Rabbitisrich

Packer16, did you come to a conclusion regarding the treatment of FCF for companies with a high debt load? I take a simple approach based upon management's intentions. If management intends to reduce debt: 1. If debt above WACC--or my estimate of required return--then treat as an investment with no adjustment to FCF (I use owner's earnings). 2. If debt below WACC, then deduct the principal reduction from FCF. If management is ambiguous or does not intend to reduce debt: 1. Add a risk premium to required return. 2. Pray. The first situation tends to overstate the value since I don't make an adjustment to required return while the company is paying down the debt. The second method will increasingly undervalue the company assuming that asset growth outpaces debt. I'd be interested if you find a better method.

I enjoyed the article and the odd turns of mind of the author. Cui bono speculations tend towards specious arguments, but the author's point about the relationship between global risk premium and trade deficits is well taken.

Are you reducing principal for debt in which the costs exceed the WACC? In that case you might consider the principal reduction as an investment, in which case you wouldn't make an adjustment to FCF. If the debt cost is below WACC, then you are making a principal reduction for balance sheet or contract purposes, i.e. you are forced to make the payments. In that case, you should reduce the FCF by the principal payments since those monies are not unencumbered.

http://www.businessweek.com/ap/financialnews/D9FRG5H80.htm It looks like the Redneck Riviera will open for business tomorrow.

If I had to sit through a abstinence lecture in high school, I'd rather hear from someone with experience than someone who married his/her first erotic partner.

Thanks for the reply.

The Dash proxy seemed to suffer from a lack of focus. He criticised, fairly in my view, failures on the part of management, but in such a broad way that the only practical solution would have been to replace management. Shareholders didn't have much of a specific platform to judge so the proxy became a battle of reputations.

To the contrary, it shows 4 bids, the most recent dated May 10th at $750. The minimum bid increment is $100. That gives a minimum next bid of $850. The auction is open for another 14 days. In most long time period open auctions like this, the bid price prior to the final minutes is of no consequence whatsoever relative to predicting the hammer price. This is a signed first edition, donated by Seth himself, so I presume it is in reasonable condition. I doubt that this auction will close for less than $1000. Thanks for the correction, though I note that half of those bids come from a username that matches the charity.

Twacowfca, is this relationship conditional? Do you have an expectation of when the correlation breaks down? From the chart you provided, a ~15% change in the monetary base resulted in a ~24% change in the S&P, which doesn't seem to be sustainable.

There is an ongoing auction for a signed copy of Margin of Safety that has not received a single bid. It is currently set at a minimum $850. Those $1000 quotes might simply be asks or maybe they were settled prices before pirated copies emerged. http://www.charitybuzz.com/auctions/Prize4Life/catalog_items/207125

Just last night, I posted a Seth Klarman quote that is probably appropriate, "Choose your remorse." A certain percentage of my portfolio is very sensitive to the economy; they will do fine at ~0-1% real GDP growth, but they will trip over an inflection point if there is another major macro shock. However, I've right-sized my portfolio to compensate for that quality. I think the extreme conditions Klarman fears may occur, but I would rather add to my companies with powerhouse balance sheets and macro resistant business models than try to directly hedge a scenario. Unlike a pro money manager, I can adjust my return expectations and focus instead on purchasing at levels that promise some positive real return.

http://www.nytimes.com/2010/05/19/business/19client.html?src=busln Page 4 demonstrates how Goldman might, intentionally or otherwise, use legal tactics to worsen the equity value of its clients.

I like the fact that Klarman hewed to his principles throughout the 90s despite underperforming the major indices. It actually impressed upon me the importance of looking beyond the nominal returns to understand an investor. And he also provided one of the best quotes about investing: "Choose your remorse."

Cardboard seems to have the right way of it given the phrases "diversification" and "Delaware". It doesn't appear to be especially material given the size of the transfer relative to FRFHF's portfolio, but if anyone is in a masochistic mood, here is the Delaware code: http://law.justia.com/delaware/codes/title18/c013.html

So we are all in agreement that Charlie Munger had something to do with it?

As I understand, WRB doesn't file a 13f-hr because it manages less than $100 million in qualifying securities. Most of their equity exposure seems to be in the form of convertible debt and/or preferreds, which may explain the $0 cost available for sale holdings. I'm no expert on WRB so corrections are welcome.

http://www.youtube.com/watch?v=_3VgkooUpMg&feature=related I haven't had a chance to watch it yet, so I have no idea if it's worthwhile.

Txlaw, ACA possessed the right incentives for a CDO manager and it also carried the appropriate background for the job. As such, Goldman Sachs fairly marketed ACA as the final vetting agent. Any grey areas concerning the quality of information received by ACA were not in GS's purview; the Abacus owners would have assumed that ACA would properly weight such information. Even if Paulson brought insane assets to the mix, if you trust ACA, then you assume that ACA would evaluate the assets independently. Holding GS responsible for a lack of disclosure is akin to holding them responsible for not disclosing that a very stupid guy advised ACA on some very stupid bonds. The relevant information is ACA's role, and the investors should have based their decisions accordingly.

Propublica has a very interesting article about a hedge fund, Magnetar, which allegedly purchased equity positions in synthetic CDOs to influence the composition of the assets. Magnetar received cash flow from the CDOs and channeled the funds into long CDS positions. Magnetar further increased its odds by insisting that the CDOs it helped create had an unusual construction. Typically, cash flowing to the last-in-line equity buyers is cut off at the first signs of trouble -- such as a rise in mortgage delinquencies. Those at the top of the CDO -- who accepted lower returns for less risk -- received that cash, leaving none for the high-risk holders. Magnetar wanted its deals to be "triggerless," meaning lacking these cash-flow dams. When the market turned shaky and homeowners began to default, money kept flowing down to the risky slices that Magnetar owned. http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going The story isn't complete without some technical answers, such as whether they hedge out the underlying assets or simply the characteristics of the assets, or were they largely unhedged? Also, why did Moody's refuse to rate the CDO squared Magnetar sold to Moody's? And how could they reliably obtain CDS without counterparty risk, or without tracking error on the hedge? Unfortunately, only the government can pursue the answers.

I also liked the end of the article where Pabrai talks about double-checking for sustainability of profit. He mentions normalized earnings as a barometer, but that method can fool you if there is a major secular shift. It reminds me of a great speech by William Dudley where he talks about the role of positive-feedback in the credit crisis. If you are just looking at the economy from the point of view of a retailer, you only see higher margins due to wealthier customers. You don't see that you are a recipient of a huge positive-feedback mechanism. http://www.ny.frb.org/newsevents/speeches/2010/dud100407.html

Sorry, I'm wrong. GRATs are irrevocable so you can't cancel the transfer. You might be able to effectively quelch a GRAT through a process called regratting: http://online.wsj.com/article/SB124147213290384703.html. I don't know if you need permission from the beneficiaries, but you might be able to regrat with a high annuity fee that results in the paydown of principal.

Pabrai is spot on with the patience comment. I began my serious investment work at the tail end of the boom, and one of the most common techniques from "value investors" was the relative valuation method. "It's a good buy since the peers are trading at 17X earnings!" "A is trading at 15X earnings when B is trading at 18X even though A grows faster!" Impatience seems to turn normally studious investors into stock retailers.

I didn't read the whole thread so I can only comment on the last page. Ericopoly, you can establish a Grantor Retained Annuity Trust (GRAT) which allows you to control the assets and to break the trust prior to transference. The kicker is that the trust automatically breaks should you die before you bestow the assets. Any gains above the applicable midterm federal rate transfer gift tax free. If you are concerned about the character of your brood, why don't you try lending them money? It's a good way to administer a test and to provide a lesson. Current AFRs range from <1% short term to <5% long term.

Thanks.

I just read the Gurufocus article by Robert Miles. How did he find the weights for Buffett's portfolio? And how did he discriminate between Buffett's direct and indirect ownership? From what I could tell, the author took a quote from Buffett stating that Berkshire represented 95% of the Buffett family net worth, and assumed that 5% of the 13-HR belonged to Buffett. The article doesn't reveal much in the way of methodology.