oddballstocks

Have talked to some who have negotiated with Buffett, he is extremely ruthless. He didn't get to where he is by being a nice grandfatherly figure. Someone left a comment on a post of mine saying one of the KKR guys told them that Buffett had some skeletons in his closet like everyone else at that level. Buffett is incredible at manicuring his public image. My guess is the closet comes open at some point after his death. Some have contended BRK doesn't pay a dividend because of some side partnerships he setup could be exposed. I believe there was a lawsuit around this, don't remember the exact details. Can you elaborate on what the KKR guys say about him being ruthless? It's interesting, because we think of all these Wall Street or Private Equity guys as ruthless but it seems like Buffett out does all of them, and that's why he's richer. Just take the Goldman, GE, and BAC deals for example. Drove an amazingly hard bargain. Also, what kind of partnerships could be exposed if they pay a dividend? I don't see how the two are related. I'd rather not elaborate, the point was the KKR guy said that Buffett isn't exactly clean either. None of these guys are saints, Buffett is at the top for a reason. In some ways his genius is how he's perfected his image while getting to the top. In terms of the tax deals. The allegation is that Buffett helped some of his early partners set up illegal tax shelters and side partnerships that skirted the law. If you dig hard enough you can find a lawsuit related to this from 10-15 years ago. I've heard some chatter that some of the Buffett tax push could be part of a behind the scenes agreement to make some of these problems go away. These partnerships own BRK, and if BRK ever paid a dividend the partnership would have to declare income.

Have talked to some who have negotiated with Buffett, he is extremely ruthless. He didn't get to where he is by being a nice grandfatherly figure. Someone left a comment on a post of mine saying one of the KKR guys told them that Buffett had some skeletons in his closet like everyone else at that level. Buffett is incredible at manicuring his public image. My guess is the closet comes open at some point after his death. Some have contended BRK doesn't pay a dividend because of some side partnerships he setup could be exposed. I believe there was a lawsuit around this, don't remember the exact details.

Agreed, although having a helping hand to open doors is always appreciated. I've come to learn two things: 1) Initiative is rewarded, if you knock on enough doors some will eventually open. 2) Great connections should be used when possible. I've had many more doors open through referrals or introductions compared to brute force. Use whatever tools are available. I was able to get an internship during college through a strange connection. My mom ran into an acquaintance in a grocery store and the conversation turned to kids. She mentioned I was studying computers. This acquaintance said her husband was an investor in a start-up and I should call him. I called the guy and somehow worked my way into getting an interview from him. I was hired after I interviewed on my own accord. My mom found a connection, but I made it work. I don't think there's anything wrong with this at all. Too often students disregard parent or adult advice. If a niece, nephew or my own kids asked for an introduction I'd give it if I felt they could make the job work.

I've seen some chatter about this company in the past and they were profiled on TechCrunch this morning: http://techcrunch.com/2015/02/15/yc-startup-direct-match-aims-to-make-bond-trading-as-easy-as-stock-trading In short this start-up is trying to build an exchange for bond investors where everything will be transparent. The goal is to drive fees down. They aim to make money by selling research on their marketplace. This fascinates me on a few levels. The first is that they're trying to break into a notoriously closed and non-transparent market. My sense is fixed income players like the lack of transparency because that's how money is made. Secondly DirectMatch is facing the network effect issue. They need to have a market with enough liquidity that new players become interested, but the only way for a player to become interested is either with a fee-incentive or enough other volume. If these guys can crack this problem there is a lot of runway in terms of profit potential. I'm skeptical if they can do it. Current market players have a lot of incentives to remain entrenched.

Everything is negotiable. Yes they're 'fixed' but if the airline threatens to pull out of a city suddenly the fees drop.

This is true but the big airports have limits on how many planes come in and out at anytime (Let's say every plane arrives in 5 min intervals or leaves in 5 min intervals. So there is a limit of 288 airplanes leaving or arriving within 24 hours period). Airports will have to either expand or there will not be enough capacity. Usually these bigger airports are contracted to the big four airlines for a really long time. Railroads owns them where as airlines do not and these routes are controlled by the airports (government). This is a live flight status tracker http://planefinder.net/. You could also fly into nearby cities. This is a tried and true strategy for startup cheap airlines (Spirit). In Pittsburgh Spirit flies into Latrobe, a regional airport. I remember reading in an article that Latrobe's traffic went from 50k passengers a year to over 250k passengers a year due to Spirit. Parking is free and for most of the Pittsburgh metro travel time to Latrobe is maybe 30m longer at most compared to Pittsburgh International. I remember a few years ago some airline flew into White Plains rather than NYC to save on gate fees. If a ticket costs $400 round trip to JFK or $175 into White Plains is that extra train trip from White Plains into Manhattan that bad? As a consumer I hope airlines never become like railroads. What we need in the US is more airlines, not less.

This is exactly why I don't lose sleep trying to read every shred about a company or "understand the business" because we never will unless we own it. As an outside passive investors we are playing a game of probabilities. If you buy at a low enough value to *something* there is a greater chance of it being worth more in the future compared to being worth less. I like to own more than a handful of companies to spread out the probabilities. Some risks I won't see coming, I want to minimize the outcome when that happens. As long as humans with emotions work at companies there will be risks. No one is really rational. Perfect example; a client of mine, a multi-billion dollar company had a CEO fly off the handle. He was sleeping with a secretary and accused her of cheating on him with her husband (take a second and ponder that..). Went to their house on a weekend and beat up the husband and told the police "If you hadn't arrived I'd probably have killed him." You can't know about these things ahead of time as an outsider. As an insider you might have a sense it's possible.

I agree on every point. Especially on the idiotic idea of buying a company because it pays a dividend! Only exception I would say to holding stocks that pay dividends are companies that are fairly valued but are not capable of re-investing 100% of their disposable earnings at sufficient ROIC hurdles. I'm thinking of KO or something similar. Any other reason for paying dividends is inefficient capital allocation. I'm going to disagree on dividends. I like buying cheap companies that pay me (the owner) part of the profits back as dividends each year. My thesis doesn't usually rest on earnings, sometimes it does, but it's usually assets or acquisition value. I'm essentially paid to wait for IV to be realized. I own a number of illiquid stocks that never appreciate, but I get a dividend on them. I'd rather get a steady dividend for years while waiting for the 'one day' when the stock jumps at once. This way I get two types of returns, the continuing dividend return plus the eventual appreciation. Dividends are something I'm starting to appreciate as I grow older as well. Extremely successful investors who have been at this for decades all seem to favor a dividend of some sort. I believe there's a reason for that. Even Buffett likes to own companies that pay him dividends.

+1 My style of investing is more similar to Graham or Schloss with lots of cheap stocks that I sell once they hit IV. I'm always on the hunt for something new, and quick to sell. This strategy is stereotyped as terrible for taxes and fees. I turn over about 10-20% of my portfolio a year at the most. For example I turned over less than 10% of my portfolio in 2014. Taxes aren't really something I'm focused on, I don't let the tax tail wag the dog. Most investments even cheap small stocks take more than a year to appreciate to IV. There is this myth of buying net-nets or low P/B stocks and recycling them every few months. In my experience the reality looks more like this: buy net-nets or low P/B stocks and sit and wait forever as the price never moves. Then suddenly a year or two later the price appreciates in a single day or two without warning and you sell. The strategy works, but it's boring. There's a reason no one is doing this, it's like watching paint try. It's much more exciting to analyze managements or find compounders, but the strategy is sound, boring but sound.

Plenty of signs it burst last March I didn't notice. I talked to a VC about a year ago about selling a tech company. He said that valuations had fallen through the floor and I could only expect 10x sales compared to 20-30x sales a year earlier. To stodgy old value investors 10x sales is probably considered high. But when valuations fall 60% or more I'd say that's significant. Keep this in mind, valuations are much different for young and growing companies verses a larger stable mainline company. A startup might have 50% YoY sales growth, something you're not going to see at KO. On a ski lift I spoke to someone who was ranting and raving about the 'second tech bubble'. He is an engineer at a mega-corp, very stable job, risk adverse type. He lived in SV during the first bubble and was visibly frustrated that his friends who went into tech became rich through options and IPO's whereas he never did. All he got to do was attend the parties. He felt like this was even worse. To me it sounded like someone who missed out and wanted everyone else to suffer. In the 90s the market was ahead of itself. There were companies with no profits on the back of unproven business models. We wanted things like WebVAN to work, but it wasn't feasible, the infrastructure wasn't in place. Now 15-20 years later we're seeing companies implement some of the ideas we had back then. There's a difference, these companies now are profitable and are growing. Clearly the market is excited about them and has given some high valuations, but there is the potential to grow into them whereas Pets.com never was going to. Maybe a poor analogy but look at the chemical companies in the 60s (I think). They were the high tech bubble stocks of back then. All sorts of promises of a better future. They were clearly a bubble. Then 20 years later in the 80s those dreams were implemented and you had a second wave in many ways. But the companies in the second wave grew into the dreams everyone had from the 60s and earned their valuations. Rather than worrying about tech stocks being in a bubble I think value investors should be looking at tech stocks and wondering which new companies are doing to destroy their old mainline blue chip shares. A few years ago no one would have thought that the taxi business could be disrupted, and suddenly here we are. It's when industries such as the taxi industry are disrupted that one realizes we're on the edge of a true transformation. Step into many businesses today and you'll realize that they're tech companies with an old fashioned facade.

I know a bank investor who said to me "There were a number of banks with 15% ROE's up until the day they failed in 2008 and 2009." Yes, ROE isn't everything. A bank can have a high ROE and then fail, a number did. Not saying this is true for JPM, but the rest of your comment fleshed this out, there are more factors beyond just a single stat or two.

I would say yours is the interesting perspective. What's the book and can you elaborate. The Art of Bank M&A by Alexandra Reed Lajoux and Dennis Roberts. They discuss how JPM passed their stress test through portfolio positioning yet had the failed trade in London plus had to pay $400m for rigging electric rates. That those situations should have been caught with better internal controls but weren't. His conclusion was that it remains to be seen whether JPM has changed internally, but he says the market doesn't seem to care as the stock has risen. The book is excellent for anyone interested in bank M&A. It's written from the perspective of an investment banker. It goes deeply into regulatory issues, how to conduct due diligence etc.

So the GoodHaven guys left Fairholme, created a new mutual fund, and bought SHLD there? That doesn't seem to be logical to me. Maybe they disagreed on topics other than SHLD? Don't know, I know nothing about Goodhaven except they left BB. The Barons article doesn't paint the best picture of the place. Granted maybe Barons wanted to find a little dirt and magnify it, possible for sure. The article claims it was a hostile work environment. That isn't the type of place where negative opinions float freely. Maybe everything was hostile except that?

Interesting perspective. I'm reading a book on bank M&A and JPM is used as an example repeatedly of what a bank with bad internal controls looks like and the consequences therein.

To expand on my thoughts. An innovator might be Greenblatt. He was doing special situations, then he's doing the Magic Formula stuff, and now it's the value indexing. Great things that investors are learning from. An investor can jump into any stage in his career and learn something. In many ways Klarman is an executive who happens to run a hedge fund. I've run into a number of successful businessmen locally who operate similar to him. They see a bargain and go for it. One year it might be owning office buildings, then an opportunity opens up in warehouses, they jump on it. These are guys who 'get' business, not one niche, but business. Maybe a related thought can clarify. I met a guy last night who has an organization that helps to start drug recovery shelters. He has this system that he's been working with that can start dozens of this successfully per year. They've been doing it for years and changing a lot of lives. The key he said is a repeatable system that they just implement over and over. He didn't invent the system, he copied it, but he's a master at creating processes and implementing systems and it shows by the impact he's having. This is the Klarman for me, not better, not worse, just a different role.

I seem to be butting heads against you today. First on the Berkowitz thread and again here. :) I'd ask the question of whether being an innovator is a necessarily a goal worth having. I mean, if you can follow the Buffett playbook to a tee and be very successful, is there something inherently wrong with that? I'm thinking back to something Pabrai mentioned years ago about people having some intrinsic bias against copying other people's innovations -- as if that was something bad or to be looked down upon. (I think it came with a story about competing gas station attendants.) Alternatively, I rather enjoyed the story about how Burger King didn't have a real estate division -- it just built next to McDonalds. :P Not sure we're butting heads. I think in many ways it's harder to be an executor. Everyone wants to innovate, few are willing to execute and do it repeatedly and reliably. I put Walter Schloss in the executor camp as well. There is something to be said about an investor who can work the same system for decades through all sorts of market conditions. Both Klarman and Schloss' results speak for themselves. Consistency is key.

Thanks for posting the PDF. I'm not really sure what to say about this. It appears as if Klarman took Buffett's most popular quotes and reworded them. I like Klarman, he's obviously very successful and has earned the status of 'guru'. But I haven't gathered a lot of great insight from him. Margin of Safety was good, but not ground breaking. To me Klarman is a gifted executor. He can execute exceptionally well, but he's not an innovator. An analogy would be like an athlete who is one of the best using a traditional approach verses Buffett who became successful by innovating and creating a new approach. Not that one is better than the other, just different.

I have seen lots of places (heck I've even worked at one) that do exactly what you are saying - it's the boss' opinion that matters and everything else is secondary. But I have also seen & worked at places that welcome disagreement and are open to changing their views. I think it's a folly to make the leap that because one person was looking at it for a year, he had confirmation bias and / or is unlikely to disagree with the boss. Also, I would guess that for someone who has been on Bb's investment team, career risk isn't so high that they cant disagree with him. Do you really think it would be that hard to land on your feet after that gig? Is it possible that the analyst had confirmation bias or didn't want to disagree with BB? Sure. But given his track record and what I've read about ex-fairholme employees (e.g. the Goodhaven guys)- I just think it is more likely that BB is open to people who disagree with his ideas than the counterfactual that BB is so arrogant that he just dismisses everyone who disagrees with him. As far as SHLD goes, I actually agree with you (I suspect). I don't see ESL actually ever willingly winding down retail to extract real estate value. I don't see anything SHLD has done that suggests retail can turn around. I very much think that BB has probably got it wrong here and the opportunity costs of waiting around have been and continue to be huge. Didn't the Goodhaven guys leave because they disagreed? Didn't that up and coming brother-in-law COO leave because he disagreed? Maybe you've worked with BB and know better than I. But from my memory it seems that when people disagree they end up leaving, at least that's in the press.

Great book, read it in 2010 when a lot of people were talking about hyperinflation. After reading the book I recognized why it wouldn't happen in the US in our current environment. Although this book led me to read When Money Dies a more of a focused story on part of Lords of Finance. Lords of Finance fills in the gaps of 'why' things happened in the inner war period. I suspect this isn't taught in school because economics are expected to be too hard for students, so it's all glossed over with easy to digest sound bite history pieces of why things happened the way they did.

I've never worked in a mutual fund or a hedge fund. So maybe fund managers and analysts are very congenial and philosophical and debate ideas on their merits. Maybe these guys are like two English professors debating a good book over a pint at a pub, I don't know, it's possible. My experience is from working at companies both large and small. There is undeniably a power dynamic between a boss and a subordinate. Outside of very rare occasions I'd say it's uncommon for a subordinate to question a boss' pet project, and even worse call it a lark. To take this to the corporate world. What I see here is some executive who has spent a decade on some project. That's not an insignificant amount of time. He then hires an analyst to look into the position, they consult with outsiders, evaluate everything. Then he's asked his opinion, what do you think it'll be? Maybe he'll say it's good but give the cautionary language. "The real estate is valuable, we have a margin of safety, but there is an outside chance x, y, or z might happen that could potentially come close to impairing part of the thesis." When I've seen execs question the pet project of a CEO at places I've worked it's the questioning exec who's looking for a new job. I've never seen the CEO suddenly change their mind. But like I said, I've never worked in a fund. Maybe funds are politics free, and maybe the people at funds are different, I don't know. The way 'guru' managers are exalted on this board I'm not sure they can even make a bad decision. Even their worst decisions are good ones.

My guess is that this team was hired to kill the SHLD thesis, and cannot do it but is still trying. Seems like there's a bit of a conflict of interest here as well. If this analyst tells Berkowitz that SHLD is a sell what happens to their job? If SHLD is a 'buy' or needs more research this person still has a job. Maybe this isn't something they explicitly think about, but I'm sure it's in the back of their mind. I'm having trouble comprehending this as well. How many employees will tell their boss, an extremely powerful man who runs billions that they made a mistake? Unless outright fraud is found at Sears I can't imagine this analyst is going to deliver bad news. I don't know anything about Berkowitz, but if he has a temper or is a screamer I'd say there's an even lower likelihood of him receiving a truthful opinion.

There is a good book that has data that provides a very compelling case for inverse correlation between GDP growth and stock market returns. Triumph of the Optimists: 101 Years of Global Investment Returns Vinod So this would mean that over long periods stock returns are always negative right? If countries continue go grow (GDP growth) then returns should be negative over the long haul? If you extrapolate out a bit it would mean that equity investing is a losing game, as the world grows we're trying to swim against the tide. Yet this doesn't seem to be the market experience. Since we have numbers the US has grown as an economy and our market has been biased upwards. So how does this jive with the research? Dont take it too literally. It just means it would be a a bad idea to expect higher equity returns just because it has a higher growth rate. The data if you care to look in the book, shows that countries that have higher growth rate are priced higher. So equity returns tended to disappoint investors who naively investing in high growth countries. Does this remind you of value investing? Part of the explanation is also that to fund additional growth you need to make additional investments via debt and stock market issues which dilute existing shareholders. Vinod I guess I was thinking about this with a longer time window than most. I was thinking if you looked at 100/200/300 years of history what would you see? Someone mentioned short time periods, and in that vein I agree that growth in GDP doesn't correlate to returns. I'd like to see the data from 1906 to 2006 for example, what's the relationship between those two? My guess is that GDP growth and market growth are fairly tightly connected. All of the pessimism and optimism cancel out eventually.

There is a good book that has data that provides a very compelling case for inverse correlation between GDP growth and stock market returns. Triumph of the Optimists: 101 Years of Global Investment Returns Vinod So this would mean that over long periods stock returns are always negative right? If countries continue go grow (GDP growth) then returns should be negative over the long haul? If you extrapolate out a bit it would mean that equity investing is a losing game, as the world grows we're trying to swim against the tide. Yet this doesn't seem to be the market experience. Since we have numbers the US has grown as an economy and our market has been biased upwards. So how does this jive with the research?

This is just common sense thinking, but I think market growth looks like the following: GDP growth + inflation + productivity gains = market return The market cannot grow faster than those things. If something is growing faster something is growing slower. The caveat is companies that are part of a country market but have operations elsewhere. So in a 2% GDP country where all of the companies are operating in 10% GDP growth Africa for example the market could grow much faster. I don't believe that's the norm.

Nice fun little article: http://www.theonion.com/articles/warren-buffett-cant-believe-he-has-to-live-next-to,37868/?utm_source=Facebook&utm_medium=SocialMarketing&utm_campaign=LinkPreview:1:Default&recirc=luxury