rayfinkle

I've done this from a few different angles: -Professionally: bought out small $5-50M revenue businesses without audits -Personally: Spent several months shopping for smaller ($100-500k owners fcf) businesses My learnings are: 1) You can buy businesses cheap: 2-5x owners cash 2) You can get unreal leverage (6-12 month payback on owners cash), with personal guarantees (be careful, this steals sleep) 3) Determining owners' FCF is hairy. I've literally spent a month of 7 day weeks, 10 hour days digging through bank statements and credit card statements, talking to finance partners & equipment appraisers to nail down my 90% confidence FCF figure. It's possible, but doing the work is IMPERATIVE. Even so, cut 30% from your best work and exercise some good professional skepticism with respect to seller representations 4) There is real opportunity to buy stable businesses cheap, but you'll need to put 6-12 months into learning every little detail. It's not easy and on day zero everyone knows more than you. 5) Although many small businesses are under-managed, don't underestimate the power of momentum (in other words, sellers have done things for a reason. It could be laziness, but often it's a real hairball problem 6) Don't fire people day 0. I've seen this go sideways. Aim first then shoot. 7) Access to capital / banking relationships is a competitive advantage. Knowing how to manage a capital structure is not a common skill.

Halfway through this: http://www.amazon.com/Open-Heart-Mind-Awakening-Essence/dp/0307888207 Really interesting insights.

Sure thing. 1. Smurfit Stone Bankruptcy in 2008/2009. Large manufacturer of various types of paperboard products. Overlevered in an overcapacity cyclical industry. Term loans traded down to the 50's (going off memory here) but marginal production capacity was not in the "high cost" end of the industry, and there was reasonable coverage in even a downside scenario. Based on mid-cycle earnings (we used EBITDA) estimates and multiples (I think we used 5x-5.5x), and knowing that DIP financing was available, we viewed this as a dislocation and achieved 20%+ IRR buy buying when others were scared. 2. CLUB (Town Sports Holding) in 2009. Stock was trading below $2 implying equity market fears that a "debt event" could impair the equity value. A close read of the debt covenants and basic modeling of the business suggested that a covenant breach was unlikely. Looking at the business (literally mapping + visiting locations) suggested that the company's footprint (leasehold + RE ownership) was unique among fitness centers in key geographies and would be extremely difficult to replicate--this indicated that either the company would be able to weather a storm for a while or would be a juicy acquisition. We assessed that the company would survive, not trip covenants, and would likely benefit from operating leverage benefits as the economy recovered and the boxes/ individual clubs hit scale. Worst case lose $2, reasonable base case stock goes to $6. 3/1 outcomes with a higher chance of the "3" was a good investment. FWIW I thought this business was trading rich relative to IV over the past year. Learned a ton. Was introduced to buffet. Learned that fuzzy thinking & institutional incentives distort investing at even great investment funds. Learned that great returns could be achieved by simply "hitting in the fairway" / "avoiding the rough." Rarely was our analysis hugely complicated--but always thorough, logical, and clearly presented. At the time I thought this last part--presenting things clearly--was just red tape. But over the years I've learned that this is the most important thing. Communicating a thesis clearly so that a smart person with limited context "gets it" requires that you have a thorough understanding of the crucial levers of value. If you can't explain it, you probably don't understand it. Finally, I learned that being a successful equity investment requires that you understand capital structures well. Since debt is senior to equity--it is necessary for the debt to perform for the equity to have value. This doesn't mean you have to read an entire credit document, but it does mean you need to understand the good & bad things that can happen when financial leverage, operating leverage, and business conditions interact. Sorry, rambling! I learned a ton... We sourced frequently through banking relationships & contacts at other funds. In the leveraged loan space at the time the # of participants in the ecosystem was small. Most importantly though we targeted "equity like" returns which means that pretty much everything with a headline yield (or YTW) below our hurdle wasn't worth looking at--in other words, you're not going to hit IRR hurdles investing in a 6% note at 95.

Spent a year working at a distressed debt hedge fund. If you have the patience and attention to detail to comb through 1000's of pages of credit docs there can be ripe pickings at the right time. In many ways it's "easier" than equity investment because you by definition must focus more on downside than upside!

Unfortunately CEO & exec. perks are, to some degree, table stakes. Not defending this--but from a career strategy perspective every perk has a $$$ value, which will compound at a high rate over time. It is in many cases totally rational for a CEO to think this way and play this strategy.

I buy puts on crappy overvalued companies with tough comps coming up. Target situations where returns are 3-4x my (capped) risk.

From down there but now in sf. Still visit 2x / year. Would love to when I'm there.

Would love to pick your brain on securitization accounting....

The board is helping me get precise on my definition of risk. For example...After I read ericopoly's cryptic posts about leverage 10x (maybe more) I finally get a new and good perspective through my thick skull.

Thanks--this is great. I was slowly coming to a similar conclusion, but this helps a ton. I'm concluding that besides some marginal (small $$) tax benefits, the real boost is locking in future price today in states where that's available.

CA

+1 on college experience > than ROI, but they are related.

Packer, I'm leaning towards this approach too--I love the optionality. I'm 28.

I agree in theory, but my experience suggests that there are a limited number of schools that are worth paying for. I was lucky to get into one of these and the benefits will accrue for a lifetime. Without this experience I would have never left the state I grew up in, likely would have had fewer friends (and a more homogenious group of friends), and generally missed out on a ton of opportunities that I would not have known existed. I would love for my son to have this type of opportunity. Maybe it's not the best financial decision (meaning the ROI on college might not beat an arbitrary hurdle rate of return), but the intangibles are important.

Yes, fully funded

I'm trying to develop a strategy for college savings for my son (~6 months old). We live in California, and I've done only the most basic research on college savings programs (529's, prepaid plans, etc.). Has anyone thought this through in general--or specifically in CA? The main thing I'm struggling with is reconciling the tax advantaged option, which is likely has limited investment options (e.g., a fidelity fund) vs. eating the tax bill now, and investing the funds myself--I've handily beat the benchmarks (luck? skill? TBD) for a good while now. I completely understand the math behind the compounding + tax implications, but am not as familiar with "creative" savings strategies... Thanks!

Does anyone know a good source for historical implied vol data? I'm trying to understand the markets view for certain put options.

Eric are you looking gross pretax or net after tax? For example a $200k salary vs $2m saved I assume implies a 10% yield-- assuming the 200k number is fully baked with benefits, etc.

Great thread. I've tried to justify buying a house several times over the past few years, but after trying to fully load all the costs, fees, etc. I could never convince myself that the best reasonable case was more than a marginal step up the return on buying a stable REIT, for example, in a down market. My base case was likely a negative return vs. opportunity cost. There are benefits though. The main one I think is that you are trading rent--a variable cost highly likely to escalate over time--for a mortgage that (depending on how you structure it) fixes the majority of your home ownership costs. This can be a powerful mental force when in points of life transition, etc. But for me it came down to: anything you pay towards prin. returns you the mortgage rate (plus and minus).

she should spend six months working in someone else's shop first. no better way to learn. even whole foods or something like that. great way to learn on someone else's dime.

I think Friday after market close is the base expectation. Friday of the last week of the first quarter is the standard, IIRC. Thanks zarley, much appreciated.

does anyone know when the letter & results will be published?

WDDD

Another way to say that he had no qualifications or experience in climate science whatsoever. The only reason anybody ever listened to him on this is because he became famous writing fiction -- it's the shoe button complex that Munger warned about. http://www.realclimate.org/index.php/archives/2004/12/michael-crichtons-state-of-confusion/ I'm sorry, I know I said I'd stay out of it, but rolling out Michael Crichton was more than I could handle. I don't know what it is about climate science that makes everybody think they can improvise themselves an expert. People wouldn't do that with marine biology or aerospatial engineering or particle physics. Yet any schmuck who thinks about the weather thinks they can know more than experts who have spent decades studying the data. It's like citing Ron Hubbard as a neuroscience authority against someone who refers MITECS... HAHA. I should have been more precise. I wasn't posting that as support of my own view, just as an interesting perspective. It's pretty hyperbolic to compare a fiction writer expressing an opinion to a guy who creates a for profit religion...

I've been toying with the idea of building a predictive model that uses the following factors to get a reasonable guess at Berkshire's BV / Share. a) Berkshires known stock holdings (price & dividend) b) The price of the S&P c) Some TBD correlate of earnings of Berkshire's operating businesses, maybe it's just LT ROE Has anyone done this?