BG2008

I've thought a lot about what makes a value trap. I think a value trap is an investment where you think you're paying 50 cents for a dollar. But that dollar is a melting ice cube and becomes 25 cents over time. I don't think anyone will argue that the fundamentals are indeed getting better over time. So, you pay 50 cents for a dollar and that dollar becomes $2 in 7 years. If there is a catalyst, i.e. dividend initiation, take over, debt recapitalization (just take out a mortgage and dividend out to shareholders), in the near term, that's great. If you have to wait, you quadruple your money in seven years. Should probably move the discussion to the J.W. Mays thread since someone recently created one.

To be honest, at today's price, Mark Greenblatt just need to "not f*** up" for this thesis to work out really well for shareholders. It's an one foot hurdle at these prices.

Spike Lee's 7 minute rant about gentrification in Brooklyn - The audio file is down below http://www.uproxx.com/up/2014/02/spike-lee-went-seven-minute-rant-motherfcking-hipsters-brooklyn-last-night/

Google Bruce Berkowitz, he has a list of 10 or 11 checks for an investment. It is a pretty "short and sweet" checklist. From my experience, sizing is very important. Anything that you size large, you should do a pre-mortem. Ask yourself what could go wrong. Sometimes we can get caught up in an interesting idea and how much upside it has. Ask yourself what you would do if price moves against you. If the response is "I would gladly double down", it's likely a worthy idea. If the response is "it depends on what happened to the fundamentals" you should size that smaller. If the response is "lower price could be related to an impairment in the investment" then you ought to size it as a speculative position. My other suggestion would be to find what works for you. I started out thinking that I will buy great businesses at a fair price. I found out that I am much better at special situations, asset plays, and reading 300 page prospectus that no one bothered to read. Over time, you too will develop your skill. If you're 6' 5" and 300 pounds, don't try to play wide receiver. Groom yourself to be a left tackle. Of course, at this point you don't know what you are. So experiment with different investments and accept the fact that you will make mistakes with your assumptions and analysis. Size your positions so that if it goes to zero, it will not materially impact your life. It's also important to get some hands on time. A lot of Buffet books are great. The key is understanding some of the fundamental concepts such as voting machine versus weighing machine. Doubling down rather than sell your losers and ride your winners. After that, you need to start rolling up your sleeve and take the deep dives. Learning to invest is kind of like learning how to drive. You can ace the written test and understand all the concepts, but you really need the actual driving to understand how much to turn your steering to make a 90 degree turn or whether it's safe to make that left turn with oncoming traffic in the opposite direction. The big picture is to buy something worth $100 for $50. Well, how do you find such a thing? How do you know it's not a $50 masquerading as a $100 that's on fire. This is where the reverse engineering is very helpful. Research others' ideas and you will start seeing trends. A company selling a money losing division results in higher valuation for the remaining profitable company etc. Last but not least, have "situational awareness". In 2006/2007, all the financials appear cheap based on P/E multiple. What many failed to see is that Wall Street had an unsustainable business model of packaging dodgy subprime loans. Many of the home building stocks looked cheap, but were trading at peak earnings. These things are clear in hindsight but very difficult to see forward. Do your best and ask yourself where are we in the cycle? Is this really sustainable in the long run. Best of luck.

You guys are cracking me up with your comments about the webpage. Juniors is literally a stone throw away from J.W. May's building. I wonder what the $/ buildable SQFT came out to be

Yeah, I'm trying to figure out what the penalty is exactly if the AGI exceeds 181k. I wonder if I'm better off just putting money into the traditional IRA giving the uncertainty.

I want to take advantage of the IRA contribution early during the year so that the money can compound early on. Since investing is a full time job for me, it's unclear what my income will be for 2014. How do I choose between traditional vs Roth under these circumstances? 1) If contribute to Roth and income exceeds $181,000 for married filing jointly, then the contribution and earnings will have to be withdrawal or re-characterized as traditional. How does a re-characterization work? What is the penalty if the income is withdraw? 2) If contribute into a traditional and wish to convert into Roth at year end? What are the penalties and process? 3) Someone had mentioned that it's a good strategy to open up a separate account for the new contribution to isolate earnings associated with the new contribution. Thanks guys

Great feedback. Is there a way that you can provide an overview of the chemical space. All I know about the chem space is from what I remember back in HS chem classes. I guess we can start with what's in the generic camp and what's in the specialty. Is the space divided by the molecules, i.e. organic vs inorganic, etc. Is it know how? Is it barriers of entry due to permitting? What makes something generic and what makes something specialty? Is it fair to include something like Lubrizol and Valvoline in this category? How much does cheap shale gas improve profitability? With nat gas being at $5+ recently, is the advantage still there? Your feedback would be greatly appreciated.

I have noticed a lot of specialty chemical companies getting high valuations lately. Is there a fundamental shift in the pricing power and return on capital on specialty chemicals industry in recent years? Any chemical engineers on this board who can help with this?

I went by Downtown Brooklyn yesterday again to look at the changes in the Fulton Street Mall. It is amazing to see the neighborhood transform before your eyes. We are at a point where newer shops owned by national retailers are starting to equal the number of legacy shops. The contrast is so dramatic. As you walk along the street, you can notice the quality difference between the old and the new. The legacy shops like Conway, Pretty Girls, etc are just big racks of clothing with very little Cap Ex. The walls are whitewashed, fluorescent lighting, bad carpeting, no store furniture to speak of, and no ambiance to speak, and single digit price points. The new stores like Banana Republic, American Eagles, and Swarovsky put substantial amount of cap ex into their stores. Nice furniture, nice finishes, great layouts, and each stores has its unique feel. My wife mentioned that she recall the Soho (South of Houston) neighborhood going through the same transformation in the late 90s. If you go visit today, take some pictures and then compare it to Google Maps images of the same location. You can readily see the before vs after. Seems like there are 500 share offer this morning at around $46.

I've met with management team during the shareholder meeting. To be totally honest, they are not Sam Zell. They are not the best allocator of capital or at leasing new space. But they have not paid themselves in equity when they easily could have. They also have not made any acquisitions which from my experience tends to dilute away any MOS over time. Mark Greenblatt is accessible. I've spoken with him a few times and he's happy to answer questions. The adage of "watch what they do, not what they say" applies here. G&A is high. They have staff that they definitely do not need which is why the true value is obscured here. They also had a lot of space for admin purposes, but have since cut that in half to lease to their customers. During the shareholder meeting, there were admin type personnel that are excess for a company this size. This is why my estimate of private company NOI is in the 7-8mm range when the AS IS operating cashflow is about $4mm. A Vornado can operating these assets at much lower cost. The CEO owns 47% and is roughly 70 now, so I'm sure there is some estate planning in the works. Long story short, the discount to intrinsic value, the gentrification tail wind makes up for a so-so management team. Although, I don't think they will outright steal from the minority. If they do, the 23% owner will likely act as an advocate for minority.

Yes, the liquidity is a pain.

Yes, I've done a lot of work in the name. It's my highest conviction idea because I've personally seen all the assets except for their Ohio assets. I've been to the shareholder meeting and been inside their buildings. This is an example why the public market is not efficient. In a private market, it is hard to imagine that an owner with broker representation will sell these assets at the current price.

J.W. Mays (Nasdaq:MAYS) - Former bankrupted department store owns 7 seven buildings including 2 prime assets (> half a million sqft) in Downtown Brooklyn. Standalone RE company not married to some struggling dept store/restaurant etc and free to raise rent. Debt/EV is only 8%. Net Operating Income is obscured by public company cost, inefficient corporate structure (not a REIT), and lack of scale in operation. Private owner NOI is 8-9% based on a $38/share price. Current rent is substantially below market. Most importantly, neighborhood is gentrifying and being re-developed. Company owns some prime retail frontage in Fulton Street Mall where rent is rumored to be $300 for prime space. http://www.nytimes.com/2012/08/29/realestate/commercial/national-retailers-discover-fulton-street-mall-in-brooklyn.html?_r=0 They are charging $27/sqft, some discounts needed for larger size and location within the Fulton Street Mall. But still very much below market nonetheless. Hard to screen as the P/S, P/EBITDA does not appear cheap. Also requires some serious digging to figure out all the assets owned by the company. At $38 probably selling at land value of the 2 Downtown assets alone. The As Is Price today is closer to $90/share and as the lease roll off and are replaced with better tenants, value could approach $170/share. Key risk is that management team owns 47% but has not given themselves any equity compensation. There is a 23% owner who will act as an advocate for minority shareholder. Obviously, we're not investing alongside Sam Zell, but management team doesn't seem like they will purposely destroy value. NYC based investors should take the subway to the Fulton Street Mall and see the assets in person 9 Bond Street and 25 Elm Place. Best comparable transaction is the 490 Fulton Street building.

I agree with most of what you said. But there is an opportunity risk associated with being down a lot even if none of your positions suffered permanent impairment. For example, if you were down 50-60%, you're stuck with those positions as you do not want to liquidate them during the worst condition. My issue is that people put themselves in a position where they have no liquidity/cash to invest when the market is awash with bargains. Berkshire's float and operating companies generate cash that can produce 10% capital to reallocate into very depressed opportunities at the right time. If you're managing a fund, you do not have the luxury of deploying operating cashflow toward investments. Hence, there needs to be some sort of liquidity generator that will pay out during distressed times. I believe that allocating capital towards cash, workouts, bonds etc also means there's less to allocate towards generals. This forces you to focus on your better general ideas.

In Buffet's Superinvestors of Graham-and-Doddsville, I've noticed that many value investors got "slaughtered" in 1973-1974. The S&P was down 14.8% in 1973 and 26.4% in 1974. Walter Schloss was down 8.0 and 6.2% respectively, Tweedy Browne gained 7.5 and 1.5, Sequoia was -24 and -15.7, Munger was -31.9% and 31.5%, Pacific Partners (Rick Guerin) was down 42.1 and 34.4, Perlmeter Investments was down 28.1 and 12.0, Berkshires Book Value grew 4.7% and 5.5%. 1) I'm trying to figure out, why was 1973-1974 so bad? I've spoken to someone who was an investor during that time period and he mentioned high inflation, tough economic environments in general, and oil prices that in essence increased by 10X due to the embargo. Can anyone comment on why that was a perfect storm of a sort. 2) I can understand why Pacific Partner was down so much, due to the fund's use of leverage. But why was Munger down so much? Munger is universally beloved. But, I'm not sure if being down 53% in 2 yeas is acceptable as a value investor. 3) How did Berkshire manage to increase book value during this time period? 4) Does anyone have access to the old investors letters of the funds mentioned in Superinvestors of Grahams and Doddsville

I would it's usually a red flag. Situation A) The company is severely undervalued and they raise capital, management just diluted the existing shareholders Situation B) You believe the company is severely undervalued, management knows better and it's actually the right decision to take advantage of the robust equity market. Well, you're holding an over valued security. There are situations where secondaries are the right course of action, i.e. XPO Logistics, issue equity at 10-13X EBITDA and roll up smaller freight forwarders at 6-8x EBITDA.

1. More concentrated on highest conviction and knowledge of the underling 2. Familiarity with the country, product, industry, also plays a factor. Tend to tip toe into a new situation rather than make concentrated bets. 3. Market Neutral and market dependents plays a role. Generally size investments where I am expected to receive a distribution larger (if less than 12 months) 4. Tail risk - Take a Black Swan approach. Even if everything makes sense, if there is some sort of tail risk that will render the investment to go to zero, then size it smaller than I would like. Examples would include highly levered companies, regulatory risk, blow up risk (rigs), warrants, options, lawsuit outcomes that are binary, etc. 5. More concentrated in PA than fund 6. Sleep well at night test - If a position sizing causes me to lose sleep at night. I tend to trim it down. There's a threshold where even the best ideas can make good investors nervous. Have to admit we are not all Buffet and Munger. #2 and #4 should be considered in situations like this.

WealthTrack with Consuelo Mack is actually pretty good

I know of funds with less than 5% who managed to survive for 10 years.

I also work in the industry and agree with constructive. The market maker space is incredibly competitive and provides no sustainable moats. There are often price wars when new entrants enter the market which drives down returns for all participants. A fund manager that I know who is currently managing double digit million AUM had mentioned that interactive brokers is far better than all the other market makers out there. I trade through IB as well. It does appear that the infrastructure does allow you to do all sorts of trades even with a smallish amount of capital. He firmly believes that IB has a long runway. Thoughts?

This is not an advice on where to put her money. But if her employer matches her contribution, then she should max out whatever the matching is. If the company matches 100% of her contribution, she just did a double her money at the instant she made the contribution.

Bruce Berkowitz has a pretty good checklist. http://www.marketfolly.com/2012/03/bruce-berkowitzs-basic-checklist-for.html It's not a bad idea for each individual to have their own checklist. I like to write out the investment thesis. Buffet had mentioned during an interview that if you can't put it on paper why an investment is compelling, perhaps you have a problem. In the book, the Big Short, the 2 main characters from Cornwall Capital would create Powerpoint presentations for their thesis. This probably works better if you take concentrated positions. If you have a basket approach to value investing, doing so could just be too troublesome.

Wow, very impressed. Have you taken a look at STRP? Thanks. STRP just hosted a conference call and they mentioned that they are expecting a settlement soon. I like the asset like approach that the company is taking to monetize the patents and the spectrum. They estimated that the current cash balance can last 5 years with a $3mm annual cash burn. The NOL will shield income for over $100 million. The separation from IDT Corp is critical to make sure that the defendants don't go after IDT Corp.

I second this opinion