txlaw

http://www.marketwatch.com/story/brookfield-buying-17-billion-stake-in-ggp-2011-01-18 Berkowitz is selling GGP common to Brookfield for cash and Class A stock in BAM. Fairholme is not selling the GGP warrants. Interestingly, JOE spiked today. Apparently, Mr. Market thinks that Fairholme will use the freed up cash to up its stake in JOE.

Great questions and great answers! I feel like this thread is one of the more lucid explanations of total return swaps that I've seen.

Bruce Berkowitz is the best. I actually almost wrote a letter to Buffett suggesting that he consider Berkowitz for the CIO position. I may still write that letter at some point. How many people can have such great returns while holding so much cash/cash equivalents? How many people can have such outstanding returns while managing such gargantuan amounts of capital? How many people can invest across sectors, across the capital structure, and invest primarily within the US and still kick the sh!# out of the S&P 500? How many people can attract a shareholder base that actually puts money into his funds when the market goes down? Regarding the press release, I actually think it's great. Not only does my money -- my retirement money -- have a fair home, but it's actually being put to use for productive purposes. To help recapitalize the US financial system. AIG and MBIA are up next. Did you see the latest from the WSJ? Berkowitz is going to meet with AIG management to discuss the firm's capital structure. It will be interesting to see what he proposes. http://online.wsj.com/article/BT-CO-20110110-715151.html Also, it seems Bruce B is finally starting to think about investing abroad. That Fortune article indicated that he went to China, and apparently he got advice from Government Sachs while he was over there, according to the Fairholme press release. Then earlier today, he discloses that he FCM holds $650 M worth of China Pacific Insurance. Crazy.

52% ATSG was my biggest winner by far. I'm now well over my high water mark. That wasn't the case at the end of 2009. I'm very optimistic about my portfolio going forward and am close to fully invested at this time, though that will change as cash flows in.

Happy new years, everyone!

I tend to churn and burn, as you put it. Other than Berkshire, Fairfax, and possibly Leucadia, I don't plan on holding any owner manager stocks for the long run. Furthermore, for BRK, FFH, and LUK, these will only be small/token positions for me unless they are substantially undervalued. For example, I was pretty heavy into LUK at a much lower cost basis than what it's trading at today, so I've taken most of that position off the table in the last month. Having said all of the above, I find myself fully invested at this point! I'm a little wary about being fully invested because I like to keep at least 10 to 15% cash on hand. However, I really like my deep value positions, and I'm willing to sell my undervalued positions to buy into even more undervalued positions if we have a correction. I also plan on having cash coming into the portfolio in the coming months that I will do my best not to deploy.

Can you run through your estimates of cash and EBIT? My estimate isn't intended to be precise: I took the last 10-Q and netted $13.4B cash and short-term investments against $4.9B debt. For EBIT, I simply applied 4X to $1B, for a valuation of <5X operating income net cash before the Compellent acquisition. I use the entirety of the cash position because I'm looking at it as part of a going concern and assuming the stability of the negative cash conversion at 36 days. I don't give Dell any credit for any current assets not in excess of current liabilities. So I don't use the full cash hoard, despite the negative cash conversion cycle. However, I do add back in DFS receivables when doing my calculaton. I also give the excess cash a rather unscientific haircut based on the notion that some of the cash will need to be spent to "maintain" earnings through M&A. Finally, when I say earnings, I do not use EBIT. I come to an estimate of owner earnings that is also rather unscientific. But conservative, I believe. When all is said is done, I come out to a valuation that shows DELL being damn cheap. But not at a 20% earnings yield.

Yeah, the 5X earnings number (which, backs out excess cash) is not accurate. That would be insanely cheap. Regarding acquisitions, sometimes it makes sense to buy a marginally profitable company or even an unprofitable company if the company will become a very profitable company under the acquiror's control. For example, we all knew back when FFH bought ORH that the price they paid was fair when considering ORH a stand alone company, but that it was actually worth much more in the hands of the acquiror (FFH). Or take any acquisition that Coke makes. Coke typically has to pay a very full price for new brands, but the company is willing to do this because it knows that it can scale up the brand so that the earnings yield and ROIC for the business grows to a much better number. Of course, Dell is no Coke, so if you're skeptical that they can actually make the Compellent business line a worthwhile portfolio investment, I can understand that. But you can't just look at a static P/E ratio to determine whether an acquisition is a good one or not.

This old interview with Steve Jobs is amazing: http://www.scribd.com/doc/43945579/Playboy-Interview-With-Steve-Jobs I found it off of Value Investing World (Chanticleer guys).

Were the cash to be used for an acquisition at 20x earnings, the argument would go "poof" pretty quick. And that cash hoard has been sitting there for years. What is a dollar of cash worth today if you can't get it for 5 years? I don't know, but I figure one should discount it. Would I pay book value for a company that held cash only (no debt and no operations), but I was confident that it wouldn't be liquidated for 10 years? Nope. When calculating Dell's excess cash, you need to make sure that you are not overstating the cash hoard due to Dell's working capital model. You also have to consider that some of the liabilities that you would normally net out in a net cash calculation should be matched up with Dell Financial Services receivables and not included as part of any such calculation. I think Dell will do a good job of allocating any excess cash that remains after they're finished with acquisitions related to the transformation. Also, in many cases paying 20x earnings (5% earnings yield) will make sense if the business lines bought will benefit from Dell's scale and distribution network.

Yes, but what I'm arguing is that the value that a person adds to a society/country is not necessarily reflected in their annual income or in the amount of tax they pay into the system. So even though from the numbers it appears that a class of low income workers are adding less value to society than what they are getting in return from society (from the government), that is not necessarily the case. The labor market is simply not reflecting the value they add to society in a way that comports with reality. The argument extends not just to low wage immigrants but to all low wage workers. I never thought that you were arguing against immigration. It's pretty clear that you want to cherry pick immigrants that have education, language skills, etc. But my argument again is that an individual that does not have money or an education or even language skills will not necessarily be a drain on society if they are let into the host country. Indeed, there is no way to tell for sure that such an individual or their progeny will not be superstars in terms of adding value. Still, your point about likelihood of success is well taken, and I don't disagree with setting an immigration policy that lets in a disproportionate amount of people who have backgrounds conducive to success. But let's not forget that the ovarian lottery metaphor extends to everyone in the world and that some people simply need a good environment to thrive. You'd be surprised, especially with cultures that place a great emphasis on extended family. I am Desi (of Indian descent), and I know plenty of people who absolutely add value society but would not have come to the US if the possibility of bringing parents/grandparents over was completely foreclosed to them. As emerging markets like India and China develop further, getting bright people from those countries to come over to the US and Canada for good will be a much harder sell. Why leave your country and your culture if you have just as much opportunity at home as abroad? Might as well come to the US or Canada, get your undergraduate or graduate degree, and then go back home to use those skills you have acquired to add value to the home countries. Allowing those folks to bring their entire families in may be one way to sweeten the deal in a way that lures them over here (North America) for good.

It's not about following Michael Dell. I try never to follow anyone into a stock if my own analysis does not confirm that the stock is indeed undervalued and mispriced. I will admit, though, that every now and then, I will make an exception to that policy if I really trust the judgment of the person who's doing the recommending (it's still a speculative investment, though). DELL is not one of those picks where I'm relying on anyone else's judgment. I also think that the computers that Dell produces aren't that great. In fact, I own a Macbook Pro, which I am very happy with, and I can't see myself going back to a PC anytime soon. And certainly not to a Dell. But that misses the point entirely. Dell is a company in transformation, and people are not realizing this. Everyone who bashes Dell is fixated on the consumer PCs, but that's not the future of the company.

That may be your view on immigration, but not every citizen would agree with you. I rather like the following excerpt from a poem written on the Statute of Liberty in the U.S.: Give me your tired, your poor, Your huddled masses yearning to breathe free, The wretched refuse of your teeming shore. Send these, the homeless, tempest-tost to me, I lift my lamp beside the golden door! This is not true. Plenty of non-skilled, no money immigrants have come to the US and Canada (and other places) and become productive members of society. For that matter, plenty of non-skilled, no money citizens are or have become productive members of society. Do you really believe that everyone who is poor and uneducated is destined to become a welfare enrollee? And is someone who makes only $30K really a burden on society just because the average cost of benefits is greater than that amount? From my perspective, there are plenty of people who make $100K or more who actually provide negative value to society. With regards to the family allocation, there is a good argument that places like the US and Canada could not cherry pick the "best and brightest" from abroad without allowing them to bring over family members (even the dumb ones). Think about the Chinese and Indian engineers in Silicon Valley who disproportionately start tech ventures that have kept the US on the forefront of innovation. Would they agree to come to the country if they were forever cut off from their family members and community that they left behind? Or think about the Mexican immigrants who start value-added small businesses in the US. Would they really be willing to put down roots and grow their businesses if they could not share their success with their family members, whether dumb or intelligent, lazy or hardworking? My own personal definition of "merit" is more expansive than just considering future earnings potential or economic success. Character, creativity, determination and other attributes that are hard to measure just by looking at economic success should be included, in my opinion. We should be willing to take a chance on people who don't look great on paper. IMO, as ValueCarl would say.

Rather than rehash the "Why does Fairfax love DELL?" debate, I would suggest doing a quick search for previous threads on the subject. Here are two of the threads that I participated in: http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1042.0 http://cornerofberkshireandfairfax.ca/forum/index.php?topic=1915.0 The bottom line is that you have to look at the price you're paying now versus the future prospects of the company. DELL is a considerably different company today than it was in 2000. It's also trading at a much lower (and rationale) price for those future prospects. If you check out some of the comments made by savvy investors on this board, you will see that DELL is truly a hated company at the moment. I can tell you that I'm betting a substantial amount of money (for me) on the notion that most people are wrong about the company. Hopefully, I will not have egg on my face when all is said and done. Wish me luck!

http://articles.moneycentral.msn.com/news/article.aspx?feed=OBR&data-ipsquote-timestamp=20101220&id=12530254 Given that FFH owns a substantial stake in DELL, this is pretty good news. I also own a substantial amount of DELL, so it certainly makes me happy!

I love this proposal by the Fed. We'll see if it actually goes through, though. The bank lobbyists are a powerful bunch. So now people are finally thinking about the regulatory risk. I'm still not so sure that we are considering the technological risk or other attacks on the moat from potential competitors. Are we so sure that Visa and MasterCard will be the ones building out the electronic payments systems abroad? I'll tell you though, if we get a continued drop in their share price, I might start to do some real research on V and MA.

Way faster now. Thanks!

Watched a video posted by Shai Dardashti that hits on a lot of our questions about what the EV infrastructure really needs to look like. David Sokol is on the panel, and he talks about BYD. Interestingly, David Crane of NRG asks a question to the panel at one point. Check it out: http://valueinvestingresource.blogspot.com/2010/11/panel-discussion-electric-cars-mass.html

I have a 15" Macbook Pro that I really love. It's never crashed before, and I love the way the interface has been designed in OS X. I have also had no problems using Firefox on my Mac. My iPhone 3G, on the other hand, has been a nightmare. I upgraded to the new OS a couple of months ago, and the Google Maps function is almost unusable on the iPhone now because of the way it hangs, which is ridiculous since that's the feature I use the most. Instead of rolling back my OS, I have been waiting for an update that will fix the phone. But Apple hasn't come out with one yet. I'm seriously considering buying one of these Nexus S phones that's coming out in a week or two so that I can untether myself from the iOS ecosystem.

Very interesting, ValueCarl -- I never heard of Blue Rhino until you mentioned it. The analogy is a good one. Myth, when I say pay per mile, what I really mean is pay as you go for charging. So, just like we fill up our gas (petrol) tanks as we need to and pay only when we fill up, we would charge our car batteries the same way in an ideal world. Even better, though, we could charge up at far more places, including at our homes. But maybe you're right -- people might rather pay for an all you can eat plan for charging up. As for picking a standard, that's not always a bad thing, but there's too much technological/economic uncertainty here. Maybe the right thing to do is transition from mostly gasoline powered cars to mostly hybrids and finally to mostly EVs. While the transition is happening, engineers will work to optimize battery/charging technology for an all EV world and will also work to transition to lower cost renewables and nuclear. Or maybe it will be a good idea to have Better Place and NRG jumping into these markets because even if it's not as profitable as they think it will be, it will more quickly transition us to EVs. Too difficult to tell.

Thanks for posting this video, Myth. I'm actually quite wary of the Better Place proposition. Shai Agassi is clearly a visionary businessman and a phenomenal salesman, but whether Better Place is the right way to go for consumers is not clear to me. As I understand it, Agassi is proposing a telecom model for personal transport where you buy a car/battery at cost or slightly above cost and get locked into buying miles from Better Place battery exchange stations and charging spots for X years. Although it appears that you will be able to charge Better Place-compatible cars at home or at other company's charging stations, because you are paying a low price for the equipment, you must sign a subscription contract with Better Place. In the same vein, NRG is working with other electricity generators, Hertz, Best Buy, Walgreens, HEB, and other companies to create a network of charging stations in Texas, with Houston being the first place where they will start the buildout. You will be able to charge up at these places by paying a certain amount per month. The consumer is not locked into buying electric miles from the consortium, as they can always go to another charging spot or charge at home. However, to charge up at these often-visited places, you will have to purchase a subscription -- you won't be able to pay per mile or pay for the cost of electricity used plus markup. The problem I have is that there shouldn't be a network effect business model for buying electric miles. You don't have to pay a monthly fee to charge up your vehicle at Exxon branded stations. You can go to any gas station to buy up miles in today's world. If I go to HEB (a grocery store chain in Texas), I don't want to have to sign up with a particular network to charge up as I shop. I would much rather pay as I go, charge up using whatever sort of electricity generation I choose, and charge up overnight at home. Better Place and the NRG consortium will probably ask for tax subsidies and government mandated use of its network (for taxi fleets, for example) to guarantee an acceptable rate of return on their build out. Or they will probably have standards and regulations put in place that limit the number of consortiums that put in place a network of charging stations/battery exchange stations so that there is an oligopolistic market like in the telecom sphere. There's nothing necessarily wrong with that, but it's a bit disingenuous to imply that the build out is completely funded by the private sector. The other question I have is why do we assume that battery technology stays static such that convenience and affordability requires an expensive battery exchanging network that requires customers to be locked in? If electric miles do follow Moore's law and batteries get better and better, we may be able to plug in anywhere, especially if the holy grail of quick charging batteries comes to fruition. At some point in the next decade or two, we could have electric car batteries that can be charged up in less than 10 minutes -- I believe MIT is working on that. If that happens, wouldn't consumers want the flexibility of buying their electric miles from a market full of competing electricity generators? Or maybe our cities supply energy charging stations as a utility. Austin Energy (I live in Austin) is going to do that. And won't the cost of hybrid electric/gasoline or electric/nat gas vehicles get cheaper over time? It's true that current EVs and hybrids are more expensive than normal cars. However, this could just be the new tech/early adoption paradigm that we are seeing. For example, when Apple came out with the original iPod, it was really expensive, a bit clunky, and only first adopters bought it. The next generation iPod was pretty cool, and well off people started to buy it. Eventually, the price got cheap enough to where anybody could buy an iPod. The same thing is happening with the iPhone, although most of us are financing our iPhones through locking ourselves into AT&T. Just like Better Place is proposing to do with EVs. I don't know. I'm just skeptical of what the right business model is here. I'd much rather be the battery manufacturers (not designers). I want to be the Foxconn of batteries. Hopefully, BYD is that company.

Phenomenal interview. Schroeder has some great insights in the interview that I've never heard her talk about before. Major props to Miguel of Simoleon Sense.

Awesome, thanks for posting! I'd also love to see some more of his letters to his clients.

This is actually why I like Citi. Like you said, their international footprint is very attractive because of the growth prospects for their core businesses (Citi Corp, as opposed to Citi Holdings). The fact that Citi is one of the big network banks that is vital to the global payment system is also what draws me to them. Tax advantaged earnings are another benefit. And being able to leverage their experience in multiple countries should also give their Securities and Banking Group an edge over the long run. However, it's certainly riskier having operations abroad in emerging markets. For example, imagine that Mexico totally collapses and becomes a failed state. (I'm just throwing out a hypothetical -- I have no idea if things are really that bad in Mexico.) Citi owns Banamex, which I believe is the second largest bank there next to BBVA Bancomer. What happens to the business in such a situation? There are always risks like that when you operate in as many unstable countries as Citi does, whereas if you own a BofA or Wells, you don't have to worry so much about those risks. The other thing is that it's not a given that the big domestic banks will be relegated to domestic markets for the long run. Wells is too big to grow much more in the US, so it'll be a market share game for them for now, but there's nothing stopping them from doing partnerships with banks abroad or buying into foreign banks at distressed prices. But I do like the forward prospects of Citi better than either BofA or WFC, as long as they don't screw up big time like they have in the past (gotta watch that vigilantly).

Junto, I agree with you about the value of that report. Looking forward to seeing what BAC does tomorrow now that they have resumed foreclosures and after they address the put back issue in their conference call.