AAOI

Gents, a bunch of us are planning on heading to my aunts bar in the old market Saturday night around 7pm (looks like we'll have the whole top floor to ourselves). Should be a great time! Hopefully everyone can make it. O'Connors Irish Pub 1217 Howard Street Old Market District

~30.5% while holding a lot of cash and being pretty defensively positioned overall. Cash % was typically upwards of 30% but that range fluctuated significantly over the year as did the size of the short book (which ranged I'd guess between 10-20%). Big winners in big positions like BYD-UN, SSL CN, SND CN, TARO, BAC (LEAPS) & PHH helped on the long side and a few concentrated bets like BV and GRPN (long puts), ANGI, YELP and FB helped on the short side. Made my far share of mistakes but thankfully was able to catch most of them early enough to minimize the damage.

Ha, that's the second time Biglari has built a stake in a (in this case former) insurance holding of mine - PMIC was bought out late last year. While I'm a little stale on UNAM, his stake makes a fair amount of sense from a high level given Biglari's modus operandi and considering how under leveraged the company is - not to mention what has historically been an absurdly profitable insurance operation. Perhaps the idea is to press management to employ a capital structure more in line with peers or maybe he'll do something similar to his actions at PMIC and push for a sale given the small size of the company and all the costs that could theoretically be wrong out by a strategic acquirer? Might be worth revisiting... For anyone that's interested in UNAM, I've posted the link to my old write-up below http://www.aboveaverageodds.com/2009/12/11/investment-analysis-the-unico-american-corporation-an-obscureunderappreciated-microcap-left-behind-in-the-recent-rally/ http://www.aboveaverageodds.com/2010/04/29/investment-analysis-the-penn-miller-holding-corporation-pmic-a-classic-low-risk-high-return-special-situation-with-a-turnaround-twist/

Buffet wagered a lot when he bought Geico when it was near bankruptcy....so no....i think he would agree.....BRK is dominated by financials from insurance to WFC/AXP in the common portfolio..... ppl who don't understand financials will inevitably say its risky (as they problably should)....but look at LUK...their biggest business is now an investment bank.....and look at Prem Watsa, he basically runs an insurance company.... Not enough time to adequately address the above at the moment but I think your missing the context of those investments and the big picture in general. I'll circle back in a bit to address when I have time but rest assured I understand financials and actually love to invest in them in the right situations - I just don't put 75% of my portfolio into financials all at once I'm investing other peoples money and neither did Buffett. Though Merkhat is right, Munger gets balls to the wall concentrated (if I remember correctly, Mungers ideal portfolio has like 4 names) but again, its his own money in his PA. I wouldn't flinch investing 100% in one stock in my PA if all the stars aligned. But that's apples and oranges.

Completely agree, to be clear though my issue is the dangerous concentration in predominantly highly leveraged financials in a risk fraught global economic environment that if memory serves, made up ~75% of AUM at one point. Maybe that's changed but it's not the nature of any one investment here, as much as much as its the construction of the portfolio as a whole and the correlation between holdings that I think is irresponsible. I think Buffet has spoken plenty of times against this type of thinking....so what if he is concentrated in financials? it makes absolutely no difference so long as he is right about the business in the long term...the financial system is safer than pre crisis at this stage....the world economy is weaker but that won't be forever... Frank, not sure your reading me right on this but I would have to disagree on a couple of points... Ironically enough my argument is actually informed by Graham and (particularly) Buffett's actual approach, where risk-management is a function of not only bottom up analysis from an individual security standpoint but from the utilization of portfolio structuring as a defensive tool - the idea being that by focusing on how all of ones investments work together in context of the the portfolio as a whole, investors can create a portfolio for all seasons so to speak. Basically a portfolio that provides an investor with a balanced tool kit to profit in pretty much all market environments, where say a 50% downdraft in the general market wouldn't crush your portfolio as it would almost certainly a fund like BB's. How else do you think Buffett was able to generate outsized absolute returns year in and year out irrespective of the performance of the general market? I can tell you it wasn't by allocating 75% of his capital to high beta, highly correlated investments that could lead to massive/permanent losses under various, if not probable, certainly possible future scenarios - especially though if he was subject to an open ended fund structure as Berkowitz is, where an investor stampede could lead to mass redemptions resulting in temporary losses becoming permanent in a vicious self fulfilling prophecy. Concentration is fine - establishing a 25% positions could easily be the lowest risk option at any given time depending on the situation - but again, its totally irresponsible in my mind to not take into account other foundational factors of a well conceived approach to risk management such as a prudent level of overall diversification, correlation between individual positions, attractive hedging strategies, the proper management of liquidity and cash flow etc. etc. ESPECIALLY when your in charge of other peoples hard earned money/life savings. So he has a solemn duty in this regard given he runs an open ended mutual fund and yet it he seems more concerned about hobnobbing at the country club and reading his own press clippings to really care about all of that stuff anymore. I'm clearly being a bit hyperbolic here, but I really do believe Buffett himself would view BB's current approach is imprudent at best. But yes, if were talking about BB's P.A. I agree that all that matters is that he's right about the business given A) he's not managing the money of outside passive minority investors B) he has a deep understanding of the businesses in question and the associated risks of his portfolio and his particular strategy and C) severe volatility is something that he's entirely comfortable with. Yet taking that approach in a mutual fund is borderline full retard as rest assured the average Joe isn't so comfortable or informed. Sally Johnson of west texas doesn't have the knowledge or intestinal fortitude to make it through such wild gyrations without acting in a way that's harmful to her own interests - see exhibit A, namely the mass exodus of investors that jumped ship the last time things got a little hairy. Lastly, I'm not at all sure the financial system as a whole is safer today than it was pre-crisis. American banks and most financial institutions are for sure, but European banks are still leveraged up to their eyeballs, the fate of the European union is anything but clear, western governments are hopelessly levered, central banks are printing money the world over with no abandon etc. The litany of things to watch out for seems sadly endless these days but hopefully your right - its just that I think there is an uncomfortably large chance that the real hangover hasn't begun and if that's the case - and our little experiment in "beautiful deleveraging" goes awry - seems highly probable BB's fund will get a whopping kick in the teeth relative to those who set themselves up a little more prudently. Excuse the long winded rant btw, I'm just trying to lay out cogently why I agree with the main points of the value institute article and why, as a value investor in charge of other peoples money I've been perplexed by BB's actions over the last couple of years. His Jekyll and Hyde transformation has always bothered me and it feels good to vet a bit - the guy was a real hero of mine and that guy seems to have dissapeared.

Completely agree, to be clear though my issue is the dangerous concentration in predominantly highly leveraged financials in a risk fraught global economic environment that if memory serves, made up ~75% of AUM at one point. Maybe that's changed but it's not the nature of any one investment here, as much as much as its the construction of the portfolio as a whole and the correlation between holdings that I think is irresponsible.

My point wasn't so much AIG specific as much as a general high level statement on the sensitivity of highly leveraged financials and I agree with much of the above, but I think some of what you are saying is applicable only if we are talking about a relatively simple insurance company run by the right type of management with a long paper trail of demonstrated success over multiple market cycles (as you imply, in insurance, culture/management is everything). AIG doesn't exactly fit that mold from what I've read/gather. For example, take a look at this article from David Merkel's fantastic Aleph Blog and his comments re AIG. David is probably the most experienced/savviest insurance analyst I know and the (albeit brief) article does a good job of quickly highlighting the fact that once one starts to peel back the AIG onion, what appears a relatively simple story is anything but. That, and without digging into the details, intuitively it would seem that the new management team hasn't been around long enough for an investor to make heads or tails of its long-term underwriting acumen and overall culture, which is exceedingly important given nature of the business (long duration tail risk of this business, etc.). Also seems unlikely that the company will earn a sufficient ROE (operationally) anytime in the near to medium future to justify anything but a discount to BV, let alone a premium. http://alephblog.com/2012/07/30/on-life-insurance-and-life-reinsurance/ All that said I'm not at all averse to investing in relatively simple to understand, attractively priced insurance companies run by disciplined management teams with a history of demonstrated success/savvy vis a vi both sides of the balance sheet and where I can reasonably haircut the liabilities. Again though, that doesn't seem to be the case here. AIG does look statistically cheap and appears to be doing some very smart things on the capital allocation front by shrinking the float at what seem to be massively accretive prices assuming the stated BV is accurate, and so for that (and other reasons) it could very well be a homerun from here depending on how things unfold over the next 3-5. It's just that all the ingredients for success that I would ordinarily look for in an insurance investment aren't present - and while I wish the best of luck to shareholders - its just not the type of perfect storm insurance investment that really fires me up given the significant complexity, various unknowns, operational headwinds, long duration tail risk etc. etc. At the end of the day then I guess I'd just rather spend time on something where the return on invested brain damage is much, much higher given the risks involved. Of course I could be proven horribly wrong here as I'm not all that familiar with the finer details of the opportunity, so feel free to school me if I've mis-represented the situation and take all of this commentary with a grain of salt - it's just that given what I know AIG doesn't appear to be the absolute low-risk screamer that so many (in particular Berkowitz) make it out to be.

Fwiw, I thought the article was dead on and the meaning clear - so not sure why a few of the above comments seem to entirely mis the point. The issue boils down to the prudence of having a portfolio dangerously dependent on highly leveraged financial assets in the world we currently live in, assets that possess liabilities that are arguably impossible to accurately handy cap - especially under some of the more dicey future scenarios I'm sure all of us can imagine and where small changes in those asset values can wipe out the existing equity in the blink of an eye. His public defense's of his positioning so far have been lacking to say the least, and really hugely dissapointing given he was historically one of my absolute favorite investors. Point being, why structure ones portfolio that way...doesn't the whole idea of prudent portfolio management (from a value perspective) revolve not only on building a portfolio position by position from the bottom up, but also around the idea that one should construct a portfolio that can survive pretty much any reasonable future scenario irrespective of the macro? How does one calculate the margin of safety given the interconnectivity of the current (and hugely over-leveraged) global financial system with confidence when one can't wrap his/her head around the worst case liabilities of the asset in question? I could go on and on. To be clear though, that doesn't mean an idea like BAC or AIG isn't an attractive one on an expected value basis or that the risk/reward equation isn't attractive/asymmetric, just that permanent loss is entirely possible and given that in a financial crisis the correlation of all highly levered financial assets will go to 1 thanks to the liquidity vacuum that will certainly come about, seems nuts to me to build a portfolio that could literally be wiped out, even in what is an admittedly improbable scenario (but still). Anyhow, Buffett, Chou, etc. have fully diversified portfolio's that are much more sanely positioned to weather any oncoming global economic storms all things considered and they are not at all comparable to the way Berkowitz is positioned (not totally sure re Chou, been awhile since I've viewed his holdings). Also, keep in mind that I've historically done very well investing in banks (particularly smaller community/regional banks where the BS and its exposure is actually decipherable), so I'm not one of those "banks are impossible to value across the board" type of value investors - In fact, I actually like/own BAC LEAPS at the moment, have done very well on the investment and expect it will continue to do well. That said, it would be a cold day in hell before I would bet the ranch like I believe Berkowitz has. The future is uncertain and I respect that enough to not build a portfolio where macro conditions could lead to severe permanent impairment. Berkowitz appears to believe he has that type of crystal ball. Lastly, I like how you pointed out the almost shocking intellectual dishonesty of Berkowitz over the last few years. The examples you used highlight this point but they are by no means the only ones. For me, I guess I started noticing it with his responses to Einhorn vis a vi St. Joe and it seemed to snowball from there. I'll gladly start naming them if anyone is interested as far as additional (specific) examples but I've been shocked by it - it's like the new Berkowitz vs. the old Berkowitz are two entirely different people. Anyways, at the end of the day who am I to question one of the masters, but I'd be lying if I said my respect for the man has not been seriously diminished over the last few years. Even if he is ultimately proven right in terms of his current holdings (as I suspect he very well could be), I'm a process vs. outcome type of guy and at the end of the day I think his risk management process has completely broken down and his logic/defense of his present positioning uncharacteristically weak. Just my 02 cents of course.

Thanks AZ. Count me in the the Burry fan boy club. 08 letter was genius and prophetic, even better than what I imagined.

+1

Data can be used for anything when mixed with ideology :) Correlation does not equal causation. The truth is Sweden's wealth was built to a huge extent in an environment of low taxes and free markets. I see this constant glorification of Swedish/Scandinavian system by American Liberals. As a Swede myself, I have always been envious of the American way, so this is a bit puzzling to me. For an alternative theory, which harks back all the way to Weber, see this report http://www.iea.org.uk/sites/default/files/publications/files/Sweden%20Paper-%20revised.pdf Yes, it's from a biased source, obviously. Like almost anything else, but check it out anyway. I think there is a lot to be said for cultural factors when looking at that list of countries. Norway is a bit of an outlier because of their oil - all the other top countries have considerably lower tax rates, which is interesting. And it should be said that HDI as a measurement is considerably biased towards more equal socities. All ways of measuring are flawed and nothing can capture everything (like p/e, p/b, ev/ebitda etc) so we should be aware of that. Exactly my point!

You are probably correct on that point AAOI, Dickens and Chesterton probably would not even imagine the modern welfare state. They could also not imagine the level of wealth that we currently have. What was important was the system and the balance. Also, if you follow that conservative lineage to more modern times you will find people like Eisenhower, Rockefeller and George Romney that were concerned with the Goldwater revolution and Nixon's southern strategy ... and were always "good sports". Also, is not to say we have not increased the scope of Liberty over the last 150 years and the State has played a key role in it. Why we should not increase also the scope of equality, fraternity, security, and even happiness with the level of wealth that we have ?... well that is a decision that the republican framework has been answering over time. And it is a great framework. There are reasons why we have these fences: like social security, the Fed, and financial regulation. And we saw what happened when we took one of those down without asking why it was there in the first place. And there other sectors where there is substantial evidence that the government does a better job than a privatized system ... like health insurance that is bound to become more important. You know that I would love to throw some Keynes and data to the mix (smile) . But since were are at the level of literature and philosophy, and I have not packed for an early flight, I will leave it at that. "The whole modern world has divided itself into Conservatives and Progressives. The business of Progressives is to go on making mistakes. The business of the Conservatives is to prevent the mistakes from being corrected." Great points as always and balance is what its all about - and of course, any true civilization will take care of those that truly can't take care of themselves. That's not what we have today. That, and Moore's point is a great one and personally I think the balance is substantially out of whack and the pendulum must swing back...the center of the modern nanny state simply will not hold my friend. Ha, yes, it was late last night and after posting I immediately regretted not throwing Keynes in the mix - was certain I'd get pushback on that. But once again though there's the rub, as I'm pretty confident that Keynes himself wouldn't even recognize the progressive economists that bear his name presently. "There is no subtler, no surer means of overturning society than to debauch the currency" - J.M. Keynes ;)

One more thing, for any one that's interested in digging into that specious tax table...if memory serves, all one needs to do is to take a look at how that quality of life index or whatever is actually calculated.

You can't be serious...

Plan, you had me with Chesterton :), although (and not to get drawn into a political discussion) I think the idea that Chesterton, Dickens, Johnson, Lewis, or any of the other true intellectual giants of Britain would identify or support modern progressives is outright lunacy - and not saying your drawing that connection - just felt like it needed to be pointed out. Also, I think the idiosyncratic differences of the countries above vis a vi their tax rates (and this discussion) makes any comparison specious at best...so I would hesitate to refer to the inference as a fact to say the least. Anyhow, Chesterton's book on Dicken's was an absolute masterpiece. The best ever written by far...