RRJ

It's funny how wildly biased reporters can be to try and sensationalize to get a story published over and over. The New York Times article cited by that hit piece as confirming problems with the BYD F3 is actually very positive overall, and cites the problems as easily surmountable and the dual mode as vastly better at all electric than the other models out there: "With some engineering effort, better engine mounts and lots of sound damping, BYD can reduce the din. The company has nearly a year to absorb feedback from spoiled Americans and do something about it. The hardest engineering is done, and there are no showstoppers. All of the problems are fixable without adding a lot of cost." The NYT reporter seemed quite fair and neutral in his assessment, and came out pretty impressed with the battery range and technology. See for yourself. Here's the link: http://www.nytimes.com/2011/02/20/automobiles/autoreviews/byd-f3-dm-review.html The Reuters hit piece was a rehash of old news with lots of innuendo thrown in. Really bad reporters and editors there. BYD's got plenty of challenges, but is doing pretty well in its long term strategy - and it is one of the few domestic companies in China that actually has a long term strategy that I can see. They have since last year wisely let go of the outrageous press claims ann focus on market share at any cost, and instead are now focusing on quality and brand now. And they are still selling 50,000 plus conventional cars a month, despite all the talk of their sales being so low in the electric and hybrid models (so are everyone else's in the new technology models for the moment).

Anyone care to offer a suggestion as to a conservative value of Sandridge given the $4.5 billion in present value of reserves as of 12/31/10, and given that recent events have sent oil prices much higher than the $66.93 per barrel they used as the weighted average wellhead price used to value the reserves? I'll admit straight up that I haven't a clue.

I like and understand the business of CRVP. My concerns relate to the control group and the related party transactions. The proxy shows that as of December 31, 2009, the Baker family, in aggregate, had $13.5 in loans outstanding, and collected $1.66 million in interest. That might be what it took to keep the company going, but it is also a good way for the control group to siphon off shareholder profits. The notes pay 12% interest, are interest only until maturity, and are due in 2012. Then there are all the related party leases - also a great way to feather the control group's nest. Then there is the employment agreement for the old man of about $50k per year for "consulting work", which doesn't seem like a lot, but probably speaks to the intentions of management here. In short, I'd worry about these related party transactions, and the overall balance sheet and ability to withstand the business cycle if clients slow pay them, which is rampant these days as large companies slow pay smaller ones, and smaller ones slow pay in turn. This seems like the kind of business that would easily be put on the slowpay track. Can't tell from the 10-k from 2009, so would have to look A/R trend. Finally, from the Jan. 27, 2011 press release on Year end results, Other Income, net, benefited from a one-time increase in non-operating income of $3.5 million. That's a pretty big adjustment item for them. The $.20 cents in net income for 2011 is probably not solid. Weird too -- they then take this "one-time item" and say "compared to a one-time increase in non-operating income of $3 million in fiscal 2009." So is it one-time, and if so why is it repeated? Could be hidden value being captured, or could be maniuplation. Just started looking at this, so I can't say either way.

Myth, This is excellent, and mirrors my own basic list almost eerily, but in a more concise and organized way. Thanks for posting. You might consider: Templeton: recommended using many different valuation measures, -- P/E, P/S/ P/B, P/FCF etc. I think he mentioned he looked at a dozen different ones. I like to look at at least 4 or 5 of the most common, and when several or all flash undervalued as compared to historical valuations for that stock or the industry, then it is a real confidence builder and has helped me a lot. Also, I look for value gurus i respect to have bought in, which also builds confidence. I suspect you are trying to get away from this though, as am I, so I do not think I would add that to the list. Better results from finding your own. Also, Fisher's 15 points are helpful for that kind of growth investment, which I am not able to do quite as well yet. And Munger's "find the extremely talented entrepreneur while they're small" model is a different one as well, and would flout most of these valuation rules most of the time.

This list is, um, not exhaustive: 1. Buying Nike in 1996 (my first attempt at a Warren Buffett / Lou Simpson type of brand stock), holding it for almost 4 years, finally giving up on it. At which time it promptly rose 30% and has been a decent compounder ever since. Fortunately, I put the money in Berkshire, so did almost as well last I checked. Lesson -- patience, patience, and stick with an investment if the business is still performing well. 2. Buying GE early in the 2008 downturn. Lesson -- jury not totally back, but this will at best be a mediocre investment. Lesson (using Klarman's words): Being early is the same as being wrong. And, financials are just too hard to value with rare exceptions. 3. Selling out of good performing long-term hold stocks entirely instead of just trimming them after a runup. 4. Letting market nervousness induce me to enter stop loss orders -- which almost inevitably, whether through regular volatility or machine platform, low price seeking super fast trading, ends up selling your position on a very temporary dip, before the stock moves back up. Ensures a bad sale. 5. Chasing a special dividend. Didn't lose much, but a little.

I am not as versed in BV for FFH as many others, but I think at least some of the recent price drop is due to Fairfax going ex-payment on their upcoming annual dividend.

"The person with no assets and an income (a pink slip away from foreclosure) is a better risk than a person with 100 years of payments ALREADY in the bank. That person with the income... are they going to work for the next 100 years? It's bizarre." No, it just feels that way sometimes. . . Thanks for the very telling anecdote. This is really indicative of a topsy turvy mortage market. Government backed distortion. So much of our economy now is not about true credit risk or business sense, but about playing this or that government program, for this or that government backing, or this or that government tax rebate, or this or that government preference, etc. This framework just is not efficient at allocating capital, regardless of one's political stripes. Here is another anecdote for you. Something like a third of the small businesses my partner and I help start (we're small business lawyers) have to do with gaming some government program, or structuring it to obtain a government preference status. Think about that. From my little perch on the world, fully 1/3 of people starting new businesses are trying to "get their fair share" of government largesse --- for their living. I'm really not trying to make this political, and hope it doesn't get into all that, or at least not much. I'm just saying it is disturbing to me that so many people are clamoring to feed at the government trough. And this is the entrepreneurial group I'm talking about. I just read on the Rasmussen website today that 28% of the American electorate think the government should manage the entire economy -- not part of it, but the whole thing -- a la China or the Soviet Union. While 24% think the government should be out of the economy entirely. Then there are the 45% or so in the middle that think the government should take an active role in managing crises and downturns (I'd probably put myself here most of the time, for the record). Those are eye-opening stats for the American electorate. Maybe if Europe continues to erode and China's bubble bursts people will rethink some of those beliefs in government management of the economy. I think most people on this board who appreciate Buffett's and Watsa's capital allocation skills (and how difficult that skill is to obtain and maintain) can agree that this constant playing against government policy is not a good way for a society to allocate capital, for the simple reason that it incentivizes people based upon political interest groups and lobbying rather than sound business judgment, sound credit risk, and merit of ideas rather than "pull".

Trying to figure out the dilution here. 2,500,000 preferred shares, plus a possible over-allotment of an additional 500,000 shares, so possibly 3,000,000 all told. Each preferred share is convertible, initially, into 12.8791 shares of common at a conversion price of $7.7645 per share. This is subject to "customary adjustments", which I would think would mean organic type capitalization changes like stock splits and the like, but is not subject to adjustment for accumulated dividends. Presumably no strange anti-dilution or other adjustments terms that are rare for public companies (will have to confirm in actual filing later). So, at the initial conversion price, that means an additional fully-diluted share count of 32,197,750 shares. This is in addition to a current fully diluted, weighted average share count of 419,137,000 (taken from yesterday's quarterly results press release). If the extra 500,000 shares are issued, then the share count is increased by 38,637,300. This offering dilutes existing shareholders, on a share count basis (that is, not worrying about the fact that the shares are underwater right now) anywhere from 7.682% to 9.218%. Did I miss anything with this? How much runway does this give you, and is it worth giving up 8% of the company to get that time? Tom Ward thinks so, but it seems like big empire building at the expense of smart capital allocation and shareholder interests to me. Then again, Wall Street likes bigger empires too, and a deal like this could end up looking very smart to keep oil assets if oil continues rising.

BYD's moat is being built right now. This makes it less than real at the moment, but does not mean it will not have one. If they are successful, and there are positive signs in this direction, the moat will consist of: (1) a technological advantage, which is probably ephemeral, (2) a brand presence, which is currently weak, but should grow stronger if they can become known for quality in the way Korean car manufacturers have recently done, and the way Japanese manufacturers did in the 1980s, and, perhaps most importantly, and most lasting, (3) by being a low cost provider of critical technologies such as batteries and solar and appliances and computers. The low cost provider advantage, achieved through more or less complete vertical integration and flexible manufacturing processes that rely on cheap labor, is already present in cell phones and traditional gas-powered cars, and should be easy to translate into appliances, notebook computers, and home appliances, and eventually to electric car batteries, vehicles and industrial and home-based solar batteries and perhaps panels. The cheap labor will get more expensive, but I suspect that's a matter of moving to third and fourth tier Chinese cities to maintain the advantage. And opening up new factories in Brazil, Eastern Europe, Africa, and other parts of Asia (all already in process or in planning stages). Whether they can maintain this cost advantage for the long-term is more difficult to tell. Mediocre moat right now, but it's relevant to note that the unreliability of moats in technology companies that Buffett talks about is one reason they can make inroads into other car companies' moats quickly. When you are the insurgent, lack of moats can be a good thing. Google got into an industry with no moat, but has one now--- wide as hell, but shallow and can still be overcome with ever-changing technology. If they take advantage of that and can build a brand themselves, then that is something pretty incredible. They've done it once in cell phone components. It's not a traditional investment, but a bet on the entrepreneur. Like trying to catch Sam Walton in the 70s or Buffett in the 60s. The only person I know that is good at identifying that sort of person is -- Charlie Munger. But he might just be lucky. Like he was with seeing what he say so early in Buffett, and the many managers they've chosen over the years. Tough call though, no doubt. In Poor Charlie's Almanack, Munger talks about a very valid investment approach that Berkshire had never done -- that of "catching the best ones when they're just getting started." He says something to the effect that this is a promising approach if done well, and that if he were a younger man, he might try to invest this way. Fisher-like. I think that's all BYD is. His $250 million, small shot at that. High risk/ high reward, with a lot of satisfaction to two very wealthy guys trying to help someone solve some pretty incredible problems for humanity that could change things significantly within a generation. This is trying to pick a winner, which is anathema. Nevertheless, they've placed a bet and are supporting the guy. That, along with the Chinese government drooling to lead in the solar and electric car industries, ameliorates a lot of the Chinese corruption and political risk to me. So, if bought right, it's a decent, intelligent speculation type of bet with high upside and minimal downside. After all, this company has two successful businesses and has the leading car in China right now, and three other high-growth prospect industries, and is trading at around 18 P/E right now with 25% or more growth (recent quarter notwithstanding). Could be cheap, like Motorola when Fisher bought in early.

I don't think I'm being too defensive here when I say that this quarter's results don't bother me much long-term. It does not get to whether they have a technological advantage in lithium ferrous ion batteries, or whether they will be able to maintain a cost advantage in the businesses they are in (including solar and possibly home appliances). I don't see a reason they won't maintain that cost advantage for the long-term if they build new factories in third and fourth tier Chinese cities where labor is still cheap. To be sure, being a Chinese company adds a degree of political risk, but BYD is in a favored industry (I think the illegal land use deal is going to work out better than expected now that the authorities have saved face by issuing a "strict" punishment -- (for instance, maybe once the zoning is done they will allow BYD to buy the factories back at a reasonable price). Beijing wants badly to lead the electric and solar industries in the world, and BYD is very well positioned there, so I suspect they will have a political tailwind rather than headwind. Also, as to corruption -- Sokol's presence on the board, and the vote of confidence by Munger and Buffett ameliorate this threat somewhat, though accounting differences remain a risk. Altogether, if you want to have exposure to Chinese growth, I think the risks from that angle are lessened somewhat with BYD. But the risks are there, and this is a bet on the person, Chanfu, and a Fisher-type play, not a typical Buffett play. The biggest threat is the Chiese bubble burstin, which would kill domestic demand and maybe cause commodity heavy countries' economies to plummet too (Australia, Brazil and Canada?).

Thanks very much for posting this. It's obvious a lot of work went into this. Really lays out the comparison nicely.

Went back and read through Berkshire's shareholder letters from the late 1970s, during periods of high inflation. I won't rehash, but in I think 1979 or 1980, I do recall Buffett basically saying most stocks were not worth investing in, and Berkshire, with a 20+% return on equity, barely made the hurdle. In the Fortune interview, at the end, he does admit that despite the gloomy view of stocks, he still invests in them "partly out of habit" and partly because they are "probably" the best hedge, but only if you buy at the right prices. I think in these probably range-bound markets, what Munger is saying, and Vitaliy Katsenelson and others are echoing, makes a lot of sense. Call it modified buy and hold -- require a bigger margin of safety, and hold some cash for severe drops and look for companies with really strong pricing power and competitive advantages. Maybe it doesn't change the approach -- it just demands even more strict adherence to value investing principles than normal. And I still like me a little bit of gold and silver during times of currency devaluation, notwithstanding the Great One's comments.

Oh, and I used several ROAs -- 1.8%, yes, but I also used 1.6 and I believe even 1.5, figuring new regulations would slow things down a bit. I still came up with a value north of $30 today under just about any reasonable scenario. Even at a $30 intrinsic value now, and below long term average growth at 8% for 8 years, I get a value of $55.50, which would put me significantly in the money for the warrants and a decent return. I think they'll do much better than that, barring a complete Japan scenario. There is some intelligent speculation here though, just because there is so much that is unknowable in the banking world right now. I just think the upsides outweigh downsides for WFC by a good bit. I don't know how you take away their deposit base or their physical footprint or brand or momentum of culture for instance. This is a necessary business, and as one of the too big to fails, it enjoys some downside protection other players don't have and without as much exposure to investment banking and regulatory risk as the other major banks. And damn good management. These guys are monsters at cross selling. One thing I'd like help from the board with is the repeated references to a statutory "cap" that the banks face once they get to 10% of total US deposits. Wells is right at that, and Citi is above it I think. I believe this refers to a cap at which the regulators would not let you do inorganic purchases, but does not prevent organic growth. Does anyone have more insight into that. It does not seem to be enforced right now, but I never got totaly satisfied with that issue (which shows I did not do ALL the homework I should have on this).

I was hoping the seemingly overblown foreclosure / repurchase of mortgage securities scare would take WFC and JPM down another 10%, and was contemplating how best to take advantage of this. WFC's back up 5% today, so I guess people weren't too freaked out by the short analyses coming out. I decided that the TARP warrants (which I own for long-term purposes, and still think are a very compelling low downside / high upside play) are not the best way to play a short-term scare, because so much of their value right now is the time value of the option. I was considering LEAPS instead, which I decided would probably show the adjustment back upward more dramatically. To me, if you consider the large banks undervalued at current prices, and get comfortable with a conservatively estimated normalized earnings figure in line with historical valuation multiples (or even a bit lower to be conservative), then you would have to expect a 1930s or Japan deflation scenario to not be in the money 8 years from now. While that's possible, I think it's unlikely. So low downside, high to very high upside. Less money put at risk. It amounts to a leveraged, long-term bet on the bank in question. With a kicker in the form of a lowering of the strike price if dividends are raised beyond a certain high water mark. For Wells, my warrants give me an all-in price (warrant plus strike price) of $42 a share, not counting any dividend adjustments. If WFC common goes above that before October 2018, then I'm in the money. They're undervalued at $25 or so today. What am I missing?

I'm a WFC owner, both common stock and the TARP warrants, so I'll try and avoid any bias as defender of my idea here. But I do think WFC is undervalued right now, despite undoubtedly having some short term issues to still work through while we work through this contained deleveraging process over the next few years. They pay less for deposits by a good bit than most banks. They execute cross selling far better than most banks. They avoid troublesome activities far better than most banks. They allocate capital better than most banks (see Wachovia, which doubled their footprint but only cost them about 20% stock dilution). They wrote down a boatload of the problem loans from the Wachovia acquisition, and still have room left on those write downs. The mortgage crisis will delay things a bit, but for now they have more confidence in their processes than the other banks have shown. Time will tell here. As a lawyer, my sense is that there are technical problems, and political momentum wants to "help the poor underwater unemployed person stay in their home" -- fair enough if you disregard the moral hazard. But legally, there is no dispute that 99.9999999% of the people being foreclosed on are correctly losing their homes because they are not paying the amount they decided to borrow. The law will not let these people off on technicalities forever - perhaps it delays things a bit and drives house prices lower for longer and delays recovery. My guess is Wells will come out of this stronger and quicker than most, because of an ongoing culture of more conservative banking and good execution that they did not lose and still have. When that happens, the earnings come with it and the stock should be valued as a financial stalwart at 12-15 P/E on a big earnings base, with greater market share due to decimated competition. I'm very comfortable holding for the long term and buying mroe if it drops much more.

Or maybe Einhorn has been short a while with no result due to a fairly flat stock price, and decided he needed to really make a splash to knock the stock down a peg short term and cover at least some of his position? I might believe that if I were cynical and thought the shorts were that manipulative on occasion. What better occasion than VIC to do that?

I agree. They might both be wrong. After researching this a while back, it became one of those stories of seeing potential value, but there is now way to tell when they can unlock it. Like the Buffett quote from 1999 to Sun Valley group of having two birds in the bush, "but [Aesop] doesn't say when." They can put off heavy losses more or less until they decide to take them by selling, and Einhorn probably goes a bit too far in trying to be a catalyst by saying they can't cover their expenses -- they've cut those down to skeleton level and appear to be covering them adequately so far. Things are horrible down there now, true, but that's what piques one's interest for a value investor, right? Prices will eventually recover, at least somewhat, as there is plenty of good property in the panhandle, and some of the best beaches in the country. But real estate is a very very long cycle, and it could take 20 years to start to really realize it. The area around Destin and Panama City Beach got developed hugely between 1990 and 2006. During those 16 years, property near the beach (say, within block) went from around $100,000 for a third of an acre lot to $1,200,000 a lot, then recently (in past 16 months) has fallen to $350,000 for a lot with a tear down but usable small house. These anecdotal prices are all for the same lot, and this is based on a friend's personal experience, right around the main St. Joe developments along 30A. St. Joe has a ton of this type of near-beach-front property, from Tallahassee to Pensacola, which even though a fraction of their 577,000 acres, is probably the lion's share of the value when zoned and eventually developed with upscale amenities. Maybe there is real value there, but the stock will stay flat for a dozen years or more before it starts to be realized in real estate sales. Berkowitz and Einhorn would both lose. I passed because I can't say either what the value really is or when it can be realized. In the Depression it took real estate values in and around Manhattan 20 years to recover, such that home prices in 1949 were 2/3 of their values from 1929. That's a serious recovery time.

Agree. These sorts of kickbacks are part and parcel of the backdoor reverse merger IPO and pump and dump schemes. They get stock through the transaction and then pump and dump, leaving the company with a disparate (and disgruntled) shareholder base that they can't even afford to administer properly. Lots of companies desperate for capital get ruined this way by unscrupulous "professionals" offering to solve their capital problems. Sometimes the companies aren't victims of course, but conspirators.

I know this was a serious question, asking for a serious answer, but the sheer pithiness of it made me laugh. My somewhat unsatisfying answer to the accelerated currency devaluation problem is to supplement the high quality stocks with a little gold and silver hedging, painful as it is for a value investor to have bought at a high (not this high, but high enough).

This is a nod to obvious shareholder disappointment, but it does not change what has been shown about Mr. Biglari's temperament, judgment and tone-deafness. How likely is he to execute the long range plan of keeping excellent managers with a personality that is all about him? He has had his "naked moment" and there's really no coming back from that, at least for me. Same is true for Cooley and the Board.

I ran into this link today amid all the hubbub about gold's recent rise: http://seekingalpha.com/article/172441-buffett-s-aversion-to-gold-could-cost-him The quote from the 1979 shareholder letter got me thinking about the relationship between Berkshire's book value per share and the price of gold. Right now, my back of envelope calculation shows that a share of Berkshire, at book value, is worth about 68 ounces of gold. That's a heck of an outperformance from the half ounce of gold that it would have bought in 1979, which was near gold's previous high. Can we properly surmise from this that stocks are better than gold generally, because earning power is more valuable than a commodity without earning power? I'm not sure. I do think it is proper to surmise that capital in the hands of a superior capital allocator is a much superior investment than a non-earning commodity like gold. Disclosure: I do own a small % in gold, as insurance against currency devaluation, but have a much greater percentage with the capital allocators favored by this board.

Thanks for the posts on this. I've been looking at natgas companies for a while, and have about decided to put it in the too hard pile, but it's at such a low that it's tempting to invest in some of these well run companies with strong reserves. I tend to agree with Myth that natgas prices are likely to see a long-term low level due to irrational drilling (irrational from the point of view of the whole industry, not irrational for individual companies, which need to keep drilling to keep the lease alive or to keep some revenues coming in). We probably won't see prices above $5.00 per mbtu for some time. Even the CEO of Sandridge commented that the economics of natgas have changed recently, prodding him to do the Arena deal and balance the natgas with oil. So in the end, big picture, buying a natgas company seems to be a bet on the growth in demand for natgas, which in turn is a bet on a lot of things like political and regulatory climate, and whether electric cars take off, and whether the price of oil rises to "force" the conversion of power plants to natgas, and whether nuclear power or solar takes off to eat up some of the demand, etc. I cannot get comfortable saying we will definitely reach significantly higher demand for natgas. I do like T-bone's political analysis ---there are a lot of new states -- and therefore Senators and Congressmen with natgas lobbies at home now than there were even a few years ago. That will matter. Still too hard, but would love someone with insight to help clarify this for me if I'm missing something. If I can get comfortable with the big picture first, then I sense a good value play in the best run of these companies (probably Sandridge, Contango, and maybe a few others). Thanks.

This is good news. I had a long talk with the friendly folks at Schwab's Global Trading desk yesterday, and they are working on greater access to international exchanges as well, and hope to have it all worked out by spring 2011. He couldn't be more definitive yet, because terms are being worked out. They'll all have to do this of course to stay in the game as Americans keep investing more internationally.

I'm so glad you wrote this. As a long-time student of Buffett and Munger, and the other legends you mention, I have had some success investing in the best large-cap, well known companies bought at good valuations. But I haven't been able to move down the size chain, despite a lot of serious effort. I subscribe to Value Line's Small and MidCap edition, and pore over that religiously, and see plenty of cheap stocks -- but they are usually inferior companies or have other problems. I know there are plenty of values out there, but to find the truly cheap values is very hard, not very easy. And it takes a ton more time than "settling" for superior returns by buying the well known best companies in the world when they are at least 30% below intrinsic value, and then letting the company to the work. I won't get super rich doing this, but I won't get poor either. And I have been outperforming the S&P by a good measure for the past several years. I am always open to any advice on how to make the leap to finding the ten baggers though. That's why I read this excellent board. Thanks to all by the way for all I learn here.