BG2008

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.

This is sad, a fortune that was made over 50 years and vaporized in under 15 years.

Real Estate in markets that are geographically constrained are great businesses. I'm not saying that they are cheap. For example, RE in Manhattan, San Francisco, Hong Kong, etc. There literally aren't anymore land on the island of Manhattan to build anymore buildings. In general, real estate are very high margin businesses. Assuming there is no debt on the asset, it's almost impossible for RE owners in these markets to go under. If privately owned, most RE have cashflow/revenue margin of 50+%. Obviously, interest rates and the cost of financing will dramatically affect the value of the owned RE. Things to watch out for with RE is changes in the demographics and crime (or perception of crime). While most assets depreciate in value over time, RE assets actually appreciate while allowing the owner to take tax writeoffs via depreciation on the building. Financing also allows one to take on an immense amount of leverage (4-8x). There's a quote out there saying something along the line that real estate is the only business where dumb people can become rich over time. With all of that said, I believe that many of the REITs are overvalued because people are chasing yield. REITs in the late 90s were paying 10+% dividends because rates were higher. Despite RE being great businesses, I'm not quite ready to dip my toes into them due to the low rates.

SPY Puts at 5% OTM three months out costs about 1.5%. It's the cheapest hedges I can find. If you've got long positions, I say just pay up and get the hedges rather than trying to short individual names.

Anyone here have confidence that they can do 50% a year? Or Even 30+%? More importantly, what strategies will you use?

Yes, a lot of market neutral really aren't market neutral in 08/09. I want to make some distinctions. Spinoffs are not 100% market neutral, the sum of the parts will still depend on the market. Merger arb spreads will blow open in 08/09. Some deals will fall apart. The ones that do close are market neutral, if they close. I don't consider merger arbs to be truly market neutral. Pure liquidations are truly market neutral. However, the price on a future liquidation distribution will likely fluctuate all over the place prior to distribution. But, if the distributions are within a 6 to 12 months period, then it is truly market neutral. I would imagine that share class arbs, long share A and short share B to arb out large discrepancies will likely work out well as all share prices fall and the A/B discrepancies gets narrower with a lower stock price in general. Trades involving litigation, regulatory decisions, and other "event types" may work in your favor, but the 08/09 crisis will still price your securities much lower than 07. Would love to hear feedback from people on what's truly market neutral and what isn't. This is an important component of my portfolio allocation. Buffet partnership never really did 130/30. His portfolio was more 65/35. 65% was general undervalued (Low P/BV, low P/S, low P/E) and 35% was event driven (merger arbs, liquidations etc). Meiroy - It's contradictory for you to say that Buffet can do his 50% for 20 years. I agree that Buffet will do 50% in one calendar year if he has less than $1mm or $10mm. But, he did manage money for 20 years and he clearly did not achieved 50% returns. I thinks that's exactly why his statement is puzzling to a lot of us. He says he can do 50% in 1 year given a small amount of capital. But, his track record was closer to 30% on average during his partnership days. Why would today's environment be any more beneficial.

No one has really mentioned event driven investing so far. Keep in mind, Buffet had 1/3 of his portfolio in market neutral event driven investing. I believe someone had mentioned that he would put his money into some sort of arb plays that produce smaller absolute returns, but very high IRRs. My overall observation about the market is that the pure net-nets are hard to come by. Micropac (MPAD) is a cashflow positive net-net for those who cares. They make military grade components that has no chance of being outsourced. But, there are no catalyst to re-rate the stock. Other interesting ideas include Hudson technologies where there is a re-rating of the earnings power. The company went from earning about $2mm a year to earning double digit millions because of an EPA ruling. Stock from a low of about $1 to around $4 in early 2012. Events that includes spin-offs likely generate great IRRs. Trades involving the IPO of nitrogen fertilizer plants have been great for the parentco, same goes for refineries. I guess anytime you have a hidden gem that all a sudden has a dividend yield slap on it gets quickly re-rated. I believe that to do 50% in a year, it's hard to do so with a simple buy and hold from day 1. Perhaps, you need a 10% position to double and then you have 110% and you benefit from the effect of compounding within the same 12 months period. People should pay attention to Joel Greenblatt's strategy. He did earn 40% over 10+ years. I think that the Graham stuff is tough to do 50+% in today environment when most companies are earnings based rather than asset based. There are other smaller iliquid strategies that I'm involved that will generated 50>% a year when done right.

I want to clarify that I don't intend to open a restaurant. I intend to open a concept that can be scaled. I have no desire to open the next Momofuku or Per Se. I believe that despite the QSR, Casual dining, fine dinning, etc there are still concepts that can be scaled very profitably into a loyal brand of say 50-10 locations regionally. The focus isn't on doing one restaurant so well, the focus is on perfecting the next Chipotle by creating a great menu and minimizing complexity. Perhaps, it's a philly cheese steak joint made with premium ingredients like hangar steak. Think in-and-out burgers etc. Obviously very tough to build a great brand like in and out burger, but the initial concept is important as well as the execution in the roll out.

Fast Food Franchisor. Always wanted to do one with Chinese food. Simplify the menu and offer it similar to Chipotle style (yes, I'm aware that they've got a concept going) Got another idea for a seafood shop, Most seafood shops (including supermarkets) are way over priced and do not offer enough value add, heck, what do you do with a raw piece of salmon fillet? How long do you bake it? How do you grill it? How do you season it? What about side dishes? The first few would have to be built out. They can be high ROICs. After you perfect the model, start photo copying it and franchise them.

Is anyone still following this? I did a quick back of the envelope calculation for the $/SQFT for the company. Assuming no value for the insurance company (let's just go along for now) There are 277k sqft of real estate including redevelopment square footage With 34.1 mm shares outstanding and at 4.04 Cad per share, the total market cap is $137mm Canadian dollars. This implies a valuation of $494 per square foot. Put this in perspective. Manhattan residential is about $1,000 for the generic stuff in NYC Replacement cost and transactions for non-manhattan retail is typically $150-$300/square foot. I've seen comps in the $60-$100 for distressed stuff as well. Manhattan retail can sell for in excess of $10,000/square foot. Keep in mind, Mongolia Growth uses square meter, to covert multiple by 10x to get to a square foot number. From a rental revenue perspective, the 9 month rental figure is 1.174mm. Annualized, this would imply a 87x rental multiple, when the US trades at 10-12x rental multiples. Obviously, there are square footage that aren't generating income. I've seen emerging market real estate go parabolic, i.e. China. But, the $/SQFT is 1/2 of manhattan real estate, I don't know how much more upside there could be. If they were using leverage, then there could be significant upside. This is clearly not the case. I doubt leverage makes sense since the interest rate in Mongolia is higher than 10% and the yield on RE is about the same.

I think that consumer staples in general in emerging markets with large market share and strong brands are good companies to own at the right prices Tingyi - Beverage and instant noodles in China Uni-President China I recall that baby formula companies in general are great businesses. Some dairy business have a hidden gem in it's baby formula business. Mead Johnson is a publicly traded company

I was having a discussion with my friends who invest full time and someone mentioned that he studies up on good companies and knows them very well. When markets crash, he's able to buy with conviction. He mentioned "I know that the home alarm companies and asset tracking companies will continue to receive monthly subscriptions going forward. It is a high margin business with recurring revenue. With Fossil, I'm seriously worried about whether people will buy watches going forward back in 2009." So, I'd like to create a list of good businesses regardless of price to get ready for any impending selloff. Tellular and other home security business - Recurring revenue stream, high margin, good reason for their existences, cost outweighs benefit, hard to duplicate, hard to physically wire 500k homes etc. Most REITs - Long term leases, high margin, trophy assets can't be replaced, i.e. 5th Ave Manhattan real estate, real estate in most land constrained cities, Boston, NY, San Francisco, etc. Unilever, Proctor and Gamble, Coke, - Branded food products - loyal brands, high margin, consumer staple

Some high level thoughts about concentration: 1. Big picture, I try to have 5-10 positions in 2/3 of the portfolio with any single position maxed out at 20% at inception. The other 1/3 consist of event driven/workouts where I expect a return of cash within 12 months. Sounds familiar? Yes, Buffett utilized this allocation. Instead of shorting 20 1% positions, the workout portfolio is in essence my hedge against a 08/09 crash. It is intended to be like holding 1/3 cash, but earns a respectable rate of return of 8-15% a year. 2. Situations that involve high cash balance/asset value relative to EV and management is not expect to make an acquisition, i.e. presence of activists or shareholder friendly management teams makes me a bit more comfortable about building a large position. Obviously cash burn or rapidly deteriorating businesses are exceptions to this rule. 3. I don't mind being concentrated in liquidation plays where I believe the downside is less than 10-20%. You're truly shielded from market risk in these situations. These plays won't make you rich, but the IRRs are nice. 4. For higher reward trades with the potential of going to zero, I set a % of AUM that I can stomach losing. I use the Kelly criterion as a back of the envelope method to calculate a max concentration and then I take that max % down by at least half. It's a bit of an art, but it's not a bad idea to start with the Kelly formula and your rough estimate of what you think the edge/payout are. 5. I also allocate less than 10% toward high conviction LEAP strategies where I am in essence capping my loss at the cost of my premiums, i.e. a 1% LEAP position in JCP. I'm in essence paying for the benefit of hindsight in 1-2 years while capping my losses. 6. I avoid having multiple of the higher reward/potential zero trades simultaneously as a 08/09 style selloff can potentially wipe all of them out simultaneously 7. I also try to minimize my holdings in financials as the equity is inherently levered 10 to 1. I have a healthy respect for Black Swan events and think that the world is caught between the "cliff of deflation and the hell fire of inflation."