T-bone1

CHK CHKDG GST FFH SDR INTC SD EORIF

Specialty insurance indeed!

I think a lot of us share the same frustration with Fairfax (the stock, not the company!), which is that many of the things that would be good for FFH (deflation, falling stock market, etc.) are likely to be bad for the trading price of FFH in the near term. I want to buy more FFH, but I am inclined to wait because we are likely to see a situation like 2008, where the price goes down while the IV goes up. I think Prem may have been saying the same thing, when he said that they are likely to buy a lot of stock back at some point in the future. I think the stock is very cheap near book value, and some of the cagey comments by Prem and others certainly suggests that they view it as very cheap to. Time will tell if their patience will be rewarded again, but if it goes to 2X book without them having a chance to buy back shares, that's okay with me too.

You guys really outdid yourselves this year and put on a great program on Wednesday! Everyone is a better investor for it and a lot of money was raised for a good cause. Thanks for all that you guys do!

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If we have a hot summer like last year, the price will probably continue to rise. If we have a "normal" summer it will probably fall from here. Given that I am not a weatherman, if I was running an E&P, I would be hedging right now.

I remember that Buffet and Ed Thorpe (the guy who actually came up with "black scholes" as well as how to count cards in blackjack) discussed non-transitive dice when they first met. Here is a short discussion of the dice, his conversations with Buffet on the matter, and some of the implications: http://edwardothorp.com/sitebuildercontent/sitebuilderfiles/bridgewithbuffet.doc.doc

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A big thanks to Sanjeev and everyone else who makes this board worth reading!

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I roughly agree with you NetNet. I think Horizon/Kinetics does some really excellent intellectual work, along the lines of the work Michael Mauboussin would do when associated with Bill Miller's group. I think this work has real value, but it is a mistake to blindly invest based on it - it is really more useful as a jumping of point than a conclusion. Do some owner operators post much better results? YES. It is a good screen, but it doesn't mean you can invest in just any of them (ATPG anyone?). I'm not sure how Horizon/Kinetics has done over the years, but I definitely respect their work intellectually. They were always fascinated with "croupier" investments like stock exchanges - and were very wrong on them in 2008-2010 as high speed traders ate their margins. However, Buffett's bid for NYX probably shows that they were right in the long run. I suspect that their position sizing is more in line with that of a seasoned portfolio manager (i.e. one who has been wrong enough times to give up on certainty), despite the high levels of conviction they express in some of their more intellectual pieces. In short, I think they do great work and I would probably invest with these guys - but I think they paint a lot of things as black and white that are not . . . maybe that is just good marketing.

We don't limit ourselves to size, but I would make an observation that I find interesting: Most of the value I see today is in very small (Oddballstocks has documented many of these and CNRD is a personal favorite of mine) companies, or quite large companies (FFH, CHK, BRK/A, DELL). I would add a number of the financials like BAC to this list, but I don't pretend to understand them, so I will leave them off. I think one reason for this is private equity. Some astute commentator (probable a link I found on this board) made the point that the traditionally lucrative space of small cap investing ($100 million -$1 billion) has gotten extremely difficult. The reason he gave is that extremely smart investors from private equity firms have already picked-over the entire space - and seen the internal numbers to boot. The commentator suggested that he wouldn't want to go near a sector that had already been picked over in such a manner. I think that the relative abundance of very cheap stocks (at least by our estimation) in the micro-cap and large cap sector - and dearth of such bargains in between - is due to the influence of private equity. I think very small stocks are either too small (or family controlled) for PE, and I don't think the banks will lend for PE to start going after larger companies like DELL. Just my two cents. I would be interested if others disagree on my assessment of where the value is currently, or my hypothesis as to why that is. T-Bone1

I believe he owned at least 300k shares prior to becoming an insider and buying 200k shares in the open market.

Another nail in the coffin for Stevie: http://www.businessinsider.com/wang-names-20-more-insider-trader-names-2013-1 Sometimes, when the weather is just perfect, and I'm feeling truly optimistic, I think for a moment that they just might get this guy . . . not often, but sometimes . . .

You may be able to ask your broker to make a "closet" trade and buy them for $0.01 and charge a $0.01 commission. Maybe they will and maybe they won't, but it's worth asking

what are some other examples of investors betting the farm on one company (that they do not control) for the long term? I believe Claude Shannon probably has the best investing track record of all time, but there was probably some luck involved with being around for the genesis of silicon valley (huge early stakes in HPQ and others). Bill Ackman went big into Target (and now JCP). I don't include Eddie Lampert, Prem, or Buffett because they took the reigns. I guess Buffett and Geico could be included - before he took control. I know Seth Klarmen has said he wouldn't put more than 10% (not sure if this was of his fund or net worth) into an equity he didn't control - at any price. Do people have other examples of smart, accomplished investors making a huge long term bet on one company?

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"“At SAC Capital you were expected to provide your trading ideas to Cohen,” Freeman said, according to a Dec. 16, 2010, memo written by FBI Special Agent B.J. Kang. “Freeman and others at SAC Capital understood that providing Cohen with your best trading ideas involved providing Cohen with inside information.” " http://www.bloomberg.com/news/2012-10-02/ex-sac-capital-manager-tells-fbi-fund-used-insider-data.html Unfortunately, even if they manage to convict him, he will probably be out in five years and still worth billions like Milken. On the other hand, this is a lot more fun than watching that clown buy obnoxious art and build ice skating rinks with impunity. Maybe he can go on to an illustrious second career as a James Bond villain.

I was expecting it to be somewhat equal, but got: google, google, draw, google, draw

Chanos seems to be very succesful at the business he runs. I'm not sure what I would call that business exactly. He has said on numerous occasions that valuation has nothing to do with his short ideas, but that he basically finds a company with short-term problems and publicizes them. I would like to see his 13-F to look for long ideas (if he had to publish his shorts). It doesn't take a genius to realize that Dell, HPQ and the natural gas companies are facing short term headwinds . . . Isn't this what we are looking for as value investors? He doesn't seem to say that any of these companies aren't going to make it, he just says they have problems right now. Sounds like fertile ground to search for long ideas. And if I remember correctly, his FFH thesis was that it was an insolvent fraud.

At 5 times cashflow, do you really need a good idea of what the business looks like in ten years? If the cashflow is spent on buybacks and acquisitions at reasonable prices, isn't it hard to come up with a scenario where the investor loses here?

I'm not sure of any reason it isn't worth $20. I've never seen a valuation from those who dislike the stock, instead they say it will go out of business. It reminds me of when I was (painfully for a good while) short netflix and the bulls would only point to growth numbers rather than ever say what the company is worth. The problems with Dell are well known, but in order for Michael Dell's purchases (and the buy backs) in the high teens to turn out badly, the Enterprise PC business will have to literally disappear over the next three -five years. Is anyone realistically arguing that? I haven't bought yet, but I am admittedly market timing by waiting. I think it is definately a good buy here.

Very well put

With respect to Sanjeev, I think there absolultely is such a thing as a value trap, although I agree with him that many managers simply refer to things they have overpaid for as value traps. My definition of a value trap is a company trading at a large discount to intrinsic value, where the intrinsic value is falling faster than the discount can be closed (by liquidating, buying back stock etc.) Berkshire Hathaway would have been a value trap if Buffett hadn't taken control and reallocated the capital. I don't think that my "definition" is much different than what Sanjeev said, but I think it is important in looking at the business. Do people think that Dell's intrinsic value is falling? Looking just at the PC business, until this year, cashflow has been rising over the last few years. Revenue has been falling as they "trim" non-profitable business, but cashflow has been reasonably steady. Obviously cashflow from the PC business is going to be lower this year, but these things are lumpy. Looking at the overall business, is cashflow going to be falling going forward? are they destroying capital? Obviously the high-priced buybacks of the past don't look so good in hindsight, and the intrinsic value of the legacy business has fallen, but I think that is leveling out. The consumer PC business has gone to zero basically, while the enterprise business is as strong as ever. More recently, I don't hear a lot of people saying they are overpaying for acquisitions or buybacks. They have spent about $4 billion in the last three years buying back stock for ~$15 per share. They paid 20 times earnings for a rapidly growing Quest Software, whose growth should accelerate as part of Dell. I think the other 6-7 large acquisitions have been at reasonable prices and done quite well. If you look at the enterprise desktop business, Dell's relationships are clearly sticky, but this business is/has been commoditized. Maybe it's only worth 4-5 times cashflow like Seagate or some other dying hardware business. The services business is growing, even stickier, and isn't becoming obsolete. Like IBM that business is probably worth 8 times cashflow. Looking at the two together, the intrinsic value should be growing even if overall cashflow is declining for the next two years. Buybacks should increase the intrinsic value at these levels. I don't think anyone focuses on the fact that Dell's sticky relationships on the "client" or PC/server side should provide them with a big advantage on the Services/Solutions rollout. These aren't two seperate businesses, but rather complimentary ones. Similarly to how Steve Jobs new ipod business strengthened their consumer computer business, Dell's services business will make their enterprise PC business more sticky, and vice versa. Neither of these businesses are dissapearing, and one is growing at a good clip. I think that Einhorn probably realized this year would be crappy so he bailed. He has access to all of the research, channel checks etc, and probably got the jump on this in the short term. There is a big difference between "dead money" and a value trap. This stock is "dead money" right now in the sense that it is very cheap but earnings, revenues, etc. will not be showing an appreciable improvement for at least 12 months. This doesn't make it a value trap and is probably a very attractive time to buy. By the time there is any visibility into improvements in the bottom line, the stock will have already gone up. This stock trades for 6.25 times earnings even before adjusting for the net cash. They have a strong franchise, are buying back stock, pay a ~3% yield, and even at lowered estimates the earnings are expected to rise for the next two years. I think whatever downside exists is clearly priced in, and none of the upside is.

I agree. Due to the high short interest and difficulty to borrow, the premiums on put options were through the roof. We were selling put options for huge premiums (I think we were getting more than $6 for the $60 puts, but I can't find my spreedsheet), and reinvested about half the proceeds into call options. I don't recall having a lot of confidence that the calls ($130-$160 strike) would pay off, but thought it was worth the gamble due to the huge short interest (equal to the float at 4.2 million shares) and improving situation at the company. I think we sold most of our calls for a 10-20X gain, but really didn't plan on such a windfall. (I also was proudly wearing my tinfoil hat at the time and believed that SEC enforcement of Reg SHO could cause a massive short squeeze. We had all of our shares in certificate form at the time so they couldn't be borrowed). I think there was some luck involved in these huge gains that many on this board shared in (and yes, I also have this board to thank for getting comfortable with the investment although I was just lurking on the old MSM board at the time) due to the fact that there were no hurricanes that year. At the time it seemed like there would be hurricanes, although now it seems obvious that there wouldn't be. This investment seems like a no-brainer now, but at the time there had been a lot of negative surprises in the recent past. I think selling the puts was really the great opportunity there - free money under almost any circumstance. Buying the calls was more fortuitous than anything for me and I would have never done it if I wasn't selling the puts along with buying stock. I have been looking for a similar investment opportunity ever since, as I'm sure many on this board have been. I think the basic situation is best described as: 1) a large short interest where the shorts fundamentally don't understand the company (i.e. the shorts legitamately thought FFH was cooking the books and was insolvent) 2) an actual dramatic improvement in fundamentals, but just as importantly in transparency. They stabilized run-off, cancelled the finite re-insurance contract with Swiss Re, restated past financials and got a clean bill of health from the auditors (not that they needed it), shored up the balance sheet by selling their Asian equities (in a very timely sale!), lowered re-insurance recoverable (and hedged the rest in the genesis of the huge CDS trade) I have a company in mind currently that I think satisfies both conditions, but would love to hear of other companies that board members think fit this bill. I think a company like RIMM probably satisfies the first condition, but not the second.