maxprogram
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Posts posted by maxprogram
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Max, thanks for the links. I see you made no comments on Baupost's performance. Why not?
No particular reason, was just more interested in how they invested.
This particular fund was closed I assume due to mediocre performance vs. the S&P (12.3% vs. 14.7% over 10+ years). But I'd argue the poor relative performance was due mainly to bad luck -- most of the period the market was extremely overvalued, and it was a bad time for value investing.
Baupost's main fund (BLP 1983 C-1) performed better during the same period: 17.0% annualized from 1990-2001. Not sure of what caused the difference between the 2 funds -- perhaps better private investments for the bigger fund?
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I put the public letters together into a PDF a few years ago:
http://www.maxcapitalcorp.com/public/BaupostFundLetters.pdf
This was from one of their smaller public funds. And a blog post with some analysis:
http://www.futureblind.com/2009/06/baupost-fund-allocations-1995-2001/
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Some harsh words:
http://online.wsj.com/article/SB10001424127887323689604578222051534145538.html
I was quoted in this article, but after reading what Sokol said my "probably breached his trust" line seemed like a bit of an understatement!
When this was going on a few years back, I didn't think it was that big of a deal at the time. But with hindsight it looks like it was a good thing he left -- I wouldn't want that kind of person running things at Berkshire.
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I am a "business person" and a programmer, currently running a small tech startup. One piece of general advice I have for anyone in a similar situation is this: no matter the equity split, in a tech startup like that the "IT guys" are always in charge. At least for the first part of the company's life. Then as the company grows, strategy, sales, mgmt, etc. will take a bigger role. Also, on a related note, when giving out equity (especially anything >5%) always do vesting. So, promise them 10% or whatever but space it out over 1-2 years.
Obviously this won't help Smazz now, but I just wanted to put it out there.
Re: email. It depends on what email system you are using. If you're using something like Google Apps you're probably right -- they could easily get access to your email. You just need to find a way to get control over the server (like ItsAValueTrap recommended). If they have control over it and that's where your email goes through, they can have every email sent to your address forwarded to another and you'd never know.
Know you're not looking for this advice, but I'm giving it anyway: Make up with the IT guys, work something out, and come to a compromise. You may have already tried but that's the only good solution. Sounds like they are in control short of legal action.
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I think your Jeopardy example works well, but only because it exists in a very simple, confined environment. With the rules of the game, a contestant can only gain an "edge" through one method: being smarter / knowing more than the others (at least until Roger Craig comes along and figures out a legitimate way around that too). In a simple game like Jeopardy it's easy to create rules that make it completely fair (meaning reliant just on skill). In markets it's much harder to define and more of a gray area.
There are some black/white cases like Ivan Boesky trading on mergers, but most insider trading cases aren't that clear cut. If you meet and become acquaintances with the COO of a public company, and from your conversations gleam that sales numbers are doing particularly good that quarter, is that inside information or just good scuttlebutt? The line, at least to me, isn't very clear. And I don't think it would be clear in a courtroom either. Now, Buffett gives the advice not to go near the line and I tend to agree, but that's aside the point of determining if something is actually illegal.
It's not because something was common in the past and not seen as a bad thing (mostly by those who benefited) that it actually was a good thing. Slavery comes to mind...Obviously I don't want to imply that *just because it was legal in the past* makes it alright. It's that it didn't really cause problems in the past, i.e. markets functioned fine, and retail investors knew what they were getting themselves into. I'll concede that I don't really know the details on why it was made illegal in the first place. An argument I would agree with is that the perception of fairer markets may help bring in more capital.
So either make it clear that it's a free for all and buyer beware, or make it clear that it's illegal to trade on insider information and enforce those rules as much as possible. But the worst way to do things is to pretend that you have the latter when you actually have the former.I completely agree here. Maybe I'm just more pessimistic -- I think it's a free for all even if you ban insider trading. So yes, I think the "public" are fooling themselves if they think markets are fair -- insider trading or not.
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Here's my problem with insider trading laws:
The argument is that markets should be "fair" so that the person "on the other side of the trade" has access to all the same public information that you do.
But there are probably 100s of cases where buyers/sellers have information the public can't get access to (or is extremely difficult to access). Most Phil-Fisher-like scuttlebutt would classify -- talking to employees, officers, suppliers, channel checks, etc. The public has none of this. I would personally rather not be on the other side of a trade from someone who has done 6 months of scuttlebutt and has a much better picture of where business is headed. But that's why I'm careful, and I accept that there's a risk of that happening.
In terms of legality, are hedge funds co-locating their server farms next to the NYSE to get trades 1/5 of a second faster any different? What about massive insider selling in financial companies leading up to 2008? Yeah, it was all reported and done within legal limits, but in principle it's the same thing. If you were buying Countrywide stock in 2006 you easily could be buying from Angelo Mozilo -- someone who you can safely say has a fair amount of non-public, detrimental information about Countrywide.
There is a reason insider trading was legal for all of history up until 1933 -- it wasn't viewed as being unethical! It made markets more efficient. Every investor knew the risks, and they were more careful because of it. It was an informational edge, just as value investors have analytical or psychological edges. Andrew Carnegie, who was an investor in the late 1800s just as Buffett is now, regularly traded on "inside" information. In fact, it was one of the core investment principles he wrote about in his book: Principle 2: "Only invest in companies about which you have insider knowledge".
I'm not saying you shouldn't be punished for it now -- it is illegal, and you don't want some people getting away with it while the public expects it to not happen. But not everything that is illegal is immoral.
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I think ZeroHedge is wrong here. I am 90% sure those are the notional value of the options. In other words, that's how much exposure they have on the upside but not how many shares they actually own. So call options are not actually 37% of the fund. Someone can correct me if I'm wrong here.
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For those interested here are his exact holdings at one point in time during the '50s:
Company Industry Value % GEICO Insurance $10,150 61.6% Greif Brothers Storage $3,650 22.1% Timely Clothes Retail $2,600 15.8% Thor Corp. Power tools $2,550 15.5% Baldwin Music $2,200 13.3% Other $330 2.0% ======= Total holdings $21,480 Bank loan ($5,000) Total equity $16,480
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Behold the 4-step strategy of "see what I can get away with":
Step 1: Pursue specific power-grabbing initiative X
Step 2a: If other parties remain complecent, continue
Step 2b: If other parties revolt, restart with less potent version of X
Step 3: Wait (from a few months to a few years)
Step 4: Repeat steps 1-4
Works great at finding where the line in the sand is drawn. Plus over time, the line is moved as the strategy attracts more people who are okay with the power-grab.
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And to channel Occam's Razor: the simplest explanation is usually the best.
Biglari decided that he wanted more of the pie for himself, and he took it. This unquestionably leaves a smaller percentage of the pie for other owners. The question is now whether he will make the pie bigger than it would have been had he not enacted the compensation agreement (and in turn leave other owners better off on an absolute basis).
That could turn out to be the case. But beyond a certain point, more incentives aren't correlated with better performance. In fact, many studies have shown the opposite to be true.
On a positive note, Sardar may use the other half of his performance bonus to buy Steakburgers in bulk. That way shareholders, employees and suppliers will eventually get some of the money back.
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I think what is meant is that many followers are puzzled as to why the market ignores Berkshire (especially after its long-term outperformance). I think most value investors know the answer but it's another story trying to get the reasoning across to the average stock market investor.
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I'm sorry but there is no excuse for paying somebody $400mn+ as a retention award.
Not sure if Tim Cook deserves $400mm. But saying that "there's no excuse" is wrong, IMO. There are definitely cases where $400mm+ would be justified, and maybe this is one of them.
I'm not an Apple shareholder, but if I had been over the last few years, I would not look twice if the board had given Steve Jobs $2bb+ as a bonus. Would have been well worth it. So, it may be the case that Tim Cook doesn't deserve $400mm but there definitely exist good "excuses" for doing so.
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With respect to brands, the value of a Craftsman or Die Hard, for example, actually increases the more widely these brands are distributed and in the mind of the public. Selling only in SHLD stores has actually kept the brands down in terms of optimal value. Lampert is taking action to more widely distribute these brands.
With respect to real estate, the realizable value could very well increase with time. We are still in a real estate downturn. Owned properties can probably be sold for much more later rather than sooner. Attractive leases decrease in value over time, but again, the realizable prices may actually increase in a couple of years because of the real estate downturn and because of the shakeout that is going on in the retail sector.
Brands -- I agree that their value increases when distributing to other stores, which they have just started to do. But as you said, for all these years that they haven't done that, the brands value has decreased in the mind of the consumer. This is anecdotal, but I have asked a handful of people about Kenmore/Craftsman and they said as much -- i.e., they use to only buy Kenmore but don't want to go to Sears for a new washer/dryer when they can get an equivalent Whirlpool at Home Depot.
Real Estate -- I have a little background in retail real estate (from the lessor side) so here is my take on this: the first issue is consumer habits. When a certain Kmart location has been falling apart for 20 years, people start going to other "Class A" places/malls/etc. I know from experience that these Kmarts also devalue retail property around their stores because of this effect. So despite real estate values in general increasing over time, the fact that a Kmart has been on the land for so long discounts the value (even once it's gone). This effect will wear out but it takes time.
The second issue is this: "They should maximize the traffic to stores and then sell them off to Walmart or Target for conversion to better big box retailers."
This could probably only happen on a very small scale. I doubt there are many areas in the U.S. that Sears/Kmart exist where there isn't a Wal-Mart (or Target) within 5-10min drive. Had they done this 10-20 years ago, maybe, but most big-boxes have most of the stores they want. My guess is it would take many years to fully sell and then re-lease the properties.
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The case of Teledyne shares repurchases is interesting:
-first purchase at 16.38$ on 9/14/72
-second purchase at 10.88$ on 12/13/73
-third purchase at 10.75$ on 5/31/74
-fourth purchase at 7.88$ on 12/4/74
... I imagine people reaction when he purchased for the 4th time!! Patience is sometimes required...
The difference is not in the price paid for buybacks, but the fact that the value of Teledyne was growing (at a very good rate) while the buybacks occurred. Buybacks are equivalent to re-investing in the assets you currently own. For Teledyne, that was a great proposition.
Lampert has been giving long-term shareholders a bigger and bigger share of a shrinking pie. Time is the enemy of a bad business. (In regard to Sears' other assets, as time goes on not only do their retails ops deteriorate but the value of the real estate and brands does along with it.)
About a year ago in an interview Berkowitz pointed out that although revenue at Sears has continually declined over the years, revenue per share has remained about the same. In other words, for remaining shareholders (not those who cashed out) the buybacks have been nothing but maintenance or worse.
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Does anyone else think that Eddie Lampert would do well to execute one of Bill Ackman's REIT spin-off ideas in the context of Sears Holdings? (See the presentations on McDonald's, Target -- possibly J.C. Penney in the future.)
I see no reason why he can't spin off a REIT-type company for the real estate and set some long-term lease rates with inflation-indexed rent increases for the OpCo.
This is the problem with Sears, and the problem with the real estate thesis in general. If the real estate was owned by a separate REIT with their own profit motivations, they would immediately jack up rent to market rates. Why? Because the alternative to leasing to Sears at $5/sqft is to lease to Costco/HD/Lowes at $12/sqft.
So, Sears' options would be:
(1) Realize RE value by closing down all their retails stores that can't be profitable at market rent rates -- this has to be done slowly, and is costly in $$ terms and laying off hundreds of thousands of employees. Not easy.
(2) Don't realize RE value and turn stores around, making them worth more than the real estate they're on top of. You can see how hard this would be at this stage.
Target makes EBITDAR (store earnings before D&A and rent) well above market rent, so spinning off a REIT would make sense and have little impact on their retail ops. JCPenney is in a similar real estate situation to Sears, but their retail ops are in much better shape and they have smartly opted for option (2).
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The bottom line is this, when a company engages in a capital raise to repurchase shares, at that exact moment it should become publicly traded. Lets see if the market would support such valuations.
I have been in this game for way too long and especially being around the Canadian E&P and Junior Resource companies to smell what the real intentions are. Here is how it works, my friend. Insiders, Bankers and VC's know that before a company is public they can arbitrarily decide whatever valuation they see fit. Hell now people use Sharepost as a reference, some trades on Sharepost are for $50,000... You can begin to see how reliable this is. Anyhow they use these artificial valuations to exit, and they have turned it into an art.
Not really sure what the difference is. Shares of a company are worth what buyers are willing to pay. Private markets, public markets, auctions, whatever. It's all the same. Of course, that says nothing of what the true intrinsic value is (I'm not saying GRPN and LNKD aren't overvalued--they probably are) but as any value investor knows intrinsic value and market value aren't correlated in the short run, regardless of where transactions are being done.
Just don't understand why using "Sharepost as a reference" is any different than a stock trading on the NASDAQ. It's a market of buyers and sellers. If insiders/owners want to keep it outside the exchanges at first, then that's their choice. Since LNKD and GRPN have gone public, their prices are much higher than most of the "private" market transactions so the implication that pre-IPO prices were pumped up anymore than they would be once public doesn't hold much water.
Agree that many VC firms these days are too myopic (old VC investors like Georges Doriot and Arthur Rock are good counter-examples). But providing VC money is very competitive now and I think firms who have a winner on their hands NOW are much more inclined to take the profit than wait to see if expectations pan out. But that of course is nothing new and has been going on for 100s of years.
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There are many estimates that show population leveling off or declining in the very long term:
http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf
(See pages 5 and 13). Page 16 shows with current and past reproduction rate decline.
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It got me thinking, what's the expected life of a brand in the fashion industry? I can't seem to find a lot of trademark that were really dominant for a long time (40+ years). Even stores seem to have a finite life expectancy...
Mostly because the specialty apparel business has only been around since the '70s/'80s. Before that there have been clothing "brands" but you could only get them at a department store, catalog, or later on discount retailers. No one really manufactured/designed their own clothes and then sold them (excepting of course one-off independent stores).
Specialty apparel chains really got started with Leslie Wexner's The Limited -- which began in the '60s but didn't seem to get going until the '70s. Gap was started in 1969 and a few other of the older chains (like Zara) in the '70s also.
Very hard to get a durable comp. adv. here. Good locations are a start (but probably makes little difference today, short of some department stores and the like with very good city locations). Probably some brand loyalty due to habit with some clothing items (socks, underwear, victoria's secret, etc.).
Probably the best advantage you can get in this businesses is management. If the person/people who run the co are great merchandisers, they will do well and take share from competitors. Ex. Mickey Drexler, Jim Sinegal, Leslie Wexner, Ron Johnson. As in investing, it's an art, not a science.
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Plus, you gotta remember when you're look at valuation, these historical numbers were based on higher interest rates. So, that would mean stocks don't look as highly valued in relative terms, at least.
The problem with this argument -- is that it's a relative valuation to bonds.
The 130 year average P/E takes into account many different interest rate environments, and hence should be a good barometer no matter the rate. If someone from "above" (not Bernanke!) declared that interest rates would forever stay low, then that argument would hold up. But otherwise to me it is equivalent to saying in 1982 that stocks are fairly valued because bond yields are so high.
On a related note, for those interested I chart the price of the S&P related to value (using the avg. Shiller P/E and historic 1% real earnings growth) in the following graph:
http://dl.dropbox.com/u/17160368/SP.Value.gif
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Or do people mean 6% annualized starting from each high water mark, which would in all practical purposes mean the same thing ($15 * 1.06 or 6% above $15)
Yes. Just look at it this way: as an investor, you'll only pay a fee if YOU'VE achieved 6% annualized. Meaning, if you you were a new investor at an NAV of $15, the old $10 high water mark would be meaningless, and the 6% compounds forward from the $15.
And if the HWM is $15 and you invest at $13, you're getting a "free ride" until the NAV gets back up to $15+6% annually.
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Though more big business as a % probably have moats, size doesn’t mean much. A company can have a very defensible moat but the industry/product segment they’re in just isn’t very big.
There can be many small companies will durable advantages in a local market (whether geographically local or a niche market). A few off the top of my head:
- See’s Candy (back when Buffett bought it in 1972, it was for $25mm or $132mm adjusted for inflation) had a wide moat. See’s biggest advantage is high mindshare, or the habit associated with buying the recognized “See’s Candies” brand for a special occasion, year after year. When people buy chocolates, they don’t shop for price or quality (though quality must be maintained to keep image up), they shop for the BRAND. This advantage is geographically local – the reason why Buffett hasn’t been able to expand on the East Coast. Also some local economies of scale in distributing & manufacturing (especially since vast majority of sales are in holiday season and enormous volumes are produced in short amount of time).
- Most of Berkshire’s small acquisitions -- those that would be trading for <$1bb if they were public: Nebraska Furniture Mart, Borsheims, RC Willey (may be worth over a billion). All have geographically local advantages.
- Standard Parking (STAN) – parking lots themselves have a demand-based advantage from their locations. Parking lot management has economies of scale if they have high market share in certain localities (Standard has a 90% retention rate for management contracts and very high ROIC).
- Clear Choice Health Plans (familiar to the board, acquired last year for <$50mm) – dominated local Medicare/Medicaid markets in eastern Oregon & surrounding area. Moat based on both switching costs for consumers and local economies of scale. If a bigger company wanted in on the market, it would be extremely difficult and costly. Would be far cheaper just to buy Clear Choice out (clear durable advantage for foreseeable future). *This moat also applies to many other local insurance companies and banks*
- Local utilities (Gas: CPK, EGAS, DGAS, RGCO; Water: PNNW, CTWS, SJW; Electric: CV, OTTR, EDE) – Not super high returning businesses but regulated moats nonetheless. Clearly durable advantages as profits are regulated and cannot be eroded by competitors.
- Customizable machine manufacturers (HURC, FLOW, HDNG) – These companies make expensive, customizable machine tools for other manufacturers. Most require specialized knowledge or have patents protecting their specific designs. Because of the large upfront investments required by customers (and close relationships with tools cos) switching costs are high. Probably less durable than the others but advantages still lasting many years that competition can’t immediately replace.
Also it should be noted that no competitive advantage is forever durable. Not Coca-Cola, AmEx, Microsoft, etc. So defining “durable” may be helpful (something like 10-20 years from now. See this article by Michael Mauboussin for a more in-depth take: http://www.capatcolumbia.com/Articles/FoFinance/Fof1.pdf
- See’s Candy (back when Buffett bought it in 1972, it was for $25mm or $132mm adjusted for inflation) had a wide moat. See’s biggest advantage is high mindshare, or the habit associated with buying the recognized “See’s Candies” brand for a special occasion, year after year. When people buy chocolates, they don’t shop for price or quality (though quality must be maintained to keep image up), they shop for the BRAND. This advantage is geographically local – the reason why Buffett hasn’t been able to expand on the East Coast. Also some local economies of scale in distributing & manufacturing (especially since vast majority of sales are in holiday season and enormous volumes are produced in short amount of time).
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What people are missing is in plain sight: Sokol bought the stock with a "free option" not available to the public. If WB bit and bid for LZ, Sokol wins big (whether the likelihood was 5% or 50% does not matter), but if WB did not bite and passed, then Sokol would have non-public information that BRK would NOT be interested in LZ. In the latter hypothetical, any sale of LZ shares would then be an insider trade. A win/win situation for Sokol - last I checked, those are not available to the public.
Although this reasoning makes sense, it contradicts itself saying that the likelihood of the deal going through doesn't matter. The likelihood matters a lot -- for ANY company, there is a "free option" that Buffett buys it.
I might buy stock in Fairfax, then send a letter to Buffett trying to convince him to buy it. I wouldn't count on Buffett listening to me or trusting me, so maybe I'd figure there's a 1% chance he'll agree and buy Fairfax. Does that mean I have a free option not available to the public? So David Sokol would clearly know there were higher odds of Buffett buying LZ than the average investor. But wouldn't that be true for any company? (Assuming the company broadly fit Buffett's acquisition criteria, which Sokol isn't the only one privy to.)
So maybe it is a matter of Berkshire policies -- that Sokol shouldn't have been allowed to purchase ANY company in his personal account without explicit permission from Buffett/Marc Hamburg. I don't think that's a good solution but maybe thats what the SEC would require.
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But BRK would not profit from the runup in price in this case because they would eventually have to pay more to buy the company, as a result of the runup. But Sokol did stand to profit because his shares in LZ would be bought by Buffett at a higher price.
Well, Berkshire would ultimately be profiting from buying the first part cheaper -- if they bought 100,000 shares which was 4.9% at $100 then acquired it for $120, they would have made a "profit" (although embedded in the purchase price) of an extra $2 million. Obviously not exactly the same thing, but ethically similar in my view.
I don`t see how he is not trading on insider information. The general public was not aware of these discussions. As I said earlier, if it was a Citi employee that had made those trades after learning that LZ was a potential BRK takeover target, it would be cut & dry...a case of insider trading. How is this any differentTo me, there was no "special" information that was any different from what the public knew. The only difference is that Sokol is one of the handful of people who has Buffett's ear. LZ was on a list that Citi provided with I'm sure many other names -- and really, any company that size could be a "potential" Berkshire takeover target. And as an investment manager, I know that if an analyst of mine bought stock and then recommended the investment to me, assuming they fully disclosed their personal position I would think it was fine even if my subsequent purchase drove up the price. I just don't think its frontrunning if you don't know whether the transaction is going to take place.
As for if it was a Citi employee, Investment Advisers and Broker-Dealers have a completely different set of much more strict rules of what they can or can't do -- and even then I don't think it's clear cut insider trading because it was at a point where it was no where near a certainty (though it would likely be a violation of Citi rules, and a fireable offense).
Berkshire Letters Compilation
in Berkshire Hathaway
Posted
Wasn’t sure whether to put this in the book section or here.
I few years ago I created a basic compilation of Buffett’s letters to shareholder for myself and a few other friends (many of them on this board). It was mainly for reference and as a much easier way to consume the letters without having Berkshire print them all off.
Last year I got Buffett's endorsement -- plus a few non-public letters -- to publish the book for the benefit of fans and shareholders of Berkshire. It’s got every letter from 1965 to the most recent one, plus indexes, charts, and a “Corporate Genealogy” that Warren passed on that summarizes Berkshire’s history and financials from 1955 on.
Here is the official page with all the details. There you can find a more detailed description, plus some sample pages and a chart detailing the performance of Berkshire's insurance operations. (For any programmers out there, the chart was created with D3. You can check out the development version on GitHub.)
The book will be sold at the annual meeting for $14.35, but will also be on Amazon (can pre-order here). Hopefully at some point I’m going to come out with a similar book with the Buffett Partnership letters.