BG2008

Packer, This is purely for my IRA account - Less than 10 names, portfolio level returns are based on fund assets as of Dec 31, 2012 Special Situation #1 - 90% gain on portfolio level, 250% gain on the name from inception, currently ~60% of my portfolio, I backed up the truck on this one. Return is totally market agnostic from the point of entry with a ton of margin of safety. Special Situation #2 - ~8% gain on portfolio level, 80% gain from inception on the name Special Situation # 3 - ~13% down on portfolio level, 30% down on the investment - value has stayed the same, price is down, one of the higher upside ideas going forward Special Situation # 4 - ~6% down on portfolio level Special Situation #5 - ~6% gain on portfolio level Awilco Drilling - ~ 6-7% gain for the portfolio, bought in the $14s and sold in the $21 and $24 (to make room for other positions) and received 2 dividends ISLE - ~ 4% gain for the portfolio Digirad - ~4% gain for the portfolio Puts/Calls that expired worthless and other misc gains/losses I've experimented within my IRA in the last few years. I've come to the conclusion that I will concentrate on my best ideas. I am willing to allocate up to 50% toward market neutral workouts and up to 1/3 toward my best "general undervalued" ideas. I am obsessed with market neutral workouts and hedging against a 2008/2009 style market meltdown. All throughout 2013, half of my IRA account is in workouts that will pay a cash distribution within 12 months. Sometimes, they take a bit longer. So, if we get into another 2008/2009 situation, the account value may go down temporarily, but the events will pay out cash when they occur generating market neutral returns and providing cash when I can best put it to work. Hope others share more details on their investment styles. These are great. I'm noticing that there are some SuperInvestors per Warren Buffet's article here on this forum. I would love to learn how people generated 20+% CAGR over 10 years. I would love to hear strategies, any large gains/losses that altered the returns over time, anything that people would do differently if they were to start today. In Buffet's Superinvestors of Graham and Doddsville http://www4.gsb.columbia.edu/null?&exclusive=filemgr.download&file_id=522 The 10-20 year returns at the partnership level is less then 40%. Some of the superinvestors on this forum generate returns that are actually higher than that. I'm wondering what drives that? Higher concentration? Leverage? Smaller AUM? Would love feedback on this topic.

http://www4.gsb.columbia.edu/null?&exclusive=filemgr.download&file_id=522

Share your uploader name on Youtube perhaps?

This is awesome guys!! Keep them coming here's a great Seth Klarman Interview with Charlie Rose http://vimeo.com/32333102

I do long duration cardio during the day (30 min plus) and want to watch investor interviews on youtube at the same time. Please help me curate a youtube video playlist of Buffet, Munger, Greenblatt, and anyone else interesting. Hopefully, I can kill 2 birds with one stone by watching informative interviews while I work out at the same time. Thanks

Yeah, that makes sense. I actually meant to say 2015.

In trying to analyze the 2008/2009 experience come full circle, I want to share something that can hopefully answer the question of "when do you get back in?" He mentioned that when you start seeing net-nets (excluding Chinese frauds) that actually have a good underlining business, it is time to tip back into the market. A good example is Tellular was trading at liquidation value, the company was buying back stock, and the underlining alarm business is a very high quality with recurring revenue. When you can find those for sale, just buy a basket . If there is a drawn out recession/depression, the buyback in shares and the growing cash balance will serve as a catalyst to drive the price higher. There were a handful of companies that exhibits these characteristics during the darkest days.

I didn’t mean that! You should know by now, if there is someone who buys insurance (maybe too much of it!), it is just me! Instead, what I meant is I don’t feel comfortable yet with the “technicalities” of options trading. That’s why I wouldn’t buy or sell options with much capital involved. Gio I see. Well, I can only say that it has been worth it for me to learn about them. It's sort of nice the way you can write the $25 strike call and use the proceeds to purchase two $8 strike puts. This way, you can put 100% of your present capital into the stock at $8 per share during a panic (by either purchasing the underlying common stock, or by flipping each $8 put into an $8 call). So if it goes from $16, down to $8, and then back up to $16 you can double your money even though the stock never appreciated from present levels. And instead if the stock doesn't go into a panic, but rather it goes from $16 to $25 over those same two years, you can make 56%. That's not a horrible thing either way -- panic or no panic. You get to preserve your buying power, and at the same time you don't have miss out on gains if there is no panic. And really it costs nothing at all -- only gets expensive if the stock goes over $25... but if that is to be considered an expense, then you have a much bigger expense if you are instead in cash all that time. Eric, I'm assuming you're talking about Jan 2014 BAC calls and puts. The $25 calls are 10-12 cents and the $7 (no $8) puts are 5-6 cents. Seems like tiny % of the common. Does seem to make sense to sell the upside here. If buying the $7 puts only cost 30bps, seems to make sense to just pay up for them. I really like the strategy of buying the commons and the ATM puts simultaneously. Seems like a great way to sleep well at night knowing that you've paid the cost of the fire insurance on your "house" even if it cost 10% annualized. It allows one to comfortably size a position at 20+% knowing that worst case downside is 2% of AUM. Sizing trades large in a fund is harder to do than in your personal IRA. This seems to resolve that issue. If you want to size something at 20+%, the CAGR on that idea is likley above 10% anyway. If you were to initiate a position in BAC today, which strike would you buy? Would it be the $15, 12, or a mix of both with some deep OTM thrown in? How do you think about the % premium vs OTM and duration? Regarding lending rates for shares like SHLD, can you implement a strategy where you can buy the ATM put and lend at a double digit rate that pays for the put? I recall the cost of borrow for SHLD being close to 100% at one point. Do you recall how much ATM BAC puts cost (% of common) when it was trading close to $5? Great discussion on this thread. I delayed the launch of my fund for 2 years because I couldn't figure out how to hedge a repeat of 2008/2009. I've decided to borrow a page from Buffet by investing in workouts/special sits as an alternative to holding cash. I believe that I can do >10% CAGR regardless how the market performs. But your long commons coupled with long ATM puts is a great addition to my tool box of hedging against 2008/2009.

How did you aggregate all the data? Just a binder with printouts/cutouts? How would you track everything today? Just dump everything into a folder, world file etc? I keep folders of companies that I look at. So, it's good to look over my analysis at a later time. I also will update my analysis/Excel files by naming using a new date. That shows how my thoughts have evolved over time. There are online tools such as basecamp.com that you can use to track all of the notes. Any suggestion of a cloud solution would be appreciated.

Original Mungerville, How did you know that there were impending doom? I think many of us realize that the US RE market exhibited bubble like characteristics. But it was hard to time. Many were too early. Were there particular signs? Was it expensive for you to put on your Russell 2000 put strategy? How much OTM were the puts? How much did it cost at the time? From what I hear about China on the ground, I think it's due for some sort of correction. Overall, there's a prevailing sense of "you can't lose money buying real estate" and the government will save us all. But, I've felt that way since 2009. The kind of euphoria in China now is very similar to the euphoria we experience here in the US when the meatheads at the gym talks about flipping houses for $50k profit.

I think it is very hard to adhere to this principal. In reality, most people tend to allocate their best ideas to their first 20-30% cash. After that, the quality of the ideas tend to decline. It's like 1st 30% - 3x in 2-3 years, 20% downside 2nd 30% - 2x in 2-3 years, 40% downside 3rd 20% - 1.5X in 2-3 years, 50% downside Last 20% - Marginal, coin flip, 50/50 upside vs downside The fact that this is the reality of how most people allocate capital is the reason why it's a good idea to hold cash. If you can adhere to Pabrai's allocation method, then it probably makes sense. The reality is that most people's portfolio are built the way that I illustrated. For example, after 2008, Pabrai has indicated that he thinks about cash allocation in the following manner: 1st 75% cash - 2x in 2-3 years next 10% cash - 3x in 2-3 years next 5% cash - 4x in 2-3 years next 5% cash - 5x in 2-3 years last 5% cash - >5x in 2-3 years

Eric, I'm particularly interested in how you were positioned heading into the storm given that you often use LEAPs. It would be great if you can share the answers to the following questions and share how concentrated you were between LEAP/Options and outright common stock positions going into 2008/2009. 1. How were you positioned going into 2008/2009, % cash, leverage, what were you holding? 2. How did you shuffle your portfolio during 2008/2009? Were there liquidity constraints? Were you able to swap into better ideas? 3. Any permanent impairments? 4. How did you emerge from the crisis? 5. Would you do anything different? Personally, I spent 2 years searching for ways to hedge or partially hedge a 2008/2009 style event. I've tried shorting and buying OTM puts. I don't think either works well. The shorts are just too distracting. Ultimately, I believe that I have found the best solution in Buffet's early partnership letters. Buffet allocated about 1/3 of his portfolio into workouts and special situations. His workout portfolio actually did about 20% CAGR over the life of the fund. Given that the IRR on merger arbs isn't what it use to be and tenders are more efficient. I think that workouts and special sits will probably be a 10% CAGR in this low interest rate and more efficient market today after accounting for the fact that you'll never be 100% invested at all times. You kind of switch between special sits and cash from time to time. If you allocate 1/3-2/3 in special sits and workouts, it can certainly mitigate a lot of the down turn. Also, it forces you to focus your capital on your best ideas in the 1/3-2/3 in the "generally undervalued" category. Nygren had 16% in Washington Mutual. Kaput! Back up the truck when the market is .... Greedy? For the record, i was an apologizer -- but out of lack of confidence i hid out with FFH. And Nygren is a better investor than me, but still gets a little playful ribbing for being bold when braver men were hiding.

I am fascinated by the 2008/2009 experience. Every year that goes by, it seems like people are forgetting what an extraordinary time that was. At the time, I was working at Citigroup as a real estate investment banker. When Citigroup reached $3/share, they decided to get rid of my group entirely. I only had my 401Ks in the market and no personal portfolio. When the market tanked, I started buying net nets and great franchises at 4-5x FCF. I would like to hear some feedback on what people's 2008/2009 experience were like. 1. How were you positioned going into 2008/2009, % cash, leverage, what were you holding? 2. How did you shuffle your portfolio during 2008/2009? Were there liquidity constraints? Were you able to swap into better ideas? 3. Any permanent impairments? 3. Did you have permanent capital or did you need the capital for personal expenses or fund redemption? 4. How did you emerge from the crisis? 5. Would you do anything different? I spoke with someone who manage a fund. In short, he was down 50% peak to trough. Big picture: 20% Brk and Fairfax - drop by 20-30% 40% small cap quality ideas - no liquidity, drop by 50+% 10% - total impairments - drop by 90+% 30% large cap quality ideas - some liquidity, drop by 40% In short, he swapped out of BRK and Fairfax into other more attractive ideas. He in essence utilized the proceeds to invest in special sit and workouts. He made about 100% on that 20% (now 14-16% of a original AUM). He mentioned that the special sit and workout were important in case the market dropped more. The cash in and cash out allowed him to earn a decent return that was market neutral at the time. He was stuck in the small cap quality ideas - It was illiquid and selling would've been the wrong thing to do. Some of the ideas did come back, some of the businesses could not earn its pre-crisis peak earnings The total impairments - no way out and no way of coming back 30% large cap - he swapped out of some of the large cap ideas and started buying net-nets and generally undervalued securities When you're down 50%, it takes a 100% fund return to hit your previous high water mark. This took a few years rather than being down 30% and being up 42% to come back. the stress from LPs from being down 50% was also enormous. In hindsight, he would probably have hold more cash, bought more puts, or invested more in special sit/workouts. Please share your 08/09 experience. Especially those that were down a bunch and how you managed to come back.

Plato, That's pretty impressive with that much cash. I'll bet you sleep quite well at night. If you're doing 40%/year, you can afford a few points a year given your ability to sleep at night. During 2008/2009, did you go from holding cash to fully invested? What's the composition of your invested capital going into 2008/2009? There was a lively thread about the merit of holding cash versus not holding cash. If you were to average all your returns together, did holding cash help or hurt in the long run?

104% in my IRA YTD 2014, 24% CAGR in my IRA since June 2009 For 2014, mostly concentrated market neutral workouts and special situations.

I couldn't tell if you were being serious or sarcastic. I'd like to fully understand why the 2% absolute return is valuable to an investor. Why not buy short duration treasury rates? I'm genuinely trying to see the value that Chanos provides.

I really appreciate your dogmatic comment. Sometimes value investors can be quite snobby about what the best method is. Often, it's their method. Seth Klarman was humble enough to claim that he never graduated to the "GARP" way of investing from cigar butts. Deng Xiao Ping Said "It doesn't matter whether a cat is white or black, as long as it catches mice."

I know of a lot of idiots in the RE business both in NYC and overseas who made a killing in the last 20 years. You're making a leverage bet by borrowing 80% against the asset price. So there's 5X implied leverage. It's usually a big position rather than a small one that you tinker with. NYC because of gentrification, getting rid of crime, and lower interest rate. There were apartments buildings selling for 300K in the 90s that are now selling for $10mm. Given that you only put 20% down. That's a 166X return on your equity of $60K. When the trend is your friend in RE, just buy and hold and you're going to get really rich. When you buy a building, it is also likely 1/3-1/2 of your networth.

Blog certainly helps. In a way, it's a detailed and time stamped resume. If you're looking to go the traditional route. I think there are a few things that you should be ready for. Wall Street guys are notorious for having a short attention span. 1. Ideally, you should try to network and become friendly with someone who works at a fund. Get to know them and get them to know your line of thinking, ways to source opportunities, etc. This is a soft get around to the traditional interview process. I think you should invest 6-12 months to get to know a few guys and get them to know you. 2. Don't know anyone in Cat 1, okay, now you're going through the formal interview process for a standard research analyst position. I can't suggest where to look. But I would suggest a few behavioral tips. As someone who had interviewed a few candidates from the hiring side, it's important for all candidates to tell a story of why they are pursuing that position. For you, you need to decisively convey why you're looking to make a career switch. If the hiring party sense any sorts of hesitation, they'll likely say no. One of the things that I learned the hard way with job interviews is that "fit" is more important than "skills and talent". In short, I can hire the best mathematician in the world, but he's not the right fit for flipping burgers at McDonald's. So a concise and logical reason of why you're looking to make a career change is very important. Other behavioral tips are suggestions that this is a very serious career move. This isn't some sort of a college sophomore who's wavering between law school, saving the world, and investment banking. For the hiring party, it's an investment to hire someone where the payback is likely 3-6 months away when their job skills catch up. Don't give them any reason to doubt your intentions. 3. Investment Ideas - Always have 5 good ideas in your pocket. If you can walk into an interview and pitch them 3 really good ideas where they start looking into the ideas right after you leave. Then you're probably in good shape. Ideas are hard to come by. For investment managers, good ideas that will make money are like cigarettes in prison. It's a substitute for currency. 4. Pitch your industry experience. Your leg up over the freshly minted BS/MBA candidate will likely be the fact that you've worked in an industry long enough to talk intelligently about it. You've been through the cycles and you understand the incentives and other quirky little facts. Good luck.

At last year's Fairfax shareholder meeting, I pressed Prem (during the public Q&A) about who the counter parties are for the deflation CPI. He danced around the topic a bit at first. I refused to relent. Finally, he mentioned that the coutnerparties are all "Too Big To Fail" banks around the world. I would imagine they were of the rank of JPM, BAC, Citi, and Deutsche Bank etc. Hope this address some of the questions one may have. Personally, I've kind of given up on shorting/hedging via puts, shorting S&P etc. I've decided to take a page from Buffet's playbook and allocate capital to workouts that involve distribution of cash.

I think if have less than $10mm, there's always something to do Selwyn is interesting

http://vimeo.com/32333102 Some good nuggets of information from a Seth Klarman Interview with Charlie Rose. Starting from 25:25, he talks about buying cigar butts versus good businesses. Seth talks about how Warren has moved to the third stage and he's got "stunted growth". Klarman at one point mentioned that he himself can't find too many businesses that are great. If Seth is being honest, that speaks volumes about others in the business. I thought his comments about management quality of cigar butts is invaluable. He mentioned that Ben Graham overlooked that aspect. This is why I pay a lot of attention to whether the melting of the ice cube can be slowed or stopped. If it does not come internally, there better be an external factor forcing that ice cube to stop melting. Seth is managing $30 billion of assets and Warren is managing about 15X that (Total assets). So Seth has a bit more wiggle room. How does Seth make money? He's got a few areas that he sticks to. In short, he's the provider of liquidity during distressed times, i.e. bonds/claims against Lehman Brothers etc. Claims against Madoff lawsuits. Interestingly enough, distressed debt is an area where size helps to a certain extent. When a company files, one can buy up a large chunk of the distressed debt and utilize their bankruptcy/legal know how to push for maximum recovery for that class. Small investors can't really touch that space. I also know of a friend who is partnered with Baupost on some RE development projects. He had mentioned that they are really long term focused and use very little leverage. If one looks at Baupost's equity portfolio, it consist of obscure securities that are quite hard to understand. Oh yeah, let's not forget about the quarry mines in Canada. A lot of time, you need a specialist to understand why they bought certain stock. Admittedly, their equity portfolio is not where they outperform the market. In short, Baupost can be think of a X bn distressed debt fund, x bn real estate, x bn complex/complicated securities bet, x bn equity. Seth also routinely returns cash to investors. I get the sense that Baupost today almost wait for a storm to come along and then buy really undervalued securities that will drive returns for 3-5 years. Then they rinse and repeat. Again, I think you should stick to you what you know you're good at. I don't think it's wrong for people to switch styles as they scale up. The key is to be honest with yourself and understand that your out performance is due to a good investment process rather than a bull market i.e. late 90s, 2002 to 2007. Admittedly, it is quite hard to self assess in reality

My suggestion is to do what you have a "knack" for and try to find a "niche" that you're really good at In the past, I thought I would buy quality business at a fair price. After a couple year of tinkering with my personal capital, I personally find that quality businesses are much harder to spot than the way that Grandpa Buffet explains it. Obviously, it's easy to look at Coca Cola and say that's a heck of a business when Buffet explained it. This is akin to looking at the answers in an Engineering problem and working backwards to figure out the 5-6 steps to get to the solution. You also know you're right to begin with. In real life, finding a quality business is like solving a complex engineering problem without knowing the answer. You have to make sure that you follow the correct logic and you did not miscalculate along the way. Then you have to load up the truck and buy with conviction. I truly respect people who can do it well, especially those who can do it well really early on in their career (20s). I myself have dedicated my craft, for the time being, to harvesting melting ice cubes and engaging in special situations. But I make sure a few things happen 1) The melting of the ice cube stops or slows down drastically (liquidation, asset sale, shareholder activism etc) 2) I buy an ice cube that's substantially larger than the adjusted size 3) I can put the ice cube into a freezer at some point (return of cash to shareholders) I do this because I am confident in my analysis and I will know whether I was right or wrong rather quickly. Another downfall of paying up to buy quality is that one can look like a genius for years in a bull market. I bet there will be a few fund managers who started their fund in 2009 who will be exposed the next time we have a financial crisis. People who bought Bear Stearnes and Lehman Brothers looked like geniuses for quite a few years until it all came crashing down I was at a conference once and David Einhorn mentioned that he bought Apple when it was a net-net and he regrets not holding onto the name. What Einhorn forgot to mention is that he compounded money at some pretty impressive double digit returns since. Last time I check 20% compounded over 20 years is about 38x. It's not Apple like, but it's not far off either. But I am certain that we can spot a net net a lot easier than how Apple was going to revolutionize the electronic business, that Steve Jobs was going to create a computer masquerading as a phone and get people to pay $600 for the machines. That's a much more difficult call to make than "I'm buying a melting ice cube at a 50% discount and I know that we're going to stop the melting very soon" I personally think that Buffet started buying great businesses because it's hard to find net nets when he was managing over $100mm back in the 70s/80s. There are less opportunities for him to rinse and repeat at that point. Buffet also said that if he was managing $1 to $10mm today, he would look at a much different opportunity set and he can guarantee to do 50% a year. That's a very powerful statement and one should invert that a bit. It's a known fact that Buffet used to shoot the lights out of the Dow when he was trading in his PA. For those of trying to "get rich quick without taking on a lot of risk", I suggest that you look at the more obscure corners for the truly asymmetrical risk/reward opportunities. As the asset base grows, I will absolutely start to look at larger market cap and higher quality businesses. As a matter of fact, I kind of have a plan in place for when the asset base is 5x, 10x, 50x, and 100x of its size today. In the meantime, I will learn about picking good companies as well. In short, do what you have high conviction and can honestly call yourself "the smart money." Also, I would recommend that everyone learn to hedge or set aside cash for that 25 year storm where you can pick bargains on the cheap

Can anyone provide an update on the "good" VIC users and any recommendation for Sumzero Users?

I have noticed that there is a divide between the smaller bankruptcies and the largers one. The Trustees/lawyers for the smaller BK tend to charge reasonable fees. Some even agree to work on a % of payout. Then there are the $50+mm bankruptcy cases where the lawyers literally will cost you an arm and a leg. You pray that they wrap things up quickly. Their reimbursable expenses can be quite extravagant as well.