BG2008

If I recall correctly, USO Is a terrible instrument if there is contango in the forward curve. You should look into that and see how contango eats away at the performance of USO.

Frommi, I think the 50% put protection is a wise idea. It's all about protecting tail risk. Tail risk by definition is often unknown and unpredictable, rigs blowing up, medical devices resulting in death etc. By definition, if you're putting 50-100% in 1 idea, most likely it is a 3X or a 2x with a clear catalyst. Either the deep undervaluation itself is a catalyst or there is some sort of corp event that will re-rate the stock. Personally, I wouldn't mind paying 10% cost of ATM put to hedge a 100% position. I would also argue that the optimal put protection is likely somewhere between the ATM strike and 50% lower. The rationale being that the upside is so large relative to downside that it should take care of itself over time. Why buy the put and own the stock? I think it gives you an undistorted view of your exposure. Also, it's often much easier to enter/exit the common shares when needed. Getting in and out of LEAPs can be tough in size.

I second the philosophy that personality and skill set plays a big role in choosing concentrated versus diversified. I may also add that if you invest part time versus as a day job also plays a big role.

To a certain extent, I do think that return stats do create envy and all the unintended consequence of driving others to take on more risk. On the other hand, understanding Eric, Packer, and other's out performance forces me to investigated why did they outperformed? Can we improve upon their strategy? Would they do anything different. I think Eric's extreme concentration has been very enlightening. Although, I would probably buy some put protection whenever I decide to put >80% of my networth into an idea. Packer has consistently outperformed by finding leveraged situations. It's almost like he's participating in public LBOs without paying a take private premium. He rinses and repeats. Both Eric and Packer have found a methodology to compound at an crazy rate. If you are a student of value investing, you have to ask yourself why were they able to get to where they did without blowing up. Admittedly, I probably won't size my positions as large as Eric. Buffet also said if he had less than $1mm or $10mm, he can guarantee that he can return 50%? This naturally cause me to be curious and want to reverse engineer that CAGR rate. Why would Buffet make such a bold statement like that when he is known to under promise and over deliver? Take one of Munger's quotes, "invert, always invert". Let's dig into that a bit. Buffet, allegedly was compounding at 60% prior to launching his fund. Why? I've also have the luxury of getting to know people on this board and off it who have achieve 50+% CAGR for 5+ years where each trade was "life changing" for them. When evaluating their strategies, I don't think their risk under taking approached the level of "running through a firework factor with lit matches." I think their risk under taking was closer to "I may lose 20-30% of my networth if everything that could go wrong did go wrong by have 2-3 ultra concentrated positions. But that probability was likely low because of how compelling their investments were." No one here would question Joel Greenblatt's wisdom. He compounded at 40% per year in a fund that had several hundred millions of assets. He was before his time and held 6-8 positions that specialized in spinoffs and specials situations. If Greenblatt had not written his book, I think we all should've still investigated spinoffs and special situation. Happy holidays to all. Again, would appreciates thoughts on the diversified versus concentrated approach and your thought process about position sizing etc.

I think we can all learn from each other regarding a diversified versus concentrated method to riches. Over the years, I've learned that when you really really understand an investment, it's best to back up the truck and really own it. If you run a fund, there are limitations on what your max position size is. Obviously, your LPs may not appreciate you taking a 50% position in a name (if it can be hedged at 3% OTM for 2% premium, then it's likely okay). Your position size with LPs are pretty much pre-agreed upon. I think that there's a place in a diversified portfolio for a couple concentrated position and there's a place in a concentrated portfolio for a few diversified positions. Over the years, I've gravitated towards concentrated positions. Here are a key checklist items I use for concentrated positions. 1. Do I really understand the company? This means O&G, Tech, Financials, growth companies, etc are automatically weeded out. Any company that has a weak balance sheet, commodities exposures (miners, O&G), etc are weeded out within the first 5 minutes. Companies that have tail risk, i.e. Awilco Drilling's rig explosion risk, regulatory risk etc are out. Personally, BAC, AIG etc are out for me. Simply because I, personally, can't figure these companies out. 2. Is there a clear catalyst? If not, the investment needs to be cheaper than a 30 cent dollar with intrinsic value growing. Most of the time, the investments needs to be simple enough so that the next investor will understand it within 5 minutes. If it's too complex, then the price may not re-rate. 3. Either you are perfectly okay getting in bed with management team or there is an activist presence that will enforced proper behavior. This absolutely cannot be under appreciated. Often time, I wait till after management have pissed off every shareholder and an activist have filed a 13 D. 4. Complexity of the situation - There is only 1 variable in the outcome and it's very easy to gauge. If you need 3-4 things to go right for you to make money, it's probably hard to achieve. If you just need to get 1 variable right, it's a lot easier. 5. Would you buy more if the price were to drop by 20% tomorrow? If the answer is yes because it's so cheap and safe, then you're onto something. If the answer is no or depends, then you probably shouldn't take a 50% position on the name. There are other items to check on the checklist, but I feel like if you get these 5 right, you've cover the bulk of the items. However, I have also notice that sometimes, it's good to have 1-3% positions when you've come across something that you can't dot all the i's and cross all the t's. For example, I was made aware of Kreisler Manufacturing at $10.50 per share. It was pretty close to a cashflow positive net net and we had an activist in AB Value watching over the company. I also knew that these small defense/aerospace manufacturers tend to be cashcows because no one wants their planes to fall out of the skies due to parts failure. But I couldn't bring myself to size this at a >5% because management will never return my call. I meant to go visit the company, but they simply won't talk to me. The price moved up pretty quickly after I bought and I only owned a 1% position. There is a place in a concentrated portfolio to quickly allocate 1-3% to a name like KRSL upon a quick smell test. Other names that pass the smell tests are names like Straight Path Communication, Volcano Corp, etc. These names are harder to figure out. How much was Straight Path's IP litigation assets and spectrum worth? Hard to tell, but it seems a lot more than the $60mm market cap that it was trading at initially. More importantly, the management team utilized a low SG&A burn approach to monetize the IP and spectrum assets. They can finance 5-7 years of cash burn with the $14mm of cash on their balance sheet. Volcano Corp was a 60% gross margin medical device company and an activist had written a lengthy letter telling the company to sell itself. The company has also alienated all its shareholders in the last few years via its poor capital allocation. At the time of purchase, Volcano was trading at roughly 15X-20 OCF. The issue here is that I don't know much about intravascular ultrasound or fractional flow reserve. But I do know that medical device companies with 60% gross margin can usually be bought by larger competitors and the SG&A cost can be rationalized creating a ton of value for the acquirer. If you run a concentrated portfolio, I've learned that it's wise to allocate a small position, 1-3% to names like KRSL, STRP, and VOLC despite not fully grasping the business quality and risk of the company. From 30,000 feet, the risk/rewards are so compelling that it pretty much justify a 1-3% positions upon a few hours of research and accepting the fact that you're not going to figure everything out. Buy the small position and move on to hunt your elephant. I would love to hear other people's thoughts on these topics. I would especially like to hear how people manage to stay on top of 20+ names. If you run a strategy of 10 positions at 10% each, I would love to hear the reasoning and how you stay on top of news/filings, etc.

Yeah, the dividend announcement was very much explicitly conveyed in the Qs, conference calls, investor presentation etc. You just have to piece all the information together. Ok, thanks. Was that in the annual/quarterly reports before the announcement or could someone just act on the publication of the information and still get a similar result?

Corporate actions that obscures financials followed by dividend announcement that made it easier for people to figure out the financials. Without dividends = no man's land. With dividend = yield driven investors. What were the catalysts in these cases?

I understand that distributions that you received is actually netted against depreciation charges. Sometimes the distribution maybe larger than the depreciation and expenses,etc. Is the gain from the differential between the dep/exp versus the distribution and/or from your purchase price and final sale price? Any idea how this is calculated?

Does anyone have any experience with MLPs and Grantor Trust in your IRA and the headaches associated with it? If there's 50-100% upside, is it worth the headache to buy it in your IRA? Would appreciate any feedback.

38% so far this year in retirement accounts Basic strategy was to concentrate on best ideas. Most of the ideas had catalysts. The returns were largely driven by 2 top ideas that were sized rather large. Had more than 50% of assets stuck in a legacy workout/special situation that didn't generate much return but significantly lowered my cash available for investment earlier during the year.

jmp8822, I have tried different things in my retirement accounts in the past few years. As I get older, I have come to realize that backing the truck up on your best ideas tends to be the easiest and safest way to compound your money at rates that are eye popping (above 25% CAGR). I have out performed in the last 2 years mostly because I have simply concentrated in my best ideas. In addition to owning something cheap, both of us seems to share a commonality in that we look for a catalyst or some sort of event that will unfold and reveal to the market that a specific name is cheap. I would love to hear your thoughts about some questions that I have. 1) How do you think about initial size of an investment? How do you add/trim position as they grow larger? Does taxes and the associated short/long term rate play into the equation? 2) Do you actively look for a hard catalyst? 3) Do you actively buy puts to hedge out catastrophe risk? If you do, how do you think about what strike price and % premium that justifies the price? 4) As your assets have grown, have you grown more diversified? I've had a conversation recently with someone who mentioned that he sized positions much larger earlier on because the absolute dollar amounts were smaller. As the absolute dollar amounts have grown bigger, he did start to diversify more. 5) Since you were 100% invested, how were you positioned going into and coming out of 2008/2009? 6) Do you own "probabilistic names", intelligent speculation, or whatever you want to call it? 10x upside, 0 downside type of names? If you do, how do you think about proper sizing within the portfolio? Would love to hear your thoughts on this. BG2008 I am not trying to make an extra 20% per year necessarily, I aim for about 60%-plus annual returns as an arbitrary target. The only way I know of to make that much is to be concentrated (and in the money puts on one stock can be less volatility and provide more downside protection than owning the S&P 500 unhedged in some market environments). Not making 60% when you should is extremely expensive - the money you should have based on your results is just as real as the money you lose when your portfolio declines in value. Having very high return expectations is my way of defining margin of safety - I use an inverted version in my head. If my arbitrary target was 100%, that suggests I need to buy something at 50-cents on the dollar. In other words, the more money I think I will make, that suggests I am taking less risk, not more. Expecting the return in 12 months is the catalyst, versus just buying something cheap and hoping it goes up. Don't buy BAC if that's not your stock, pick the one you are most confident will go up soon. But I try to think in a very focused manner rather than spreading money over 30 stocks with 20% implied upside. It feels safer to me.

Just a thought here. Sometimes you do run into that girl who is seemingly out of those cheesy chick flicks. She loves you unconditionally for who you are, all your flaws and all your quirks, along with all your strength and resolves. She doesn't mind that you decided to quit your job, she doesn't really know how much you make anyway. She just knows that you're driven and you're passionate. You tell her that you're going to start a hedge fund and you won't have income for potentially a few years. In a worst case scenario, you may even lose your savings. She tells you to "Go and do it, we're young and if everything fails, we've still got each other and a lot of years ahead. We can afford this." She gets upset because her girlfriends tell her to "smarten up" and don't make her life revolve around you. They tell her that she needs to love herself, pamper herself, travel, and enjoy herself while she's young. They tell her that she works too much. She's upset because they are life long friends. She hangs out with them less often now rather than question herself "is this all worth it?" There will be days when you've sunk to the abyss because you've asked people close to you about investing in the fund. The conversation turns awkward, before you know it, e-mails and phone calls have stopped. You've seemingly lost a friend. You're upset not because they won't invest, you're upset because they do not bother to learn about whether investing in your fund is a good idea or not. You start to figure out who truly considers you a friend during this "unique time" in your life. She's had bad days at work. But she puts that aside and she reaches down and lift you out of that deep mental abyss. You don't really know how she does it, but she just does. She tells you "if you build it, they will come" Sooner or later, people will realize you're pretty good at this compounding capital sort of thing. She's tired and stressed out, but she prioritize your needs above hers. You constantly wonder how you would climb out of that abyss if she wasn't there. Sometimes in life, you get lucky and stumble upon someone like that. You have to be smart enough to realize that this is the "no brainer" and "one foot hurdle" that people talk about. You forget about the pre-nups and etc. You choose buy and hold for the long run and put a ring on it.

A few lesson from my personal investing experience 1. Tape Bruce Berkowitz's 10 item checklist next to your computer monitor. Every time you buy something, ask your self if it pass all those simple checklist http://www.marketfolly.com/2012/03/bruce-berkowitzs-basic-checklist-for.html 2. Accept the fact that early on, you will not understand a lot of the businesses. Very few people can figure out IBM as a novice. Pick on easier to understand businesses. I still avoid mining, O&G, financials, tech, etc till this day. There's no shame in admitting you just don't know. Sometimes, certain business may seem easy, but they are actually very hard to understand and even harder to predict, i.e. retail turnarounds, etc. Yes, you can hang out at Wetseal or Ruby Tuesday all day long, but it's hard to know if their customers will come back and increase their purchases. Only invest in companies that you understand or in situations where the valuation is so beaten down, i.e. 2x FCF that you have a lot of room for error. 10x FCF is tough to figure out. Investing in smaller simpler companies can be helpful in the beginning. 3. Mentally play out what you would do if prices drop? What could cause it? Would you be happy if prices dropped? If yes, you maybe onto something. Will you have cash set aside? How would you scale into and out of the trade? 4. Either management team is shareholder friendly or there is an activist who will watch over them, otherwise avoid. This point cannot be stressed enough. You can have a ton of cash on the BS, but if management team is hell bend on blowing it on bad acquisitions, you better make sure there's an activist who will instill capital displine. 5. If there is no catalyst for 3-5 years, what will happen? Buying at 3x FCF means the BS will have cash that exceeds the market cap. If the underlining business will be worth 3x as much because of growth etc, then you're onto something. If no price movement in 3-5 years is a terrible scenario, might want to avoid 6. Conviction and really knowing your name - I'm partial to concentrated bets. You might be different. My edge in investing is that "if the price goes up, I make money. If price goes down, I know exactly how much the company is worth and I view it as a bargain and I add to the position." If you 're not confident with your analysis and you do not have conviction, it's tough to stomach the price drop. You start guessing and it's emotional torture. In short, if you do not have conviction, either avoid or size it small. A different way of thinking is that "if it's not worth sizing it big, then it's not worth doing the trade." Hopefully, these are helpful.

I think the impact that Amazon will have on retail real estate is unbelievable. Amazon is becoming so easy to use, it is hard to justify going to the physical stores to buy the products. While living in NYC, it was extremely expensive to buy basic consumables like soap, lotion, toothpaste etc from your local CVS, Duane Reade etc. By housing the items in a cheap warehouse in NJ and then delivering the items to your door in Manhattan cuts out that really expensive NYC rent. I consider this the low hanging fruit of technology disruption. Why will people voluntarily go to the Duane Reade and buy these consumables when they can be deliver to your door at a cheaper price is beyond me. Why didn't I do it 6-7 years ago, the technology and ease of use isn't what it is today. Amazon prime was not available back then? Soap.com, etc website isn't as big as it is today. As Amazon grows, it achieves more scale and the warehouses are then places ever closer together. Same day or next day delivery becomes the norm rather than the 2-5 days for delivery. There will come a time when Amazon equals instant gratification or very close to it. I think there are a ton of retail space that will go away and be replace by the digital store fronts on your phone or on the web. The physical locations might devalue over time. Airbnb poses great threats to the valuation of hotel assets. There will always be a certain classes of travelers, i.e. business who will never stay at an Airbnb. But Airbnb is certainly taking a bite out of the casual/family hospitality business. In a way, RE is facing many head winds, all time low interest rates (rates can go up, but can't really go down anymore), technology eats away at the amount of space that are needed, etc.

I find the pomodoro technique to be very productive for both business analysis and TPS reports. It is slightly more so for the TPS reports when you just got to sit down and grind through things. When I do do research, I kind of "freestyle" a bit in that when I let the mind wander and just go with it until I hit exhaustion. It could be 1, 2, 3 hours at a time. Although, I feel that my max endurance at any given time is about 1.5-2.0 hours without a 5 min break. My mind also works better when I let things stew in my subconscious. If I am faced with a seemingly impossible problem, I tend it let it stew and I'll wake up with a lightbulb moment a few days later.

Let's assume that you're Buffet-in-training and you're working form home and have a completely flexible schedule. How would you schedule your day? If you have 2 hours each day that are completely free, what skills would you pick up? Part of my routine is to utilize the pomodoro technique to help me work in bouts of 25 mins followed by 5 mins of rest for 2 hours and then taking a 30 min break. It is incredibly productive when followed to the T. http://pomodorotechnique.com/ Currently I work for 2 hours straight and I'll try to get a workout in, i.e. rowing. What else can one do to broaden one's experience? Learn to break dance at home? Learn to give better speeches? What would be the highest return-on-time activity if you have this flexible schedule?

Chou was once asked about why he owned Radioshack. He mentioned that it was a basket bet along with other names. It goes without saying that cloning their high concentration ideas, their 1-3% positions may not be the best to tag along.

I truly believe that Buffet's stock pick performance in BRK has been underwhelming in the last few years due to the fact that he's focused on sourcing great companies at reasonable prices in the private market. Despite BRK being a decentralized holding company, it is still a monstrosity in terms of number of companies, employees, business lines etc. Hence, Buffet in recent years have resorted to "okay" long term compounders. Ted and Todd are working with a lesser amount of capital. More importantly, that's their sole focus. They are not sourcing deals, reading reports of the various holdco companies, going on CNBC, traveling the world to promote the BRK brand to attract sellers, etc. This allows Ted and Todd to focus purely on stock picking which allows them to "rinse and repeat" certain investments that are cheap relative to intrinsic value but not long term compounders, i.e. GM. Ironically, these rinse and repeat generates higher IRRs during their holding periods which somewhat contradicts Buffet's preaching of holding shares for the long run. This is not to say that the casual investor should start to "rinse and repeat" as well. Clearly, the Teds and Todds of the world do this on a full time basis and they are world class investors. Structurally, Ted and Todd have as close to permanent capital as any money manager in history. I have a feeling that they will continue to outperform for quite some time.

I saw the following in one of the listed risk factors in a SEC filing for a company in the process of converting into a REIT. Does anyone have thoughts/comments on whether this proposal will be passed? If passed, this will likely end all PropCo/OpCo spinoffs that subsequently convert into REITs. "On February 26, 2014, House Ways and Means Committee Chairman David Camp released a proposal (the “Camp Proposal”) for comprehensive tax reform. The Camp Proposal includes a number of provisions that, if enacted, would have an adverse effect on corporations seeking to make an election to be taxed as a REIT. These include the following: (1) if the stock of a corporation is distributed in a tax-free spin-off under section 355 of the Code, such corporation will not be eligible to make an election to be taxed as a REIT for the ten-year period following the taxable year in which the spin-off occurs, (2) after the ten-year period, if the corporation elects to be taxed as a REIT, such corporation will be required to recognize certain built-in gains inherent in its property as if all its assets were sold at their fair market value immediately before the close of the taxable year immediately before the corporation became taxed as a REIT, and (3) any dividend made to satisfy the REIT requirement that a REIT must not have any earnings and profits accumulated during non-REIT years by the end of its first tax year as a REIT must be made in cash instead of cash and stock as is permitted under current law. These provisions, if enacted in their current form, apply to any corporation making an election to be taxed as a REIT on or after February 26, 2014 and to any corporation the stock of which is distributed on or after February 26, 2014 in a tax-free spin-off under section 355 of the Code. If enacted in its current form, the Camp Proposal would materially and adversely affect our ability to make an election to be taxed as a REIT. See “— If we do not qualify to be taxed as a REIT, or fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.” It is uncertain whether the Camp Proposal, in its current form as it relates to CareTrust, or any other legislation affecting entities desiring to elect REIT status will be enacted and whether any such legislation will apply to CareTrust."

In a market where undervalued securities are hard to find, I'm trying to look for a few structural shorts. I also find it fascinating how quickly industries like Coal collapsed. The objective here is to find a few short ideas and also to understand the short thesis if I am long in a name. I fully agree with the class B and C malls. Rouse properties is a good example of a turd of a mall. The issue is that they pay out dividends and the credit market is very accommodating at this moment.

This is a thread for industries or companies facing structural headwinds. I'm trying to identify themes/names where the challenge is structural and secular rather than cyclical. However, I prefer names where the market has a misconception about the steepness of the decline rate. For example, everyone knows cigarette volume is going down, but nicotine is addictive and the shareholders can continue to milk that cashflow. On the other hand, coal mining is a sector that is doomed because of the relative cheapness of natural gas. 1) Iron Ore producers - Heavily tied to China's RE and Infrastructure build out. Steel consumption will revert from infrastructure (rail, skyscraper, et) towards more consumption (auto, appliances etc), the shift is dramatic when it happens. 2) Coal - Nat Gas is simply cheaper 3) Radioshack - Hard to compete when Amazon is so much cheaper and more convenient

1. Hard to sleep shorting tech. Someone at the Columbia Value Investing Conference once said that it's much easier to short the restaurant/retail stock on its last leg and dying on the side of the road. You're just there to put a bullet in its head. I really am not an expert of shorting, although I've had a couple that worked out. 2. I think SPY works. Doesn't seem overtly cheap. 3. Short indexes outright and Prem bought deflation CDS from "too big to fail banks around the world" (He was reluctant to state who the seller was, I kept badgering him during the shareholder meeting) 4. Cash is always a good option. If you hold 50% cash and the market dropped 40%, you are likely going to be down 20% (assuming your holding drops the same amount as the market). Holding cash also stops you from investing in that nth idea that should've never been allocated to in the beginning.

What's interesting about books like "The Game" "Rich Dad and Poor Dad" etc is that even though many of the stories are fictional/made up, they do contain some important concepts. Rich Dad and Poor Dad is purely fictional. But it contained concepts and view points that are very important. Owning a big house is a liability not an asset. You want to continue to accumulate assets that generates income for you. etc. In the hand of a sociopath, "The Game" has the potential to be exploited to the nth power. In the hand of your average joe who just want to attract the opposite sex and understand all the not so subtle land mines that you have to navigate through, it is a really good read.

Couldn't say it any better. Buffet talked about the guy in camp who are really good at net balls in table tennis. Sometimes, you just got to find these niches where you're that net ball guy and just have fun. I was at a conference once and Greenblatt spoke. The way that he talks about dealing with investors while running a concentrated portfolio, you can tell it was mentally exhausting despite the numbers that he put up. He talks about how at times, he's down 20% upon waking up and he would feel depressed. It's amazing how someone with 50% gross CAGR can openly admit to such "tough grinds" at times I don't think this is correct. Joel Greenblatt's public track record for the 10 years he had his hedge fund, which did exactly the type of investing he describes in You Can Be a Stock Market Genius, was 50.0% per year gross/40% net of incentive fees. I don't think that Buffett beats this in any 10 year period. Buffett's track record is very long and he is one of the richest people in the world. I don't see Greenblatt putting up a similar performance when he hits Buffett's age. Guys, what is your point? Nobody disputes that Buffett is a great investor. I don't dispute that he may be a better investor than Greenblatt and I know that Greenblatt talks about being Buffettized. And achieving high returns on billions instead of millions is simply another league – it's incomparable. What you can't say, though, is that Buffett has the better track record, when there is no ten year period in which Buffett had better returns than Greenblatt managing similar amounts of money. Saying "spin-offs are bad investments because Buffett is the better investor" just doesn't make any sense. This is especially the case, because Greenblatt's 10 year track record is simply insane – and he achieved it by investing in special situations, of which he says spin-offs are his favorite. We're talking about the attractiveness of investing in spin-offs after all, aren't we? I think the point is that some investors equate Buffett's wealth with god-like status. If he's so rich then he must be the smartest person in the world, and if we must mimic his actions we'll all be as smart/wealthy/good looking as he will be too. For my money I'd say Greenblatt is the authority here. He literally wrote the book on this stuff, he generated incredible returns then got out at the top and shifted his style. Yes Buffett is richer, but I don't consider riches to equal authority, although most of America disagrees. There are a LOT of little market niches, many of them will have insane profits laying in the bottom for those who choose to specialize. I think the key is finding the niches and exploiting them, it worked well for Greenblatt. A last thought, not everyone has this weird drive to have the most money in the world and work their entire life. Some are happy with 'enough' and getting out of the game. In some past interviews I read of Greenblatt that seemed to be the case with him, he had enough money and was tired of running a fund, dealing with investors. +1 I would add something, if there was something to add.

Buffet talked about spinoffs as event driven investments in his early partnership letters...Early Buffet was very diffferent than current grandpa Warren