Mephistopheles

Was there any news? Seems like the common outperformed the preferred yet again. :( The common are now higher than they were before the DC case was thrown out, and the preferred are still 40% lower... Either the relative valuation was way off then, or is now. I don't remember the earnings off hand but if I remember correctly, I think an 8x return, which is what you'd get with the prefs, is a bit of a stretch with the common at this price. You would need quite a rosy scenario. On top of that, the regulators will most def require a substantial capital amount if they're ever released from conservatorship. Still this is really frustrating. I used to own Fannie common pre DC case, and then when the preferred fell more I took a tax write off and bought Freddie preferred.

I don't get why anyone would want to give their money to a fund of funds, with the added layer of fees. Are they that lazy that they can't pick a manager themselves, that they think is worth paying another layer of (probably expensive) fees for? Or do they really think they'll gain alpha by doing this?

^ They're not required to report OTC securities holdings

"That, combined with investment managers' focus on the S&P 500, have tilted the gambling table in Buffett's favor, he said." What does this even mean? "Moreover, he argued, it was not the fees that accounted for the poorer performance of the hedge fund of funds, so Buffett's thesis has not been proven." But Buffett's thesis was that the enormous fee structure of fund of funds isn't justified. This DOES prove that! Moreover, even before the fees the index outperformed, so this argument is meaningless! "These seven lean years for hedge funds may go down in the annals of market history as a period driven singularly by central bank stimulus. Using that lens, it becomes less clear that the bet, if lost, proves that hedge funds are not worth an investment across a cycle." As professional investors earning hefty fees, the job of the hedge fund manager is to outperform the market over a long time no matter what the world throws at them. That's their job. This guy should have just stayed quiet. By trying to blame others, he is making himself look worse.

Why only 9.1%? The prefs are trading at an average of like 11% of par. And of course if you add in the time value, the number should be a bit above 11%, depending on how long it takes to break or make it. In his example he gives a purchase prices of 5 and a max profit of 50. So: -5*10/11 + 50*1/11 = 0 So at least an 1/11 chance of succes is needed for this to be +EV. I see. Well the gain would be 45, not 50. So at a price of $5 it would be a 10% chance of success needed.

Thanks Packer. I'll have to think about this.

How do you balance low expectations with pessimism? Low expectations can lead to more happiness, but then you can become pessimistic, don't reach for the highest goals, and ultimately end up less happier. I've generally found trouble reconciling the two to the point where it's paradoxical to me. Maybe I'm approaching it wrong.

Why only 9.1%? The prefs are trading at an average of like 11% of par. And of course if you add in the time value, the number should be a bit above 11%, depending on how long it takes to break or make it.

So the GoodHaven guys left Fairholme, created a new mutual fund, and bought SHLD there? That doesn't seem to be logical to me. Maybe they disagreed on topics other than SHLD? As per the Barron's article posted above, they disagreed on Charlie Fernandez.

One positive is that after seeing all the documents thus far in Discovery, Berkowitz did buy more, and apparently got back into the common as well.

I think it's different with good value investors who have the experience, temperament, and discipline to look at the downside. Berkowitz has been at this a long time and if his hiring of consultants to kill the idea was biased in confirmation, he wouldn't have made it this far in terms of market outperformance. That is not to say that I agree with the SHLD thesis. I was an investor a year and two ago, but now it's in my too hard pile. Maybe he's right on SHLD, maybe he's wrong, but if he's wrong I wouldn't attribute it to a power dynamic between him and his consultants. I would think that he is well aware of a mental trap as such, as opposed to CEOs in the corporate world.

what does this mean in english? Seems like the Judge dismissed it because Continental Western is a subsidiary of Berkley Regional Insurance co., which was one of the Plaintiffs in the District Court case that was dismissed last Fall. I think the Judge is saying they are the same entities for all intents and purposes, therefore they can't have two cases in two different courts with identical complaints. Merkhet would probably be able to give a more eloquent answer.

I assumed the cash earned 0% for two reasons: 1) Since the cash needed to be available to be deployed, I did not have it get invested in bonds, as I did not want to expose the study to interest rate risk; and 2) I was mostly doing the study for myself, and I don't invest cash in bonds when not invested to ensure its availability. I also assume this is generally the case among most investors here, but perhaps I'm wrong on that. I'll PM you. Hi race, I just read your paper and think it's very well thought out and written. Would you mind PMing me your calculations as well? Thanks for sharing!

I don't know anything about ZTS, but for CP, the reason he was able to make changes and massively improve results was because it was very inefficiently managed compared to competitors. So if the company were to simply become an average railroad, it would mean a massive improvement, and that was the margin of safety. The risk was that the board won in the fight against him.

Interesting about the tobin ratio, I had never heard of it before.

I'm not sure how it is in other states, but in NJ, you can charge performance fees to unaccredited investors as long as you don't register with the state as a broker. And as far as I know there isn't much of a purpose to registering with the state besides being able to go around saying that you're "registered in NJ". Nevertheless, my original dilemma is not in regards to performance fee or not, or how to align incentives. It's simply trying to figure what sort of structure is fairest to the client so that you don't rip them off. Is any price okay as long as you can beat the market after fees? Or should it be comparable to what some of the great low cost value investors charge?

Which is completely misleading since there is an estate tax over a certain amount. So really, it's not a loophole for the people, but just for the government to double tax us. I hate war mongering gun slingers, but I'm voting Republican next year.

Makes sense. I think a lockup is beneficial not only to the manager, but to the client as well in that it protects the client from himself in times of market turmoil. It can absolutely make a difference. Is the manager generating enough fees in a base case that he is reasonably satisfied? In a downside case that runs several years is he making enough to cover his normal living expenses? You want the manager managing your assets and not taking too much time worrying about raising capital. That's true. But this is assuming all else is equal (which may not be the case for the reason you point out). Maybe I'm thinking too much into it, but it's difficult for me to reconcile charging more than a super investor like Bruce or Francis. Perhaps I am sensitive to this because it will be all family and friends for me in the beginning.

There are great investors who charge fees on all parts of the spectrum. There is Francis Chou and Bruce Berkowitz who charge only 1% in their mutual funds, and obviously no lockup. In the middle of the spectrum there is Pabrai and Buffett in his early days who charge 25% on anything over 6%, with a 1 year lockup. And on the other end there is 2/20, which I believe Ackman and Einhorn charge (though I'm not positive). I've talked with some wonderful, talented fund managers on this board who also charge fees on all parts of the spectrum. I understand that there is no one right answer as to what is fairest, and it may vary depending on other factors such as the AUM, etc. For example, someone who is starting out managing, with less than $1 million may find it necessary to charge heftier fees to support himself in the beginning. Then there are those who work with $100 million or more, who can live a life of luxury simply from a 2% management fee. As you can see, it varies from the perspective of the fund manager. But what about from the perspective of the client? Does it really matter to a client if a manager has $1 million or $100 million in AUM? Probably not so much. I bring up this topic because I dream about all aspects of starting my own fund some day, and I would like to charge a fee that is fair to the client so I can feel satisfied in earning it, and a lockup agreement that allows me to think long term while allowing investors to have access to their money within reasonable time limits.

+1, thank you merkhet!

Where can you get updates and access to new transcripts/reports from the court cases? Also, yes seems unlikely she'll stop discovery, but it's odd that she's taking so long if this truly were the case. Anyway, I'm excited yet nervous that discovery is about to end any day now.

(2) As I stated before, the Takings Clause discussion in the Lamberth opinion was dicta, and Fairholme rightly points out that there's no reason to give it any weight. (3) There is, suspiciously, some pretty material evidence that has not been turned over. I wonder how Judge Sweeney is going to decide on the Government's motion, now given that Discovery is presumably almost finished. Common sense makes it seem highly unlikely to me now that she would grant the motion at this point. Merkhet, any thoughts?

Thanks! Looks interesting from your comments.

^ I believe Buffett was even more concentrated than that in AXP - about 75% of either his portfolio or partnership, if I recall correctly.

Hi yadayada, I can't seem to find the company MCR. Would you mind sharing the ticker?