topofeaturellc

Its entirely possible for a business to lose value from growth. If say the base business earns a 15% ROIC and reinvests the retained capital at 5%. However here it just sounds like you have a mechanical issue in your model. basically impossible to troubleshoot w/o seeing the model

I'm asking a question here. I can actually parse the document and I do know what I'm doing even though I am not a lawyer. Its called being self-effacing. I've personally chosen not to invest in the situation because it appears to me to be purely a legal argument, and yet no one seems to be able to tell me why this is such a clear cut open and shut case. You are right, there are a great many other investments out there where economics matter. This isn't one of them. That doesn't preclude me from being interested in discussing it. What other federally chartered institutions have come under a conservatorship.

saw this tweeted out. seems interesting http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2480835

do you think any of that runs counter to what I said? That's not a rhetorical question. I have no idea how to parse docs like that as a non-lawyer also is there existing case law WRT to conservatorships? I thought there was not?

The terms of the conservatorship are that the conservator has to protect the assets of the company, with the goal of becoming profitable and returning the company to the shareholders once that happens. Sweeping most of the assets to Treasury is the opposite of that. Furthermore, they claim the net worth sweep was in fact in the best interest of the shareholders because the company was in a state of perpetual borrowing to pay back the dividend, due to continuous losses. However, the sweep was enacted right after the GSEs started reporting profits again, which makes it hard to prove that it was necessary (not that it makes sense anyway), particularly given the huge valuation allowance for the DTA that was present on the balance sheet at the time. Can you provide some docs for that? My impression was the conservators goal was not to protect the assets of the company, but rather serve the interests of the government, which in this case are one and same with the senior pref holder. Additionally I was under the impression that other than the act of entering into conservatorship itself the conservators decisions were not subject to judicial review, nor did they have any fiduciary responsibility to the capital holders. Not only that but the conservator has the ability to unilaterally abrogate any contracts the pre-conservator entities entered into. The issue for me is purely legalistic. The other stuff doesn't matter if the conservator can't be challenged.

Well there really aren't many basket folks. I think lots of those guys will all tell you they do fundamental research, even if all they are really doing is making sure the data is correct and rejecting leverage/structurally low ROC that implies serial equity raises. Often there may be other little heuristics as well - those tend to be idiosyncratic across fifrms. I dont think you can generalize. Certainly many guys I know have one or maybe two position sizes at purchase - and usually the difference isn't discount to IV so much as B/S and known unknowns.

I have to admit I really don't get this. Putting aside whether or not FNM and FRE were insolvent, it would seem like the change from the divvy to the net worth sweep is irrelevant once they were in the conservatorship. The terms of the conservatorship clearly state that the conservator has no fiduciary responsibility to anyone other than treasury. I think they only way to win this is to prove the conservatorship was illegal. And yet if you read the terms of the changes to the charters in '08 that was clearly legal. Maybe you could argue people who bought the securities prior to the '08 and maybe '04 amendments were never compensated for the changes. Although I believe the original debentures basically said congress could change the law at any time. Can someone explain to me what the legal argument is? Not the economic one. I know that one, agree with it, and fundamentally agree that in hindsight this was a confiscation of private property.

But that's what is so wonderful about value investing. Its precisely because of this that value investing always works. I bet Donald Smith has a company file on him on average once a year. Could you imagine telling a potential investor that in a meeting? Just as behavioral biases create the opportunity for us as investors, they create huge barriers to building a business. I've sometimes thought analysts are more valuable for marketing than investing.

It is far better to learn about one industry in depth and build your circle of competence. There is no magic screen that returned companies that would allow you to compound at 15% a year. Value investing today requires that you understand something about a business that the market is missing. The market doesn't miss data that shows in a few clicks of a mouse. The reason there are so many piggy back value investors or value investors that troll for insider buying is its much easier to focus on companies where management is confident the company's value is increasing, or where an institutional investor with a small army of analysts has found something. Go look at the new buys on dataroma. There are about 50 new buys to keep you busy. If you choose to focus on one industry within your circle of competence, there may only be a name or two to check out. spending time learning an industry in-depth is actually detrimental to returns. You become over-confident about your ability to predict the future and essentially force yourself to buy things because of all the time you've invested. In reality there are only two kinds of businesses - Return on Capital Businesses, and Margin businesses. Figure out how to look at those and you can look at anything. At the end of the day research itself is a commodity. No one consistently gets paid for knowing businesses better then someone else. If you are a basket type investor who is going to buy 50 names that you turn up with a screen I would agree with you. If you choose a more concentrated approach you need to understand the relevant metrics within a company's given industry. Maybe I implied too much by saying "in depth knowledge" as I was not talking about anything remotely close to becoming a consultant of some sort. I am referring to having the knowledge of an industry to at least understand what is important. You may screen for two energy companies with low P/B ratios. Which one is better? Does one have more implied reserves than the other? At what stage are they allowed to count oil in the ground into their BV? How much does an efficient producer pay to extract oil per barrel? This is not particularly in depth knowledge. You could teach yourself most of it in a day or two of reading. Don't disagree with that at all. Indeed I actually think most good basket investors do that much DD.

Any process - any process - is going to miss ideas that turn out to be good ones. What you are basically saying is that the process saves you from more supposedly good ideas that turn out to be crap than it keeps you from buying good ideas that actually are good ideas. I think that's a pretty important idea in investing.

I agree in theory re: one year numbers, but the data show that its not a terrible option. Certainly better than none at all. OBS - I think its a mistake to throw out businesses that are losing money today. If you don't want to throw those out by hand maybe pick a minimum ten year ROE or ROTC number. I usually use ROTC over time for my minimum quality threshold for Capital businesses. Margins biz can be a little more complex - tho broken margin bizzes tend to not fix themselves anyway. AFAIK Donald Smith is not basket guy. My impression is that they generate a universe of 200 names (10% of the R2K) and then use fundamental research to narrow things down. Right now he's got 81 holdings but half his portfolio is in his top ten names. Here is a decent interview with him in the G&D letter. He's pretty low profile as he's been closed for a long time and his only MF AFAIK is a portion of a subadvised vanguard fund. He's got a great business for himself though. Like 4 bil in Small Cap AUM (so prob like 1% fees) and 7 employees. IIRC they basically refuse to speak to other investors. http://www8.gsb.columbia.edu/sites/valueinvesting/files/files/Newsletter%20Issue%2010_Fall2010_v4.pdf

It is far better to learn about one industry in depth and build your circle of competence. There is no magic screen that returned companies that would allow you to compound at 15% a year. Value investing today requires that you understand something about a business that the market is missing. The market doesn't miss data that shows in a few clicks of a mouse. The reason there are so many piggy back value investors or value investors that troll for insider buying is its much easier to focus on companies where management is confident the company's value is increasing, or where an institutional investor with a small army of analysts has found something. Go look at the new buys on dataroma. There are about 50 new buys to keep you busy. If you choose to focus on one industry within your circle of competence, there may only be a name or two to check out. spending time learning an industry in-depth is actually detrimental to returns. You become over-confident about your ability to predict the future and essentially force yourself to buy things because of all the time you've invested. In reality there are only two kinds of businesses - Return on Capital Businesses, and Margin businesses. Figure out how to look at those and you can look at anything. At the end of the day research itself is a commodity. No one consistently gets paid for knowing businesses better then someone else.

While it is absolutely correct that P/B does not take leverage into account, the difference in performance between P/B and EV/EBIT is really pretty small. Its not really worth worrying about at the screening stage, and instead is something to focus on at the name level. Also somewhat surprisingly to me the levered names in the cheapest quintile of P/B don't reliably underperform the unlevered names. I think because the levered names that survive have some massive returns. An I def disagree about screening not working in the US. Donald Smith has basically crushed the benchmarks for decades doing nothing but buying cheap Price/Tang Book.

You are probably aware of this, but that's a Graham P/E. Its generally a decent tool, but I find that the 10 year look back is too long. You end up with many permanently impaired names that screen very cheaply. Personally I use 5 year ROE to drive my normal earnings and screen on that. I also have this kind of funky thing I do that forecasts normal earnings based purely on mean reversion in margins, capital required, leverage and coverage rations, and sector metrics. It is of more use for businesses that don't have a lot fixed assets.

I'm a huge believer in screens. I think anyone really interested in this topic should read the book West reccs: "Quantitative Value" Personally I mostly use a modified version of their approach that mean reverts returns a bit. I disagree that screens don't work in the US generally, its just that valuation spreads are tight right now in the US, so a quantitative value approach is probably not primed to perform particularly well until the next crisis blows spreads back out. ETA: The Quantitative Value guys use an EV/EBIT screen with some other factors to try to avoid value traps. Personally I think if you screen to source ideas rather than construct a PF from the process, you can manually find and reject the value traps.

the most interesting spins to me are often the bad part of businesses or business units that the board at the parent has just given up on. Things like Huntington Ingalls or Fortune Brands H&S. Can come out at huge discounts to what the business is worth once you look through the nearer term issues.

I'm totally the opposite. I feel like by starting out with the set of names a guy like Buffett has been interested in, I'll have a less polluted lake to swim in. It doesn't seem like a good idea to me to ignore his behavior and instead only go with the names that I think are best. I'm aware of his experience and wisdom and... more importantly, mine! I'm not saying a random process. I'm just saying if you put all of Buffett's investments (including the bond deals and what not) on a piece of paper and selected one at random the chances are pretty good that it would underperform a name selected similarly from the cheapest 20% of the market that is investible to you and me.

I pass by a lot of people that hang out on street corners in DC who "[do] their own thinking," but that doesn't necessarily mean that their thinking is correct. (Or maybe the statute in Washington Circle really is following that dude around... who knows.) Buffett's not always right (he mentioned he should have bought the common stock of Harley-Davidson, for instance, rather than lend them money at a fixed percentage) but he's more often right that wrong. That's not being a "Buffet[t]Bitch" -- it's just playing the odds. Your ability to pick which names he's right and wrong on isn't going to be substantially different from your ability to pick good and bad idea from the cheapest 20% of stocks ranked on P/B. I'm actually pretty sure its worse.

If there is one thing I bite my tongue about, its this. If I do my work on something and like it, it pleases me to see people I know and understand in the name. But I'd never even crack a 10-k or an AR for something just because someone I think is smarter than me owns it.

or maybe he thinks its impossible to underwrite if AMZN is the low-cost retailer of the future. The bull case on AMZN basically relies on them eventually having such a scale advantage they can procure and deliver so much cheaper than anyone else that they'll be able to earn great returns on capital and still have a moat. Except in 1992 you might have said the same thing about WMT. And that was even true for a long-time. You even saw some of that cashflow. It worked. You were right. And yet if you bought and held it till today what was your annualized return? Low teens maybe? Price return was 7 and change. But you were right. That's what's so crazy. Imagine if you were wrong? I mean yes - you've outperformed the market, but ex-post would you have said that was a good bet? Given the odds you were wrong? Sure sure, you could have sold in 2000 and looked like a genius - but here's a guy who explicitly says he buys and never sells.

and I would hope you would at least question things if you were a BRK owner, understood how Buffett conceives value investing (Which is different from how I do BTW) and saw him buy CRM or even AMZN. It wouldn't be logically consistent. The closest thing to those businesses that he's participated in was NetJets - except there he was providing all of the capital. And I'm not even sure how the returns on that look today to be honest.

You said, "The fact that a stock goes up after you decline to buy it doesn't mean your analysis was wrong". Ok, then what shows this analysis is wrong or right? Two points 1) Its antithetical to value investing to believe that market price moves validate or invalidate the research you did. 2) It doesn't really matter if your thesis was incorrect on something you didn't buy. Its almost never worth rehashing it. The reality is that value investing will always miss some great ideas. You have to be comfortable with that. I would never buy AMZN and I can't possibly fathom how someone who calls themselves a value investor as I conceive value investing could buy the shares. But that's ok.

I don't have the data at hand but certainly there are periods of time (like today) when the market overvalues paying out as opposed to retaining capital for reinvestment. I suspect the opposite was true during the Tech bubble - dividends were undervalued and retained earnings assumed to be reinvested at an unreasonable rate of return.

you are misinterpreting the question. We're talking about managements decision making, not your decision making as a share holder. Yes obviously you shouldn't own overpriced shares, but OP's point was that paying out is always the wrong decision - and it just isn't. Its corp finance 101 not investing 101

In a sense that's clearly true, but its also true that a poorly priced buy back or even worse, levered recap, can destroy a lot of the equity capital that was left behind.