txlaw

I bet. If I were running a fund, I would definitely have lockups. You must have fairly savvy partners to run your fund without lockups (I think I remember you saying that you don't have any lockups).

Plan, no need to spell it out so clearly! We need this thing to stay dirt cheap while we build our positions.

Also, I bet a large percentage of people who pulled money out of Fairholme were financial advisors who have been getting calls from their advisees regarding why FAIRX went down so much and was so concentrated in US financials. Or perhaps they were trying to avoid extreme volatility, which one would expect with a concentration in financials. After all, Barty Ritholtz -- who for some reason, has a huge following -- wrote a post specifically about firing Berkowitz for many of the reasons articulated by Mr. Stockwell. http://www.ritholtz.com/blog/2011/04/when-do-you-fire-a-manager/ I guarantee you a lot of FAs thought the very same. "Style drift" and his activities in JOE were the main criticisms I remember hearing over the course of last year.

Yachtman made contortions to explain himself at Consuelo Mack a couple of days ago: several small positions over several banks (even Bank of America, wow). That's after saying things like this before: “With a bank you create assets with a stroke of a pen. You’ve got a black box.” You have to give it to him. He seems straight in the camp of changing his mind when things change (or they become cheap). Just watched that interview. Yacktman's new position in banks is not necessarily inconsistent with his previous statement on banks. Most likely, he was questioning before why the US big banks and i-banks were such a high percentage of the portfolio of some investors (e.g., Bruce B), given his thoughts on the "black box" nature of the banks. Tons of people on this board feel the same way, although I disagree with them. Yacktman seems to be running his investment management business quite well. His portfolio is the type that will keep his AUM fairly sticky, I think. Which really brings to the forefront the issue with Fairholme. Bruce B appears to be crafting focused portfolios for total return only, without regards to whether his investors will get spooked and pull their money out. It appear it is in his blood to maximize return using a focused approach. He must stay the course. I like that, but I also recognize that most investors -- even sophisticated ones -- suffer from perverse psychology.

Yes, I was so lucky. I was lucky to buy the fund when it crashed in 08. As a short term investor, I was lucky to sell it in July of 11. I was lucky that I didn't like the headlines of how large the fund was getting, or the concentration of huge financials that was making me uncomfortable. I was lucky he wanted to run a business rather than run his fund. I was lucky the man thought he was bigger than the market. I was lucky to make money off a fund that has a negative five year return. Yep. I am a lucky man. Okay, so you were uncomfortable with his "concentration of huge financials." Fair enough. That does not mean you were not lucky when you say that you made "money off a fund that has a negative five year return." Or that people who held onto FAIRX were not unlucky to see their fund go down 30%. That's classic Mr. Market, right there. Over the long run, I predict Berkowitz will handily outperform the market. And there is even the possibility that his portfolio is a coiled spring that will come back rapidly in the short to medium term. But what about JOE? I'd like to hear more about your rationale in this regards? What makes you think he's trying to run JOE?

I agree 100%. But you'll probably get trashed by some on this board for saying it. They think that just because someone has done great for a while that they can never do wrong. They will sell a stock when Mr. Market pushes it stupidly high but when all that money came into Fairholme and Berkowitz decided he was going to try and be a Buffett or Lampert and it was weak money that was driving the price they would say you were stupid for selling Fairholme. He should have stuck with what he knows and what the long term investors originally bought into. No matter how great the St. Joe land development story might turn out, he should stick with what he had made his name doing. I think it was more of a matter of luck than anything else in making that decision. If things had worked out, this conversation wouldn't even be happening. So when investors think they know more than proven long-term investment managers, I'm thinking that may be the case in just a handful of situations. In most circumstance, it's because the investor was lucky. When Prem made the bet to buy TIG and C&F, no one thought that was a bad deal at the time. As big as the deal was, there was considerable protection in place...buying at 60-70% of book, a billion dollar reinsurance contract protecting against future losses, and paying with overvalued shares. Yet the deal went wrong because the losses were just far greater than the reinsurance policy could cover. Was that someone getting a big head, or just something that went wrong even though all the precautions were in place? Berkowitz didn't do anything differently than he has in his past, but the bets went the wrong way because he was early. If anyone thinks that a year or two is enough to judge a fund managers performance, than I think they are simply speaking from the obvious view of "what have you done for me lately!" Investors on this board always talk about long-term or how they will hold forever, but when things go sideways, investors rarely think about long-term. In Berkowitz's case, most of his "long-term" investors were thinking solely from a "short-term" view. And as I said at that time, they will be proven wrong in the long-term. Short-term, if they pulled their money, it was more of a matter of luck in timing, because that's exactly what it is...timing! Cheers! Well said regarding the conventional investor's view on Berkowitz and the luck of getting out at the right time. However, it's worth pointing out that the folks on this thread who have expressed pretty negative views on Berkowitz appear to be criticizing him for the investment in JOE and, specifically, for his trying to take over the company and run it better (their words, not mine). I'd like to hear more from them on why they think he's trying to run the company and whether they would have different views of him if he had not put any money into JOE.

Yacktman appears to have the right idea in terms of buying high quality businesses at fair to good prices that will give you a decent risk-adjusted return over time. And I'm not just talking about him because he "made money" last year. Yacktman's portfolio is the type of portfolio that someone who is really rich would want to have to first preserve -- and second grow -- one's wealth without too much stress.

Up about 30% YTD. But I was also down about 18% last year, so I am only up about 7% from beginning of 2011. But the beauty of my portfolio is that it is still substantially undervalued.

My only objection is that during periods when inflation is very high this gets illogical (we should in theory only be taxing real income). The CPI-U is already available -- we could be fair and tax people (regular income rates) only on REAL capital gains. To demonstrate how stupid it is to tax people on inflationary gains, the principal adjustment from TIPS is fully taxed (under present law) as regular income. So if there is a 100% inflation rate you wind up losing 17.5% of your real principle value -- the yield on the TIPS isn't high enough to reimburse you for this. Wouldn't be opposed to that. This would of course imply that you could take a $5 tax-loss if you sell a stock today for $10 per share that you purchased for $10 per share ten years ago (if the inflation-adjusted cost basis is $15). That's very fair. Sounds administratively difficult. Perhaps we do not allow for inflation adjustion and put the risk back on the individual who is earning their income from investment rather than labor.

My only objection is that during periods when inflation is very high this gets illogical (we should in theory only be taxing real income). The CPI-U is already available -- we could be fair and tax people (regular income rates) only on REAL capital gains. To demonstrate how stupid it is to tax people on inflationary gains, the principal adjustment from TIPS is fully taxed (under present law) as regular income. So if there is a 100% inflation rate you wind up losing 17.5% of your real principle value -- the yield on the TIPS isn't high enough to reimburse you for this. Wouldn't be opposed to that.

One could make the same argument about MSFT, although I'd be willing to bet that MSFT reverses that trend slowly going forward. Actually, some of the problems inside the company have been fairly well publicized. There were a bunch of employee letters that went around criticizing the bureaucracy and reactionary nature of the organization at RIMM. You have to take that into account when valuing the company.

1) No, I am not making a general case against RIMM. What I have done is offer a perspective on the potential for a loss of capital. I do the very same thing for other investments. 2) Liquidation/runoff/break-up is only a relevant valuation method if you believe that management would actually do it or that management actually could do it. With respect, I would suggest that this view of the would would be patently wrong with RIMM. I'd be very surprised if management liquidated in the face of difficult business conditions. More likely they would throw more money into it. And that's the problem with this type of company. You can fritter away shareholders' capital chasing a market that you've already lost. 3) I never suggested that RIMM is currently worth $0. I simply suggested that a heavy, permanent impairment of capital is a realistic outcome. And I suggested that the stock does not need to go to zero for that to occur (heck, even at $5/sh we'd lose what? Like 75% of invested capital?). Zero is just the very worst possible case, and it does not strike me as very likely. 4) Never say never, but I would probably not buy a tech net-net. A tech company can be a net-net one year and could be far worse than a net-net five years later due to hubris in management. Lack of debt and low share prices do not mean that management will drive a positive outcome for owners. Unfortunately, in tech, it's possible to fritter away large amounts of shareholders' capital quickly. I hope this one works out well (which it might!), but I will not be investing in RIMM for my personal account! SJ SJ, my original post was directed at a post saying that we should assume RIMM is worth $0. Not only is it very unlikely that RIMM is worth $0, but anyone who says so is almost insulting HWIC and Prem Watsa. If HWIC cannot prevent management from burning cash and assets such that the assets are worth less than the liabilities, then they're nowhere near as good as I think they are. Now, you may not have been arguing that RIMM is a $0 (and I even said later that reasonable people can disagree on what RIMM is worth given an uncertain future). But you appeared to be overstating your case or responding to something I was never arguing (although at some point, I might try to provide a case for why RIMM is worth X amount). Additionally, what is your evidence to say that management would "throw more money into it" without any concern for ROI? If you look into RIMM, you will see that the management is not unfocused on shareholder value. It is that they messed up on the strategic issues and design issues. That is the pitfall of being in the technology sector. You can be very focused on getting good returns for shareholders, but you can make bad decisions and you can be outcompeted. Take a look at Mr. Softie, which still is worth more than $0. Liquidation or break up of RIMM may not happen. Indeed, the new CEO has suggested that he will keep RIMM together. That does not mean that RIMM is not worth more than the sum of the parts or that the sum of the parts equals a negative number.

I pointed out earlier though that under a dividend franking system we could give US corporations the ability to pay tax-advantaged dividends out of after-tax income (so the individual doesn't pay tax twice on the dividend). The individual would then only pay tax if his personal tax rate were higher than the corporate tax rate. I find it surprising that I've never heard this kind of system discussed anywhere in the US media. Scenario A: A corporation that pays no tax will be one where the owners need to pay up to the highest marginal income tax on any dividend. Scenario B: A corporation like Berkshire that is a good corporate tax citizen (pays up to 35% marginal rate) will be able to distribute tax-advantaged dividends that are not taxed twice (individual only pays tax if the personal income tax bracket is higher than the tax rate paid by the corporation). Pretty straightforward solution to this long running argument. Perhaps the players aren't actually looking for a solution? The Republicans likely want a 0% individual tax rate, even if the corporations also paid nothing. The Democrats likely want to tax the dividends twice if they can. We've had this discussion before, and I have agreed with you on having a dividend franking system. In fact, my next post in response to Tim was going to be to say that we should have a franking system that moves us more towards a consumption tax. The only caveat is that you have left out one important change that I would institute. Capital gains should be taxed as ordinary income.

Okay, you may think that WEB is wrong about the prescription, but to jump to the conclusion that he has is in denial because of his need to be loved is a bit much. But let's talk about the Buffett rule. The Buffett rule isn't really just about levying taxes on the super-rich. It's about how we treat labor income versus investment income and about progressivity in the tax code. Let's talk about two hypothetical individuals: Taxpayer 1 and Taxpayer 2. Taxpayer 1 makes just over $1 million in income from his labor on an annual basis. He almost certainly pays an effective tax rate well above the tax rate of WEB's secretary, and most likely pays an effective tax rate of over 30% on his realized income. Income tax and payroll tax. It might even be the case that his employer's half of payroll tax (if he has an employer) is passed onto Taxpayer 1 in the form of lower wages. Taxpayer 2 makes just over $1 million in income from collecting dividends on his large muni bond portfolio and selling a bit of his LUK, which he has held for a long time. His effective tax rate is likely well below the effective tax rate of WEB's secretary and Taxpayer 1. He pays no tax on his muni interest income, and he pays long term capital gains rates every time he sells his LUK. He pays no payroll tax. The Buffett rule, as I understand it, has no effect on Taxpayer 1 but makes it so that Taxpayer 2 has his effective tax rate go up to 30%. Taxpayer 2 still isn't in as bad a tax situation as Taxpayer 1, but his tax burden is now a bit closer to Taxpayer 1, making the system a bit closer to fair. Now, you might say that Taxpayer 2 is suffering because he actually pays a 45% tax rate on a look through basis on his LUK income. Well, in this particular case, he pays no look through tax because LUK never pays tax. ;D Okay, so maybe using LUK is a bad example. But what about BAC? My "look through income" yield from BAC is pretty darn good and will be tax free for a good amount of time, certainly more than a year, which will allow me to get the long term capital gains rate. Or let's take corporate America as a whole. In aggregate, I suspect the corporate tax rate is actually substantially lower than the statutory rate. It could even be around 25%, in actuality. That's not including the use of debt to shelter income, the use of NOLs, and the various credits and subsidies that corporations, as opposed to individuals, can get more easily. Imagine how the most savviest investors can avoid situations where they are paying more "look through income tax" than they have to. Or perhaps the corporation Taxpayer 2 owns is an S corporation, where the income is passed through to him. He pays income tax, but no payroll tax. No double taxation, no payroll tax. Not bad at all. Or Taxpayer 2 may simply choose never to sell any of his stake in the corporation, instead watching his look through income (which under your definition could make his actual income well over $1 million) being taxed at 35% or less and never realizing any capital gains income. The point of the above is to demonstrate that even if we include the investee corporation's income tax in Taxpayer 2's individual income tax rate, we cannot assume that Taxpayer 2 pays an effective tax rate of 45%, especially when we take into account the fact that he can defer the "double tax" by not selling stock or by owning a corporation that retains all earnings. More importantly, why are we even considering the corporate income as Taxpayer 2's income? He cannot use corporate cash for personal consumption. Until cash gets distributed to him or until he realizes income through the sale of part of his ownership stake, there is no income.

Well, now we're getting away from WEB and starting to talk about Obama. I've been saying that WEB is rational. I don't want to open up a can of worms, so I'll abstain from defending Obama at this time.

Sure, but I'm not arguing that there isn't operational risk with RIMM or that RIMM won't crash and burn in terms of market share. Nor am I arguing with the general statement that with technology companies, there is less certainty regarding the future. What I'm arguing is that to say that RIMM equity is worth $0 is quite a statement -- a hyperbolic one, IMO. The reason the distinction must be drawn between RIMM and Canwest (and the other investments you mentioned) is that in those cases you mentioned, there was a real question as to whether all the assets were worth more than all the liabilities. Now it just happens to be that I think RIMM is probably worth where it's trading at if not more, but that's a discussion we can have another time. Same comments from above, although I cannot comment specifically on the value of WordPerfect -- I didn't even know that it was a company. I do know that the product WordPerfect is still used in some places, including in the legal profession. So the intangible assets of the product itself is still worth something, if not much. To reiterate, you're mixing and matching two things: decline in the business with whether the assets are worth more than the liabilities. Again, you seem to be making a general case against RIMM with regards to the uncertainty of its businesses, particularly the selling of Blackberry hardware. However, I'm suggesting that the safe way to approach RIMM is to look at it from a liquidation/runoff/break up perspective and try to determine how much it is worth dead or broken up versus alive. That could be $5 per share. Or it could be $20 per share. It's very difficult to make the case it's worth $0 per share. And it certainly isn't appropriate to make the case that it's worth $0 per share by talking about how its going concern value erodes with market share loss. Put it another way: if RIMM were a Graham net-net with no debt, would you be making the same arguments as to why RIMM is worth $0? I doubt it.

Silly like Canwest Global? Or silly like Abitibi Bowater? Or silly like Torstar? Or did you mean silly like TIG? Or maybe Lindsey Morden? The point of listing all of those train wrecks on which FFH was a passenger is that some value investments do not work out. Sometimes they do not work out even if you have full control of the company. Being an outside director of a company does not mean that Prem will prevent the inevitable (if it truly is inevitable, which is an open question). But it does impose something of a moral constraint on FFH which may prevent a "cut-and-run" strategy. So, no, the potential for a permanent loss of capital is [glow=red,2,300]not silly[/glow], IMO. SJ All those investments you mention were leveraged companies where it was far from clear whether the assets were greater than the liabilities, and whether the equity would retain any value whatsoever after restructuring. There is a world of difference with RIM, and I don't understand why anyone would lump RIM into that category of investments. You are essentially saying that the liquidation value of RIM, which I believe is greater than $0 if you run the numbers conservatively and don't believe there is fraud involved, will decrease over time, even with Watsa on the board. I completely disagree. But perhaps I misspoke by talking about "permanent loss of capital." I agree that if RIMM is only worth $5 and you paid $20 for your share, you have suffered a permanent loss of capital. My main point was that to treat RIM as a complete loss is either extremely conservative or disingenuously stated in order to freak people out regarding the potential impact on FFH's NAV.

This doesn't really make sense. You really think RIM is worth $0? Someone the other day said that they wouldn't buy RIM even at $5. I'll tell you this -- if were RIM were trading at $5 tomorrow, I'd be buying hand over fist. Is RIMM with zero? No, that's probably not the case right now. However, you can make a strong case for a permanent loss of capital if you believe that their phones suck, that clients have zero loyalty, that switching costs are not large, and that RIMM will continue to use shareholders' capital to pursue a market which they will inevitably lose. The history of technology is littered with companies that were leaders in a particular product/service and that eventually squandered shareholders' equity. So which view of RIMM is correct? Will RIMM be another Corel which was a zero for shareholders, or will it be another Apple which came back from the dead? Time will tell. As a user of both BB and Android, I have a fairly well entrenched (but perhaps not well informed!) view of RIMM's future. But who knows, Apple came back from death's door... And, we shouldn't forget that RIMM doesn't need to be a zero for this to work out badly for shareholders... SJ Reasonable people can be on both sides of the debate on whether or not RIMM will work out badly for shareholders at prices currently paid. But a permanent loss of capital? With Prem Watsa on the board? You really think FFH will watch assets be dissipated and liabilities be increased such that there is nothing left whatsoever even upon liquidation of the company? That seems incredibly silly to me. And I would be the first person to argue that Apple, Google, and maybe even MSFT are eating RIM's lunch. I've personally seen people switch over to the iPhone from a BB who will probably never go back to RIM. And for good reason too. It's not because the iPhone is cool -- it's because iPhone is a superior device, and the Apple ecosystem (iOS and OSX) is very forward thinking.

This doesn't really make sense. You really think RIM is worth $0? Someone the other day said that they wouldn't buy RIM even at $5. I'll tell you this -- if were RIM were trading at $5 tomorrow, I'd be buying hand over fist.

I believe WEB is letting himself be a symbol of how things work and how things should be changed so that we have a fairer system. I'm pretty sure he really does believe in the Buffett Rule, though not that putting the Buffett Rule in place will solve our debt problem. Actually, I'm not sure I have ever heard even President Obama say that the Buffett Rule will be a panacea for our problems, and I don't think it's accurate to say that Obama thinks "you can increase taxes and have little or no meaningful spending cuts." That's just the way that Republicans spin the President's position because they dislike him so much. Paul Ryan's plan is simply the wrong policy for the moment. Frankly, I believe the GOP will lose this round and put up Paul Ryan for president in 2016 -- and Ryan will be a much stronger candidate than any of the current slate of Republicans.

Completely agree with you, Richard. I get more fond of the guy the more I hear from him. WEB is a national treasure. I see it the opposite. He is a man. A great investor, but a very flawed man. It looks more like he is is continuing his lifelong desire for others to love him. Instead of offering ideas that would tackle America's fiscal problems he offers a prescription that makes him look better and fails to make a significant difference. Implementing the Buffett rule (a 30% tax rate on all income over $200,000) is a $50 billion impact to a $1.5 trillion debt (based on 2009 tax data). He isn't solving any problem other than his apparent need for others to praise him and Obama's desire to get re-elected. (By the way, a 100% tax rate would still leave a deficit.) The facts are that the bottom 60% has seen their tax burden reduced significantly over the last thirty years yet Buffett is telling them they have been getting screwed in favor of the rich. Buffett's argument is wrong and his prescription is meaningless. We are not coddling the super rich. Their effective tax rates are largely unchanged from 30 years ago. We are coddling the bottom 80%. Buffett's Secretary, assuming a $60,000 salary and normal life expectancy, will have a lifetime tax burden of 2.5% (income tax plus her half of payroll taxes less SS and Medicare benefits). She isn't getting screwed in favor of Buffett. She is getting an incredible deal. I disagree with your assessment of WEB's motivation. I think he's being supremely rationale, rather than being a bleeding heart, or having a burning desire to make others love him. Clearly, he doesn't feel the need to have hardcore conservatives love him, since he's willing to go against them so readily. WEB's philosophical viewpoint is simply different from yours. WEB believes in the notion of the ovarian lottery, and that a just society should be structured so that the vagaries and randomness of life is accounted for in the rules put into place. This is simply a folksy restatement of the Rawlsian Theory of Justice. (See http://www.youtube.com/watch?v=LiTkU9eIFPs ; http://en.wikipedia.org/wiki/A_Theory_of_Justice. ) In other words, WEB has put his philosopher/policy maker hat on, not his "I want everyone to love me" hat on. The "I want everyone to love me" theory is how hardcore conservatives who admire WEB reconcile the fact that one of the most supremely rationale (and awesome) investors of all time disagrees with their viewpoint. You might even call it "cognitive dissonance." Regarding the so-called Buffett Rule, WEB himself has noted that it is really directed at fairness and having a system where everyone knows (or at least feels) that the rules are set up in a fair way. All Americans will have to pay more taxes in the future. Furthermore, all savers will pay the tax of inflation, as we will have to monetize some of our debt. But we simply cannot expect the middle class and lower upper class to not get pissed when their taxes go up if the upper upper class are able to retain favorable tax rules that allow them to increase their wealth at a faster rate and possibly gain/keep disproportional influence in the political sphere. WEB has said time and time again that taxes must be raised and spending must be cut. Remember, he specifically stated that what happened to Simpson-Bowles was a "tragedy." If you read between the lines there, he's saying that Obama should have gotten that done instead of allowing the fiasco that occurred last summer. I don't really get your tax burden as 2.5% argument. For your whole working life, you have taxes taken out of your labor income that go into government coffers and are used for public spending. And at the end of your life, you get SS benefits (a pittance when you really see what SS benefits are) and Medicare (which may not even exist in the future for non-baby boomers). At the same time, your income has stagnated, the cost of housing, education and energy has gone up, and risk has been shifted from the private sector back on to your household. So you actually have an incredible deal now?

The problem with this notion is that it is very difficult to predict how the market will react to either good or bad news in a situation like this, unless you have "trader's sense." Therefore, it's best to rely on the concept of MOS and prepare to average down if there is a manic sell off. In other words, don't buy a full position unless it's going to be a small one. Edit: I suppose you can buy a full position if you really believe it's very undervalued, for example, if you think RIMM sells well below liquidation/runoff/break up value, but I'm not there yet.

Have now watched both JCP presentations. Second day presentation is interesting and gives the basics to the Street. First day presentation is even more interesting and worth watching for anyone who is interested in (or invested in) retail.

Completely agree with you, Richard. I get more fond of the guy the more I hear from him. WEB is a national treasure.

Isn't the rejoinder here that if you do what you're talking about (and you're not LUK, who never seems to pay tax), your "look through" earnings get taxed thrice? JNJ pre-tax income gets reduced by corporate tax rate. Dividends to insurance sub get taxed, though not at full 35% rate. Finally, to personally realize the benefits from the JNJ income, which in theory should be reflected in stock price appreciation, you must sell some stock and pay another 15% on the appreciation associated with the JNJ income. Or am I wrong here? You are right that there is extra tax if Berkshire pays a dividend or if you sell some stock. However if you live on the income from the tax-free munis and treat Berkshire as a family wealth asset (to be passed to heirs) then there is no second tax (step up in basis when you die). Wealthy families can benefit greatly from this terrific tax shelter that Warren runs for them. Ok, agreed. I hope to benefit from that tax shelter someday. Not happening anytime soon, though.