Ballinvarosig Investors

I am not being smart, but if there's one thing that makes me tremble when coming to evaluate a supposed value investment, it's the words "patent portfolio". Motorola, Nokia, Nortel, a whole bunch of companies that ended up imploding were supposedly value at some point because of their portfolio of patents. It feels that when you start evaluating a company on past achievements, the future really must be bleak.

Death spiral seems too strong a term. Aeropostale was heavily bleeding cash for 3 years before it went under, its brand was nowhere near as strong, it had no international exposure worth speaking about, gross margins were poor. Abercrombie is a much better business and a stronger brand. The positive free cash flow has only just went negative this year.

A whole pile of companies in the apparel business are getting smashed up. Nike and Under Armor have hit 52 week lows while Abercrombie & Fitch is at an unbelievable 16 year low. The latter seems pretty unbelievable. This was the pre-eminent brand when I was at college 15 years ago, yet here it is seemingly at risk of going under. The stock price decline is all the more startling when you consider it is has gone from 92M shares outstanding to just 68M outstanding today. I would have thought this was normally a good thing, but just ask Aeropostale shareholders if they thought the same about their stock buy back binge. It doesn't seem all bad for Abercrombie though, gross margins are still relatively strong, and despite the strong dollar, growth seems to be continuing internationally (just over 1/3 of revenue), with the US stores leading the declines. Having said that, the real worry is the US store sales are the leading indicator here. With $3.5B in sales, I do have to feel that this thing is worth more than $1B current market cap to someone out there. Thoughts?

Or even just look at the blended tax rate on his income. $11.5M income, $1.8M in income tax.

Can people debate this lifestyle stuff in a separate thread please?

You are not the only one. My brother works for a large multinational that is trying to disentangle itself from IBM. He said the reason why the IBM mainframe business is so profitable (and hated by customers) is the fact that customers are charged on a MIPS (millions of instructions per second) basis. Historically, they have been willing to pay this cost due to the stability (and some inertia) that a mainframe platform provides. Technology has moved on though and the upstarts at Facebook, Google, and other companies have developed technology (that's open source and can be run on commodity hardware) that allows customers to scale applications horizontally. This has left IBM selling a solution that's obsolete and too expensive, little wonder customers are leaving. The process isn't all or nothing though, and it is being staggered. If a company has just bought a lot of IBM mainframe hardware, they will want to get the full life from it before upgrading. This is why IBM are able to manage the decline. Make no mistake though, this part of the IBM business is dying. Of course, people will say look at the free cash flow yield. It looks great, and if you believe the story that products and services outside of the mainframe (the other cash cow) can take up the slack, then IBM is a screaming buy. I asked my brother about this one too, and he actually said that not only is his company trying to get off the mainframe, they are trying to stop using other IBM products and services too (people are less willing to spend $200k on a fully loaded IBM web server when you can configure environments on Amazon for much cheaper). Again, like the mainframe, a lot of the benefits that IBM were able to provide for a price is now free and much of this technology is still in varying ways of early adoption. That leaves me wondering, what products do IBM actually have a genuinely competitive advantage in? What I will say about IBM is that they are doing right by shareholders and are managing the decline reasonably well, so there is the possibility to buy it if it's cheap and sell when it's dear.

Not going to list everything I own because I have lots of tiny positions, so here are my main ones. FYI - cash the biggest position by far at ~40%. Generals UNIQA Insurance Group (Austria) Karelia Tobacco Company (Greece) Brainjuicer (UK) Yahoo Japan (Japan) Eni (Italy) Lloyds Banking Group (UK) Wells Fargo (USA) Special Situations LXB Retail Properties Plc (UK) Bowleven PLC (UK)

I would have thought Biglari was the most successful one out of any of them. With very little money down, he has effectively managed to make a $1bn company his own personal piggy bank.

This has shades of Bob Goldfarb and Sequoia all over again, selling down good positions to keep bad ones. Are Sears, Fannie/Freddie, and St Joe really so good to sell Berkshire and AIG in order to keep? Personally, I just can't see it, if these positions were so good, they would have worked out by now. That's the one thing I have learned in investing - the good ideas are the one that don't need years to come good. So I have no idea why he is engaging in this strategy of doubling down on losers, especially considering the investment vehicle that he runs (a mutual fund that is likely to have a lot of unsophisticated investors). If he is getting redemption's, then he really has no one to blame but himself. One thing that disturbs me about Berkowitz is just how disingenuous (whether it's accident or not) he's being about Fairholme's current position. He keeps talking about how this is like the time in 1991 when he had 35% of his assets in Wells Fargo. I have to call BS on this. Firstly, I don't think that Wells Fargo ever fell by 50% during the real estate crash of 1990. Looking at the share price over the period it's more like a 35% decline. Even at that, within a few months of the trough, the share price just went up and up smashing new highs with each month. Operationally, the real estate crash really only caused Wells to wobble for a few quarters. Just look at that 1990/1991 annual reports and you'll see that what Wells experienced was really only a hiccup that the market over-reacted to (but rapidly corrected). I have to wonder are there any vulture hedge funds out there looking at Berkowitz's very public book and desperate liquidity position in order to engineer some sort of attack on his fund.

http://www.bloomberg.com/news/articles/2016-09-27/eight-cent-eggs-consumers-gobble-cheap-food-as-grocers-squirm Very interesting article on competition within the grocery sector.

Not sure it's been mentioned before, but it looks like Parsad has himself a new website. I noticed there's a new section with annual reports which I will be devouring. http://www.cornermarketcapital.com/annual-reports.html Cheers ;D

Is it time to stage an intervention for Berkowitz? Almost nothing of what he says these days has any basis in reality. It's crazy how someone who has been so insightful in the past has just lost their way so badly.

Anyone got the full letter? The editing at Value Walk is awful and often misses out good bits.

I have a good one. We owned close to 1% of a micro cap British company that's listed on AIM (not saying the name as it's still going). We thought the company was cheap, it was growing, was in an ok business (8-12% avg ROE); we liked management, and they were also considering a dividend. It had almost no institutional investors, and with the dividend being initiated and ok growth, it'd sooner rather than later that investors would pile in. It was literally 2 weeks after we got our full position, we learned the CEO was ill and would be resigning. We were a little worried, but decided to hold the course. Needless to say, the replacement CEO that was brought in had a "colourful" past. What worried us more was the long-term incentive plan that the company signed up for to get him on board. He only had to increase the share price by 23% to be granted a chunk of the company for nothing. We eventually got to meet him and within minutes, we just knew he was an oily character, too much promotional talk, too much focusing on the stock price. The alarm bells were ringing at this stage, and when by chance we ended up meeting an old acquaintance of his who told us he was a bad egg, we unloaded our stock. I am almost certain that he is defrauding the company, because the stock price to a literal day managed to stay in the 90 day range above a certain price so his performance options would vest. We thought that he would do something like that to get the options to vest, so probably could have held on and made money.

Acquirers Multiple recently discussed an old interview with Berkowitz from back in 2009. It really illustrates just how much Berkowitz has deviated from his core principles of investing by looking at free cash flow. http://acquirersmultiple.com/2016/08/how-to-pick-good-stocks-by-trying-to-kill-the-business-strategy-bruce-berkowitz/

That is exactly what I was thinking. When I look at Francis' portfolio, I see a few stocks I have owned myself, along with others where I can see why they are in his portfolio. Some are up a little, some are down, but as a whole, he's winning. As you've correctly pointed out, the problem is in over-sized losing positions. My natural assumption as to the reason for this is the same as yours - Francis is doubling down on bad positions. It almost looks to me like he's unwilling to accept a loss, so instead of just cutting the loss, he doubles down his position without paying attention to the deteriorating fundamentals. I mean, when you look at his large positions (Sears, Valeant, the Greek bank), you can hardly say that the fundamentals of these companies were anywhere near as strong as they were when Chou first went into these positions.

Not just the Japanese. http://www.fuw.ch/article/the-fed-is-now-hostage-to-wall-street/ Genius really :o

Buffett cutting WMT is not at all surprisingly. Look at the ROE, look at the net margin, you don't notice it quarter to quarter, but over the years, the squeeze has been relentless. When you look at how Tesco imploded, I am surprised he hasn't cut the position sooner.

Burry shrinks his portfolio http://www.dataroma.com/m/holdings.php?m=sa

You are missing the most important one (of our time). Klarman.

When I say value, I mean in the traditional sense of the word. Buying unloved companies, companies at a discount to underlying value, companies at low PE's, etc.

If you're looking for spectacular returns, I agree. Speaking of imagination/insight, I am reminded on Buffett's purchase of Coca Cola 30 years ago. It was already a large, well followed company with scores of analysts. Yet Buffett was able to make a simple extrapolation that vast untapped markets outside of the US could be opened up to Coke's products. It was a simple deduction that a ham sandwich could have made, yet Buffett was the only one to do so. Anyone care to speculate what in plain site opportunity like KO exists today? My thought would be Bank Of America. You have a CEO that is telling you that the company has $35-$40bn in normalized earnings. you have all the wreckage of the financial crisis now firmly in the rear view mirror, you have a stock that's priced well under book value. I don't think it'll be a 20 bagger like KO, but in 5 years time, I simply cannot see how it will not double from today's price. Incidentally, it ticks the value investing criteria ;D single digit PE, priced under book, in a sector that is hated.

Sorry to pick you out, but that statement actually gives me hope that value investing has a future if anything. I think so many folks have been so badly stung by value (whether it's through permanent capital loss or awful performance) that they're now increasingly embracing growth. It seems to me that the growth story is now so ingrained into investors, that their expectations have become detached from reality. I actually read an article a few days ago that suggested that stocks were actually cheap as their returns were favourable when measured against long term bond yields. It's like no one can conceive interest rates ever going up ever again.

Jeff Matthews wrote the following about Mattress Firm (MFRM) just two months ago, I hope he does not mind me reproducing. http://jeffmatthewsisnotmakingthisup.blogspot.com/2016/06/mattress-fire.html Yesterday, Mattress Firm was offered an all cash buyout of $64 per share; a 100% on the share price as of when Jeff wrote his blog entry. I am not having a go at Jeff (whose work is always illuminating) and I am not really suggesting value investing is actually dead. But the current investment environment has become almost totally bifurcated towards growth rather than value. Even looking at the ideas on this forum, considerable bullish argument is made unicorn stocks with the most extended valuations. You look at the traditional value funds, performance has generally lagged badly. I won't name names, but plenty of people are badly under-performing the market, especially in the 10 year period following the financial crash. With the S&P at all-time highs and the valuations of growth stocks certainly looking frothy at least. Are we finally reaching a stage where value could out-perform growth?

Buffett has a habit of going with companies that he has past history with. Naturally, he's looking to buy at a fair price. This is controversial, but what company ticks that box? Goldman Sachs ;D I am jesting, but for the reputation risk, I think it really would be his kind of company, especially at today's price.