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vinod1

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Posts posted by vinod1

    What does Value Investing mean to you

    in General Discussion

    Posted

    In my mind I categorize any investment into one of the following

     

    1. Exceptionals - These have two properties: (a) Businesses which are virtually certain of increasing IV over a 10 year period. (b) Businesses that can survive a 5 year period representing depression like conditions. These businesses have very low levels of business risk either due to the nature of the business itself or due to the owner/operator. If you buy these at reasonably prices, the only question is whether you are getting 5% or 10% or 15% returns, the chance of loss of capital even inflation adjusted is very low. I do not think it is consistently possible to make above 20% returns on a portfolio of these investments.

     

    2. Deep Value - All other businesses that do not meet the criteria above. The quality of the businesses within this category varies of course. These can be net-nets, discount to net asset values, discount to sum of parts, distressed turnarounds, etc. These would give an opportunity to earn really high rates of return.

     

    I try to balance between the two though not in equal proportions. My belief is that if we ever encounter near depression conditions, investments of type #2 above are going to be wiped out. Investing complete portfolio with little cash levels purely in type #2 involves some kind of "willing suspension of disbelief" that ignores risk of severe economic stresses for an extended period of time.

     

    The above classification helps in position sizing, portfolio allocation and cash levels.

     

    Going through 1700 Value Line stocks I made a list of about 120 potential candidates of type #1 that I am in the process of digging deep into. So far I only have about a dozen candidates that I am comfortable to label as type #1 (and most of it involves piggybacking on Buffett's comments and portfolio a.k.a drinking the kook aid).

     

    Nothing original here, all the above has been copied from various investors. From Seth Klarman to Myth.

     

    Vinod

     

     

    Some Views on HP and Apotheker

    in General Discussion

    Posted

    rranjan, I think you're probably right about that.  But since they're not doing that and the stock got slaughtered, is HPQ a good deal today at 6.1 P/E?  That's remarkably cheap. 

     

    They have been tracking for non-GAAP earnings in excess of $5 in FY11.  And management continues to claim $7 in 2014.

     

    Will they make deals that will jeopardize the EPS targets they are promising?  In the end, they will be graded on only one thing.

     

    I did not find any reference to the 2014 $7 EPS target in the Q3 Presentation or Conf Call. Given that they are making so many changes, management has a good case for saying that the conditions have changed so that the EPS target is not valid anymore - I have a nagging suspicion they made all these changes to avoid meeting the $7 target.

     

    Vinod

    Which Would You Say Emulates Early Buffett the Best: GLRE, SHLD or BH?

    in General Discussion

    Posted

    Each of these companies have one ultimate goal...The wise distribution and reinvestment of free cash flows with the aim of constant compounding of book value.

     

    I just want to get your idea of who most reminds you of a young Mr. Buffett of the following three men:

     

    1. Einhorn

    2. Lampert

    3. Biglari

    None of the above Einhorn and Biglari lack his ethics and Lampert lacks his humility ( no humble person would try to turn around Sears for crying out loud ) I think the person who best channels the young Buffet is our gentle host Parsad I just do not know much about his ukelele proweress however to be certain LOL ;D

     

    +1

    HP to Spin Off PCs, Eyes Software Purchase

    in General Discussion

    Posted

    I am surprised at the level of incompetence of the management and board. The direction they are heading makes sense but not the way they are going about it.

     

    1. If you are going to concentrate on software, I would think they would put together a portfolio of related software products over a 2-3 year period. You would try to pick up any companies opportunitistically on the cheap or at least at a reasonable price. They just seemed hell bent on making a large acquisition just to show off their intent.

     

    2. If they want to divest PC business, I absolutely understand. What I do not get is making it public before they have firm plans. Now they have pigeon holed themselves into a position and they would not get the best price possible for this segment.

     

    I am getting the feeling that all these unnecessary actions at this time is an attempt to get away from the fact that they had publicly committed to a $7 EPS by 2014. Management must have realized that this is not achievable and these changes would provide a mechanism for management to not meet the target but avoid the responsibility.

     

    The stock is cheap with a modestly incompetent management but they seem to be much worse.

     

    Vinod

    Understanding TIPS

    in General Discussion

    Posted

    How can I calculated the inflation assumptions built into TIPS prices?

     

    You need to look at individual bonds as inflation expectations are priced at different rates across the term structure. For example as of this moment we have (from http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/ )

     

    10-Year Treasury has a yield of 2.22%

    10-Year TIPS has a real yield of 0.01%

     

    So the inflation expectation is 2.22 - 0.01 = 2.21%. Since TIPS do not theoretically have inflation risk, there is a certain amount of inflation risk premium built into this 2.21%. If we assume the inflation risk premium to be say about 0.5% (just a guess), then the inflation expectation can be said to be 2.21 - 0.5 = 1.71%. Most people just assume inflation risk premium to be negligible and just use 2.21% as the inflation expectation.

     

    You can do this across the different maturities to get the inflation expectation at that particular term.

     

    Note: The nominal and inflation Treasuries used above have a slightly different maturity dates since they are not issued on the same date.

     

    Vinod

     

    Eric - You Were Right

    in General Discussion

    Posted

    EDIT:  I also have 30% in MBI.  Then a fair chunk in WFC calls.  Oh well, you might not hear from me again after they all go under.

     

    I'm wondering what kind of reaction MBI share price would have if they annonce 1 Billion $ settlement with BAC concerning the putback.

     

     

     

    They would crash like hell! MBI already booked $2.7 billion on their BS as if it has been recovered (if I understood it right). I think they are looking at something around $5 billion.

     

    Vinod

    Eric - You Were Right

    in General Discussion

    Posted

    I was fully invested this whole year, but I changed things around to lever up -- selling things like DELL that held up well, down only 10% from where I'd bought.

     

    Things I added:

    5% of portfolio put into BAC $10 strike calls

    17% of portfolio put into BAC 2019 warrants.

    34% in AIG 2021 warrants.

     

    Yes, die by the sword perhaps.

     

     

    Wow! That is like 200% nominal portfolio exposure on just what you added!!

     

    Vinod

    Now the U.S. is AA+ according to S&P

    in General Discussion

    Posted

    Ratings agencies as a policy in general and historically in practice have limited a corporations debt ratings to its country's credit rating. The basic theory is that the corporation is dependent on the country's legal/institutional framework and therefore never a better credit risk than the country itself. (Dusting off old CFA notes :) )

     

    S&P and Moody only make specific allowances i.e. under particular circumstances where a corporation has higher rating like a multinational that has the support of a parent company with a higher rating.

     

    Vinod

    Is there a fix to this? Really...

    in General Discussion

    Posted

    I agree with lower growth rates but that implies lower rate of growth in standard of living - not declining standard of living. If you take out the expected increases in Medicare and Medicaid costs US does not have even a tiny bit of problem in meeting commitments over the next century with roughly existing tax rates, expected economic growth and sustainable debt levels. So the main issue that needs to be dealt with is improving efficiency, limiting fraud and restricting some of the treatments at end of life in Medicare and Medicaid. Many have proposed solutions to these issues but it is more a matter of political will. I guess the public has to feel some pain before there would be a push to solve this problem.

     

    I do not really have any concerns on the long term future of US. The current problems are puny compared to that faced by US in the past. Civil war, Great Depression, World War 2 where the very existence of the country is up in the air.

     

    We might get a slightly lower increase in the standard of living. So what? I would very happily take this compared to say facing the GD or WW2. Bailouts, money printing, deficits? So what? We get some inflation for a few years (70s) or maybe at worst be like Japan (in 90s) but very unlikely. I see some turbulence in the next few years, but personally if given the choice of the country or the century to live in, US or any of the developed countries at the current time as a no brainer.

     

    Just my ramblings, but you asked. :)

     

    Vinod

    LEAPS, Portfolio Cash and Leverage

    in General Discussion

    Posted

    I have recently moved towards using LEAPS (primarily in the money Jan 2013 Calls) in my portfolio. Where as in the past I have primarily invested directly in stocks. At this time I am long nominally about 80% of my portfolio size. This uses up about 30% of cash - 15% directly in stocks and 15% in LEAPS. I have the rest of about 70% in cash.

     

    I am using LEAP's for four reasons

    (1) To get around the fact that I have about 30% in a retirement account where my only options are index funds and cash equivalents.

    (2)  Use what seems to be not too expensive non-callable leverage at this time.

    (3) As an alternative to buying put options to hedge some of the portfolio. Buying LEAP's seemed to me to be better than using up the cash to buy stock + buy put options to hedge some of that exposure.

    (4) As a way of locking in an attractive price in the future for stocks that I would be happy to own at that price.

     

    Board members have commented on their cash levels in a recent thread and it got me thinking on how they are measuring the cash levels and how I should view my own cash exposure. I would really appreciate if you could comment on a few items

     

    1. How do you measure your cash levels? In the above do I really have 70% cash or should I really be thinking of my cash level as only 20% (100% - my nominal 80% long exposure)?

     

    2. How net long as a percentage of portfolio would you be willing to go if the specific stocks in your circle of competence get to once in a generation level of cheapness? I have a roughly 150% net long as my own maximum and wanted to clearly think through the risks in this approach.

     

    3. A 15% of portfolio in LEAP's is giving me about 65% of portfolio net long exposure. I am not sure if this is incredibly conservative or incredibly reckless.

     

    Looks like good times (sharp market declines) are coming our way and I realize it would be easy to lever up very easily and get wiped out. In the Great Depression, it is said the really smart people waited for the stocks to get down 50% and loaded up only to then see the stocks fall a further 80%. I am hoping to learn from the experience of fellow board members and any recommendations you have on using LEAP's.

     

    Thanks

     

    Vinod 

    So . . . Time for QE3?

    in General Discussion

    Posted

    I do think we would have QE3, it is just a matter of when. I hope this time they target the long end of the maturity curve (10 year treasuries) unlike QE2. In any case I think the actual effect on the economy is going to be pretty slim. If Ben announces QE3 and all that it entails is shaving his beard, the market would still respond very positively.

     

    Vinod

    Berkowitz Semi-Annual Report is Out

    in General Discussion

    Posted

    Re: some of the BOA comments on this thread and the other Berkowitz thread...

     

    Bank of America Corp. (BAC) Chief Executive Officer Brian T. Moynihan plans to answer questions from “skeptics” among fund manager Bruce Berkowitz’s investors after shares of the biggest U.S. lender fell to a two-year low.

     

    Berkowitz’s Fairholme Capital Management LLC will hold a 90-minute conference call with Moynihan on Aug. 10, the manager said today in a statement. The event will help investors of Fairholme, with 92.6 million Bank of America shares as of March 31, understand why the firm is a core holding, Berkowitz said.

     

    http://www.bloomberg.com/news/2011-08-03/bofa-s-moynihan-to-answer-skeptics-in-berkowitz-conference.html?cmpid=yhoo

     

    Bad omen :) The last time he brought CEO of Pfizer on just such a call, he sold out of the position in a few months.

     

    Vinod

    Bruce Berkowitz on BAC

    in General Discussion

    Posted

    BAC has changed very significantly in the last few years so I would not put too much emphasis on the reported ROA, ROE of the original BAC. We have Fleet Boston, MBNA, US Trust, LaSalle, Countrywide and Merrill Lynch. Merrill Lynch itself is valued at over $50 billion in early 2000s before much of the housing boom. It might be more useful to look at current and potential PTPP earnings given the built in cost savings that are only a matter of time before they would be realized - foreclosure resources and other costs, retirement of more expensive Long term debt, etc. No need to factor in any synergies at all. They dont need growth, they just need to work through existing problems to generate pretty attractive returns on whatever metric you care about ROA, ROE, etc.

     

     

    Vinod

    Basel - risk weighted assets; anyone know the percentages?

    in General Discussion

    Posted

    Anyone know where to find a complete list of all the assets a bank could have and their corresponding basel risk weights?

     

    For example, I know AAA sovereign debt has a 0% risk weighting, but AAA corporate debt has a 20% risk weighting. Yet, I don't know what would be the risk weighting for foreign equities, heloc loans, 2nd mortages, preferred stock...and so forth.

     

    I am trying to figure out what kind of tier 1 capital BAC would have if they sold off some of their "riskier" assets in order to increase their tier 1 capital...but without a complete list of their associated risk weights, I can't really figure it out.

     

    Thanks =) 

     

    Risk weighting is done at a much more fine grained level - using loan level data. So I do not think you can calculate it from the data in financial statements. Also there are lots of off-balance sheet items like derivatives and standby letters of credit, etc that need to be included. Finally it is not just a cumulative weighted addition but it has some complicated (means I do not understand :) ) calculation that takes into account the correlations. Different companies can come up with different total RWA for the same balance sheet. Dimon has complained about this in the past.

     

    Vinod

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