it up. :D On a more serious note, Mandelbrot deserves a ton of respect for his mathematical genius, but I've always found it difficult to apply his insights to investing. If anyone has views on this, it would be great to hear them.

Sorry, this has nothing to do with the Biglari comp discussion, but I just noticed a hilarious banner ad at the bottom of this page. It said, "The Dollar Goes Down. The Euro Goes Up - You Profit Either Way!" I wonder what genius came up with that one. ;D

I fear that even on this Board we are getting suckered into Keynes's "beauty contest." The only question for us regarding Netflix should be, "Would I want to pay $8.5 billion to buy all of Netflix?" Everything else, i.e., whether the stock was up or down last week or is accelerating in some fractal-type way, is noise.

Netflix insiders have had automatic sale programs in place since the $30s. I think that says something.

Myth, I used to view insider buying as paramount in a deep value or distressed situation, but I have learned that sometimes the insiders get scared too and simply can't pull the trigger. To give you an example, I almost bought Select Comfort (SCSS) in March 2009 at $0.20 per share. Finally, I talked myself out of it because I thought, "If this is so cheap, why aren't insiders buying?" Less than a year later, the stock was at $10, so I would have turned $100,000 into $5 million. Expensive lesson that says don't be too dogmatic. Insider buying is a plus, but sometimes even the insiders don't have the guts to do what's right.

It has been shown that the number of monitors on one's desk is inversely correlated to long-term investment performance.

Probably jumping the gun again, but here is a rather positive press release Compton put out after the market close on Friday: http://finance.yahoo.com/news/COMPTON-RECEIVES-COURT-cnw-3607051477.html?x=0&.v=1 It reinforces the idea that the company is unlikely to issue any shares in connection with the new $45 million convertible note. Instead, the note will likely be redeemed for cash from a future asset sale. Once investors understand that shareholders will not be diluted, Compton's common stock should do quite well. But, once again, we don't want to jump the gun here, so everyone please take this with a big grain of salt and do your own work. ;) Disclosure: Long Compton.

We posted the following idea on Seeking Alpha this morning, and I thought it might be good to share it here as well. Compton is based in Canada and has been hitting value screens for some time, so some of you may already know it well. Would love your feedback on the idea. Compton Petroleum (CMZPF.PK) announced the successful completion of a major balance sheet recapitalization after the market close yesterday. We expect Compton's deeply undervalued common equity to attract incremental investor interest following this catalytic event. This morning at 8:20 AM ET, Compton CEO Tim Granger is scheduled to present at the Peters & Co. 2010 North American Oil & Gas Conference. The presentation will be available at http://phx.corporate-ir.net/phoenix.zhtml?c=69018&p=irol-EventDetails&EventId=3107656 Why is yesterday's bondholder consent for Compton's proposed recapitalization so significant? The recapitalization is the final step in a series of actions taken by Compton management to delever a balance sheet that became unsustainable in the face of depressed natural gas prices. Compton now moves from being a "distressed equity" to a natural gas exploration and production company with large, underappreciated reserves and a balance sheet that can support profitable growth. The steps taken by management over the past year have cut net debt from roughly $900 million as of June 30, 2009 to roughly $400 million post-recapitalization. This is a managable amount for a company with tangible assets of more than $1.8 billion and operations that are strongly cash-generative pre-capex. While Compton was forced to issue equity along the way, CEO Granger deserves credit for accomplishing much of the debt reduction without equity dilution. Compton sold an overriding royalty interest and several non-core assets for cash at implied valuations well in excess of the company's trading multiples, generating value in the process. How much upside does Compton offer investors? This is up for debate and will no doubt depend on the extent to which natural gas prices rebound in the future. However, the equity value compression Compton suffered simply because it was viewed as a distressed equity should now be removed. Investors should once again feel comfortable valuing Compton common stock by putting a valuation on the entire enterprise and then subtracting the amount of net debt. Compton's most recent annual information form filed with Canadian securities regulators discloses an after-tax PV-10 of proved reserves of $1.0 billion. Subtracting the post-recap net debt, we arrive at an equity value of roughly $600 million or $2.28 per share, representing upside of nearly 350% versus yesterday's closing price of $0.51 per share. The after-tax PV-10 of proved and probable (2P) reserves is disclosed as $1.4 billion, implying an equity value of $1.0 billion or $6.45 per share (based on 263 million shares outstanding). Depending on the timing of this upside, it could be reduced somewhat by the exercise of up to 138 million warrants, which have an out-of-the-money strike price of $1.55 per share and expire on October 5, 2011. If the just-completed recap is such a positive catalyst, why did Compton shares decline so precipitously after the recap proposal was first announced on July 19th? Actually, the beginning of the recent decline in Compton's stock price from $0.81 per share on June 18th to as low as $0.39 per share on August 27th coincided with the company's announcement that it intended to discontinue its dual listing on the Toronto Stock Exchange and the New York Stock Exchange, opting to stay listed solely on the TSE. The U.S. delisting notice was followed by a flood of selling by U.S.-based investors, even though the single formal listing saves the company millions and Compton shares continue to trade in the U.S. in the over-the-counter market under ticker symbol CMZPF. As the selling in Compton shares accelerated, investors became nervous about the proposed recapitalization, despite the fact that Compton had a strong hand since it had just raised cash through asset sales and was offering debt holders $184 million of cash as a component of the recap. Nonetheless, because of a technical covenant breach due to errors in giving debt holders notices of past asset sales, investors apparently became nervous that debt holders could go so far as to force the company into bankruptcy. Finally, a $45 million convert that is part of the recap contained no fixed conversion price, making it look like a "toxic" instrument. Investors apparently ignored the fact that Compton had negotiated the convert in a way that forced debt holders to convert if Compton wanted them to do so, but also gave Compton the option of redeeming the convert for cash, thereby forgoing any equity dilution. Given Compton's positive cash generation and the ability to raise cash by selling a minor non-core asset for at least $45 million, we believe it is highly likely the company will indeed choose to redeem the convert for cash prior to September 2011. Compton shares have embarked on a rebound over the past week, presumably as investors began to realize that the recapitalization transaction was likely to win bondholder approval after all. This is indeed what happended yesterday, paving the way for a fact-based rather than a fear-based valuation of the company. As facts prevail, we believe Compton will finally start delivering the performance that shareholders have been denied for too long. Disclosure: Long CMZPF.PK

ValueCarl, please fill us in on what you are talking about, because I have no idea, especially when you mention Buffett and insider trading in the same sentence. Thanks!

Very interesting idea, thanks! Just so we can assess the downside, could you tell us the equity values of the EV range in the debtors' plan is used. Thanks.

Fuqi under investigation by SEC, stock tumbles http://finance.yahoo.com/news/Fuqi-under-investigation-by-apf-2042096.html?x=0&.v=1 Notice the big cash buildup in the latest quarter of unaudited financial statements. Certainly rhymes with what happened at some other U.S.-listed Chinese companies...

Underperforming companies and worried management teams may soon start buying the domain name enhance[company].com ;D

hilarious. thanks for sharing.

A few years ago a Chinese company called China Expert Technology (CXTI) was discovered to be a fraud. They also had a brand-name auditor if I recall correctly (a member firm of BDO Seidman?). Here is how CXTI did it: The auditor signed off on their year-end financial statements, for our purposes this might be December 31, 2009. The subsequent quarterly statements are unaudited, so management can invent them if they wish to do so. The next audited financial statements for the year ending December 31, 2010 would not be due until March 31, 2011 or June 30, 2011, depending on whether the company files 10-Ks or 20-Fs. So, management has more than a year to put out fake quarterly financial statements in an attempt to get the share price up while disposing of their own shares in the company (probably without making the requisite SEC filings), and/or stealing the actual cash on hand. This seems to be what CXTI did -- they disclosed a relatively modest cash number in the yearend audited financials (this was cash from the IPO or something like that). Then in the unaudited quarterly financials they made it look like cash was growing by leaps and bounds and the company was performing incredibly well. By the time the next year's audited financials were due, management had stolen the actual cash that was there and was gone without a trace, and U.S. investors (including Jeff Feinberg's fund) were left holding the bag. There was never any kind of justice nor did U.S. investors see a penny. What's interesting with CCME is that we are also seeing a very rapid increase in cash following the audited financials as of yearend 2009. At December 31, 2009 cash was $57 million. Then on March 31, 2010 it was $114 million (unaudited), and on June 30, 2010 it was $139 million (unaudited).

Agreed that QE is not the solution, but it is one thing: money printing. How can you decry QE but then conclude that one should hold cash? Cash is exactly the thing that QE can destroy. Why would you trade the hard work you have put in over the years, which has resulted in the savings you have, for something that Bernanke can produce just by pressing a button? Cash is one of the worst things to own right now, except for long-term fixed-rate bonds. If you know that Bernanke will go wild with QE, then put your cash in things that cannot be printed -- cheap high-quality businesses like KO, or commodities. I feel much better owning equities -- even if they decline in the short term -- than owning pieces of paper that may have little real value once Bernanke is done with QE.

Pulp prices still doing OK, flat for another week: http://www.paperage.com/foex/pulp.html At some point, folks will have to stop saying "I'm afraid of the eventual downturn" and start realizing that pulp prices remain well within the profit zone for Fibrek. I don't think I've ever seen a stock selling for a quarter of tangible book value with these kinds of positive fundamentals, improved balance sheet, and a smart, engaged shareholder to ensure management will not squander value. I know we've all been disappointed in recent months because Fibrek didn't deliver the upside we thought was deserved, but this investment may yet take a turn for the better. Disclosure: Long FBK.

Buffett was buying as much Berkshire Hathaway stock as he could get while getting ready to close his Partnership. When he took the helm at Berkshire, he never stopped looking for and making investments in cheap public companies, regardless of the market environment.

All we are talking about is finding 5-10 companies out of 10,000+ public companies that one understands and considers deeply undervalued. All one needs in order to make a lot of money while maintaining reasonable diversification is 5-10 good investments at a time. This should be doable in (almost) any market environment, but especially after the Dow has been flat for more than a decade.

Why do we always seem to get sidetracked in these macro discussions? Why not look to Buffett, the master himself? He has said time and time again that investing is a little like playing golf. You don't pick the holes, you play all of them and do your best. I don't see any market timers close to the top of the Forbes 400. Berkshire is pretty much fully invested right now. I am also fully invested and wish I had more money to invest. There are just so many incredibly compelling investments out there, companies that are clearly undervalued. Could they go lower in price? Sure. But if you're buying $100 for $30, do you really care if it goes to $20 before it goes back to $100? Yes, it would be nicer to buy it at $20, but that's where the market-timing folly comes in. Just like you don't know whether it will go to $20 from $30, you don't know whether it will go to $15 from $20. Meanwhile, you are pretty certain that it is worth $100. A friend of mine always gets nervous when stocks go down and says, "It's OK if I miss the first 10% of a rebound. I'll make money on the remaining 50%." In reality, he always misses on the big upward moves of bargain stocks. After the first 10%, he says, "Well, maybe this is just a headfake. Let me wait a little more to make sure it doesn't go right back down." The moral? Forget timing the market or individual stocks. Buy them when they are undervalued and then wait/monitor. Don't let some nebulous notion of "the market will go down" keep you away from the bargain that is right there for you to own. By the way, cash is NOT safe! Do you really feel rich if you own something that Bernanke can print in unlimited quantity any time he chooses? I feel safer owning a piece of a good business at a good price. Good luck!

Andy Grove is talking about the admirable goal of U.S. job creation, but he sounds nostalgic for an era that is long gone and will not come back, unless there is a global military conflict that would kill globalization (and a lot else, too). The notion that the world has lost something because the U.S. unemployment rate is at 10% rather than 5% while tens if not hundreds of millions of people in the emerging world have a chance to come out of abject poverty is quite nationalistic. Instead of trying to go back to an era where a job created in India or China is a job "lost," Grove should be pushing to accelerate global but fair trade. The U.S. should insist that emerging economies adopt working conditions that free their workers from de facto slavery while at the same time raising the cost of foreign-produced goods so that U.S. workers can be competitive again. This would be much healthier and more sustainable policy than trying to reintroduce tariffs on foreign goods.

We did a report on some companies that own land or other real estate. It's a bit dated but may be somewhat useful as an intro. http://manualofideas.com/files/content/pmr200906.pdf

Actually, the cost of heart surgery might well be higher WITHOUT mandatory licensing. Licensing lowers patients' costs of determining which surgeon is qualified enough to perform heart surgery and which one is simply an impostor. If there was no licensing, patients may feel compelled to pay up for the best surgeons -- those who have succeeded in building a "brand" for themselves. The brand building process could result in surgeons' marketing expenditures being a lot higher than in a scenario in which licensing is required. You could actually "restrict" supply without licensing because many of the folks claiming to be surgeons would not find any patients willing to take the risk. You would have a partial breakdown of the market mechanism due to imperfect and asymmetric information. Nobel Laureate George Ackerloff wrote an interesting paper that has a bit to do with this line of thinking -- I think it was called "The Market for Lemons," and it looked at the used car market.

That's interesting, thanks. So it sounds like if one intends to be a passive investor, 10% would be the appropriate threshold. This is also what I've typically seen in terms of the Early Warning Reports that are filed on SEDAR.