txlaw

I don't think that's his argument at all. Berkowitz, like Buffett, cares about the future earnings power of financial institutions like AIG and C. Tangible common equity and all those other book value measures are only helpful insofar as they tell you whether the bank is undercapitalized and is at risk of being seized by the regulators. The pig is going through the python, and what matters is what remains when everything is digested. Berkowitz believes we are "in the spring of a recovery". Those are his words. Given that thesis, C is a no-brainer. However, if you think we're in for a very nasty economic surprise, then it is too early as they would need to boost reserves further. He does seem to believe we are "in the spring of a recovery." I hope so too. But the beauty of the Citi investment is that it is sheltered against a nasty economic surprise because of its capital position and its actions to shrink Citi Holdings. So I don't think Berkowitz is too early. If things go really badly, shareholders won't lose any money. Downside protection is the mantra at Fairholme. If things go adequately or really well, then we got a nice annualized return coming our way in a couple of years.

Yeah, I remember reading that too. I don't buy that explanation. That would be an excuse not to buy in the first place if that was really what was motivating Berkowitz to sell out.

True. And so has WEB. Platitudes and contradictory statements abound both from Bruce Berkowitz and WEB. They are not as straightforward as Charlie Munger, and you always have to read between the lines when trying to figure out the reasoning behind their actions. For example, when asked why he liked health insurance cos, Berkowitz would reply that all he knows is that he's getting older and he wants more care and to live quality life as he ages. That doesn't say much, does it? But there was clearly much more than that behind his decision to invest in those companies. I say this as someone who really admires both men. Regarding Pfizer, I don't know why Berkowitz sold out. It could be a case of selling that which is cheap to buy that which is even cheaper. Perhaps he didn't like the Wyeth acquisition? Perhaps he thinks that tax reform could change his valuations of the company? It's hard to say.

I don't think that's his argument at all. Berkowitz, like Buffett, cares about the future earnings power of financial institutions like AIG and C. Tangible common equity and all those other book value measures are only helpful insofar as they tell you whether the bank is undercapitalized and is at risk of being seized by the regulators. The pig is going through the python, and what matters is what remains when everything is digested.

A recent article that goes into a little bit more detail: http://www.bondbuyer.com/issues/119_394/fairholme_capital_mbia-1015414-1.html

I can certainly understand why one would hate these companies due to one's political/philosophical viewpoint, but I do think that this disgust towards government action could cloud one's investment judgment. I don't take your comments as trying to pick a fight. My own take is that municipal bond insurance serves a very important function in our economy. Therefore, it made complete sense that the insurance commissioners approved MBIA's transformation plan. This was actually one situation where bondholders actually were hit instead of saved by government action, if you buy into Third Avenue's suit. I will reserve judgment on whether the suit has merit until I have read the complaint and other pleadings. It's never easy to win in the courtroom, and my guess is that there will be a settlement at some point, in which case the public finance subsidiary will have its ratings upgraded and will begin to write new business. If that happens, MBIA's adjusted book value could be legit in a few years. Even if MBIA goes into complete runoff, I'm not so sure the equity will be wiped out. Unlike a bank, where almost all liabilities can come due immediately if there is a run on the bank, the monolines will be required to pay out money over time. MBIA will also try to recover damages from bond issuers who committed fraud during the bubble years. It's not at all clear what the runoff value of MBIA is, but Berkowitz apparently thinks it's at least in the single digits. Note that all four superinvestors mentioned have found it attractive to get into the municipal insurance business during the crisis. Berkowitz and Ross are long monolines. Whitman held both MBIA debt and common stock at one point, so he was actually long MBIA until he had to choose sides. Presumably, Whitman thinks he can get a better return by being paid off as a creditor than by holding common at the prices he paid while the business goes into runoff or rebounds. Whitman went in too early, and when the NY Insurance Commissioner approved the transformation plan -- for the good of the country, I believe -- his debt investment was materially impaired. Buffett also likes the municipal insurance business. Ajit Jain offered to reinsure MBIA's entire municipal portfolio at one point. I think Berkshire was hoping that almost all the monolines would be wiped out and that AGO and BHAC would be able to get duopoly premiums in the US market. The offer to reinsure their entire portfolios was a predatory move -- it would have been amazing for BRK shareholders had it happened. But the monolines refused and are trying to earn themselves out of trouble. Buffett probably thinks that pricing won't be as attractive as a result until we start seeing lots of municipal defaults. AGO, which dominates at this time, appears to be happy with the pricing environment given their market position. When munis start defaulting, BHAC will probably start writing business in a hard market. You are absolutely correct that AIG would have entered into bankruptcy without government intervention. Furthermore, the common would have been worthless had they been forced to break up at fire sale prices. As it is, the pre-bailout shareholders who bought at much higher prices essentially got wiped out (not the bondholders though). I think the facts have changed now to where AIG will be allowed to divest and earn its way to health. The government will get a return on its investment and AIG will remain a going concern. That's a good thing as long as we have meaningful reform that assures this does not happen again.

T-bone, why do you think that MBIA is arguably bankrupt? MBIA appears to be paying off liabilities when they come due, so there is no need to go into bankruptcy. Perhaps you're talking about balance sheet insolvency as opposed to cash flow insolvency? The fraudulent transfer suit is related to the asset stripping "transformation" that watsa_is_a_randian_hero refers to in his post. Marty Whitman thought that his bond deal was safe and cheap before the municipal insurance co was cordoned off from the structure finance part of the company. (I think I will try to read the lawsuit if I get the time -- fascinating stuff.) The real questions are: (1) how much is MBIA worth in runoff mode, and (2) how much is MBIA worth if the creditors' lawsuit goes away and the municipal insurance co is able to start writing new business? A side question: does Bruce Berkowitz want MBIA to issue equity to Fairholme in order to pay for a settlement with the creditors? The WSJ article indicated that Berkowitz wants to help recapitalize the company. These questions are too hard for me or for most people on this board to figure out. Figuring out how "adjusted book value" approximates runoff value is something that people like Berkowitz, Whitman, Buffett, and Wilbur Ross can do. What intrigues me about this space is how Bruce Berkowitz, Martin Whitman, Warren Buffett, and Wilbur Ross all decided to get involved with these muni financial guarantors over the last couple of years. That should tell you that insuring against municipal defaults is a pretty good business over the long run. It's also a socially useful business. As far as I know, Assured Guaranty (AGO), backed by Wilbur Ross, is dominating the market right now, which I would think would be a "hard market" since we're all scared about municipal defaults. I'm not sure why BRK pulled out. I think it might have to do with BRK losing its AAA rating.

Dazel, Visa is an interesting company that several sophisticated hedge funds -- the Tiger Cubs, in particular -- love to own. But I'm pretty wary about the company for the following reasons. First, the regulatory risk dissuades me from investing in MA or VISA given the price at which these companies are trading. The consumer payment system is essentially a bundled payment system where transactional credit and revolving credit have been joined at the hip for a while now. It is the perfect example of a public utility that has been controlled by an oligopoly to the detriment of society, in my opinion. In fact, the Boston Fed just recently released a paper arguing that the bundled system is a regressive tax, as the cost of goods is higher on account of interchange fees (see http://www.economist.com/blogs/democracyinamerica/2010/07/interchange_fees). People are finally beginning to understand this, and the recent interchange fee reform could be the first steps towards wholesale reform of the industry, which could lead to substantially reduced revenue for the incumbents and entrance into the market by lower cost competitors. I haven't read the interchange reform bill, but one definitely needs to look at that to see whether it was a defeat or victory for the industry (could be a victory in that it is less effective than it could otherwise have been). Ideally, every payment systems transaction would show the cost upfront by requiring merchants to add the cost of a debit or credit card transaction to the price paid for goods and services. I know the bill has not gone that far, and I doubt we'll ever see anything like that. Also, the banks are not going to want to take a big a hit on interchange fees so they will pressure VISA and MA to give them a bigger cut of debit and credit card fees, and they may even start to explore alternative payment systems. And that's where the second risk comes in. The risk of various tech companies entering the space gives me pause. Companies like Paypal have already entered the space, but other tech companies like Apple, Google, and MSFT could also get into this business in the future. AmEx bought a company called Revolution Money, an investee company of Steve Case, which purports to be a low cost provider of payment systems (apparently, it doesn't charge merchants interchange fees). Presumably, AmEx will aggressively try to obtain market share abroad with this company and could even replace its current business in NA with Revolution Money, though not anytime soon as that would cannibalize their high margin NA profits. It seems almost inevitable that we will all eventually run transactions through our mobile phones . So another question is whether some other payments system providers will be able to get a toehold on the phone and make deals with the banks to take market share away from MA and VISA. That remains to be seen, but as contactless payment systems get incorporated into new phones, we could also see the phone hardware and software providers and the telecom companies get more involved in choosing which payment systems win on the phone. The outlook is too cloudy, in my opinion, so I would only buy into MA and VISA and much lower prices. AmEx has a bigger market cap, I think, because of their presence in emerging markets (both through partnerships and their own networks) and because they also take credit risk, which is a good thing in AmEx's case because that part of the business can't be destroyed by disruptive technologies or reform.

I had a similar take on BYD -- seems like that rare Fisher stock to me. I also have thought a lot about a speech Munger gives where he suggests that finding that one promising approach to investing that he and Buffett had not done, but he considered promising, was to "find that one in a million entrepreneur early." Munger said if he was a younger man he might well take that approach, and considered it a valid one if used super selectively. I think Wang Chuanfu might be such a person. Like a Sam Walton or Bill Gates (or Warren Buffett) type, that is just in the right place at the right time, with extremely rare talent to grow a business from a small to a super large stage. I would point out that Munger had the vision to see Buffett like that early on so his vote of confidence is worth considering. Serious hurdles, but BYD's track record is really impressive. They get more done in a quarter than most companies in a year. Yeah, Munger has called Wang Chuanfu a combination of Edison and Jack Welch. I would say Wang is like China's Henry Ford. If any company emerges out of China as a serious chemistry/electrical engineering/materials science power house, I could see BYD as being that company. Perhaps it is the company that will prove that China can be more than just a low end manufacturing center. There is a lot of optionality involved with BYD.

Ebix is very interesting. I actually owned it for a short amount of time and sold out for a nice profit. Wish I had held on, though. Then it fell off my radar, but Harry Long's article got me interested in it again. I'm gonna watch it for a while. Robin Raina is a very impressive person.

Apple is a very good guess, and I wouldn't count those guys out for anything. But I don't know how sustainable their current business model is. How long can they keep extracting amazing profits through selling hardware? It's going to be difficult to tell what their owner earnings will be like if they are forced to move to a more service-oriented model due to competition in the hardware space. The company I'm talking about is Google. Perhaps people have stopped thinking of GOOG as a growth stock now? By the way, I still always consider the price you pay and the durability of business model when trying to figure out whether a stock is a "Phil Fisher stock." As Buffett says, growth and value are joined at the hip.

Well, I would hold BRK and several other stocks (like KO, for example) for the long term, but I don't consider those Phil Fisher stocks. I'm talking about growth companies that would pass Fisher's test under his Fifteen Points analysis. See http://news.morningstar.com/classroom2/course.asp?docId=145662&page=3&CN=com . Any guesses after reading those 15 points?

I'm a huge fan of both Klarman and Grantham. I wonder what Klarman's stance is on the type of "high quality" companies that Grantham refers to.

Yeah, not a huge gain to FAIRX's NAV solely on the take out, but ACF was a beautiful investment since its inception.

I think you may be confusing '08 and '09... BS was long gone by the market bottom unless I'm forgetting something. No, not confusing the timing -- just meant that when the shit hit the fan during the financial crisis (Bear Sterns forced sale to JPM, Lehman going under, Citi and AIG getting bailed out), Bill Miller had been on record as recommending that people buy Bear Stearns as there was a "run on the bank." I think he also held quite a bit of Fannie and Freddie stock. So I don't really listen to anything Bill Miller has to say anymore and am a little confused as to why he still gets so much press. Perhaps I'm being overly harsh though.

It's definitely not a once in a lifetime opportunity for large cap stocks as a whole. That was back during the market bottoms -- a time, I might add, when Bill Miller was telling folks to buy Bear Stearns on the way down. Whoops! But certain large cap companies are inexplicably trading at very attractive levels.

It's a beautiful thing. I own ACF and LUK through FAIRX.

I saw that article on gurufocus, Alex. Very nice. I'd also recommend that people take a look at Shai Dardashti et al's website to get more info on BYD. There are only two companies that I believe are worthy of being true Phil Fisher stocks to be held onto for a long time. BYD is one of those companies.

LeBron is a great player, and he clearly wants a championship, so from that perspective it makes perfect sense to go to Miami. As you noted, Chris Bosh, Dwyane Wade, and LeBron are good friends, and this team would certainly be a strong contender for a championship from the get go. However, the decision special also shows that he was clearly considering the marketing aspects when he helped create the media frenzy around his decision. It's really the whole media hype aspect, I think, that has gotten people super pissed off at him. Regardless of his personal motivations, I am wondering whether people think that this whole situation ultimately increased the value of the LeBron brand or decreased it. The sooner LeBron wins a championship, the more valuable his "brand" becomes, and this move helps out in that respect. The media hype certainly increased his exposure in the US (people who don't even care about sports know all about what was going down) and possibly has increased his exposure abroad. It also doesn't hurt that he's going to one of the US's world cities -- and one that has a huge Latin American influence at that. Latin America could be a nice growth market for basketball in the next few decades. There is certainly a short term negative hit to his reputation, but does that fade away over the long term if he wins multiple championships? Seems to be a good move if he really wants to be the richest player in the NBA.

By now, most of us in the US have heard that LeBron James is going to join the Miami Heat next season along with Duane Wade and Chris Bosch. James, who counts WEB as one of his friends, has stated that he wants to be a global icon. He has also stated that he wants to be a billionaire. The decision was televised and is widely thought to be one of the biggest media spectacles that's ever been seen in the sports world. So the first question is: do you guys think he made the right decision from a purely financial perspective? ---- "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently. " -- Warren Buffett The second question is: did LeBron permanently impair his brand or reputation or did he make it more strong by deciding to go to Miami? Is a brand and a reputation even the same thing in a world where exposure will get you rich(er) despite what people think about you? ---- Finally, does anybody see any similarities between the LeBron situation and the Biglari situation? I sort of do, since both decisions seem to have been made in order to maximize the decision maker's wealth over the long run but have brought about some intense criticism. ---- My hope is that our discussion leads to some insight on the connection between reputation, brand, and profit maximization, or lack thereof.

Wilbur Ross thinks the economy (and presumably the market) will sputter than go up then go down again -- sort of what like you are suggesting, Myth. In such a market, I also tend to believe that value-oriented investors will fare the best. But we'll see.

Very interesting presentation, Tariq. Thanks for posting that. I'm really curious to see how Apple's cloud strategy develops in the coming year(s). I was hoping that they would announce a cloud-based version of iTunes when they released the latest iPhone since they shut down Lala, but maybe they're still working on licensing agreements with the copyright owners. MobileMe is also interesting, and I have to wonder whether they will extend its functionality to sync one's apps and media (music, video) on multiple Apple devices and on other devices (through the browser). It sure seems like they're heading that way. It's no wonder that AAPL and GOOG keep going after the same acquisition targets (AAPL snapping up Lala and GOOG snapping up AdMob before the other could get their hands on it). Perhaps a major LBS provider is next (Loopt, Foursquare, etc.). It's a little odd though for these guys to claim that AAPL has "beaten" GOOG and MSFT because of its market cap.

Excellent white paper by one of GMO's finest found on zerohedge. http://www.zerohedge.com/article/must-read-reflections-gmos-edward-chancellor

I just thought of another company that seems to do a great job at operations and allocating capital. The other Lowe's (LOW). I'll also second Tariq's MCD suggestion. Anybody else have other businesses to add into the mix?

Boy, that's an interesting question. I guess it depends on the mandate of the management team. Holding companies like L have a mandate to allocate capital to all sorts of disparate high return (on a risk adjusted basis) ideas, whereas most public companies have a mandate to invest in ideas within the sphere of their current businesses, while also thinking about share buybacks, dividends, and M&A as alternatives. ------ Buffett/Munger are the bomb, of course. The Tisch's are interesting -- I really need to look into Lowe's more to figure out how skillful they are. Li Ka Shing of Cheung Kong Holdings fame is really good, from what I've seen of his various controlled businesses. The Brookfield guys are really great. BAM is starting to get interesting at current prices. Brian Roberts and the rest of the Comcast team I think is very good. Comcast seems to be doing a really good job of optimizing their assets and preparing for a future where they could have substantially less ARPU. Unlike some value investors, I actually think that the NBC deal is a good one. Despite the pay package, Biglari will do a good job of allocating capital at BH, I think. Eddie Lampert will do a good job at SHLD as well over time. I like the guys who run NRG. They focus on ROIC and I kind of view them as a merchant generation focused private equity fund. The guys at XOM seem to do a good job of allocating capital, although they can only do so much being such a gigantic company. Muhtar Kent and the KO guys are really good. That's all I can think of at the moment.