Berkshire Annual meeting - 50% a year?

[gfp]

I believe what wabuffo is saying is that he has inferred the identity of the undisclosed foreign security by looking at the end of quarter marks for DJCO's entire investment portfolio and backing out the known, disclosed positions.  005389.KS lines up with those marks, which as more quarters are reported becomes less and less likely to be a coincidence.  Good old-fashioned sleuthing...

 

The identity of the security is not officially disclosed.  Someone may have asked Charlie about it though.

 

 

Which Hyundai entity is it? (There are quite a few - Hyundai Motors, Hyundai Engineering & Construction, Hyundai Dept Store, Hyundai Fire & Marine, Hyundai Green Food, Hyundai Merchant Marine, Hyundai Heavy, Hyundai Corp, Hyundai Mobis, Hyundai Steel, Hyundai Mipo)

 

By isolating the quarter-end fair value dollar amounts and comparing the Q-to-Q change in fair values to quarter-end prices (converted to USD), I believe Munger has also purchased Hyundai Motors Preferreds in the DJCO portfolio.  Specifically, the 005389.KS ticker on the South Korean stock exchange.

 

It hasn't been a winner for him, so far.

 

wabuffo

 

Wabuffo,

 

Thank you for that.  Where can you see 005389.KS in the DJCO portfolio? Is there some filing? 

 

FYI, I looked in the 10K and nothing was mentioned.

[wabuffo]

Where can you see 005389.KS in the DJCO portfolio? Is there some filing?  FYI, I looked in the 10K and nothing was mentioned.

I believe what wabuffo is saying is that he has inferred the identity of the undisclosed foreign security by looking at the end of quarter marks for DJCO's entire investment portfolio and backing out the known, disclosed positions.  005389.KS lines up with those marks, which as more quarters are reported becomes less and less likely to be a coincidence. 

 

gfp is correct.  To my knowledge Charlie has never disclosed the identity of the South Korean manufacturing company in the DJCO portfolio.  He did disclose that the other foreign manufacturing company on the Hong Kong exchange is BYD (1211.HK) at the AGM last year:

https://www.sec.gov/Archives/edgar/data/783412/000143774918002649/djco20180215_8k.htm

 

Using publicly available information, one can easily identify the mystery South Korean stock.  Here's a table that shows the start of how to do that. 

 

http://i68.tinypic.com/2efpctk.jpg

 

DJCO has to file a 13F every quarter and outline its holdings of its four US-listed stocks (WFC, USB, BAC, PKX).  One can back into the quarter-end fair values of its two foreign-listed stocks by subtracting the amounts in the 13-Fs with their total holdings of common stocks reported in the 10-Qs, 10-Ks.  We can see that the bigger position is BYD.  We can use the BYD information to calculate the quarter-end fair values of the South Korean stock (and then figure out what stock it is).

 

http://i65.tinypic.com/2eoce55.jpg

 

To calculate the quarter-end fair values of DJCO's holding of BYD (1211.HK) we need to peg it to the quarter-end reported fair values of BYD by BRK Energy (a more-or-less permanent holding) in its 10-Qs, 10-Ks.  You can see that the annual values (9/30) declared in the foreign currency risk section in the DJCO 10-K tie with the calculated values using BRK Energy's fair values of its BYD holding. 

 

Using the fair value of DJCO's BYD holding, we can then back into the quarter-end fair values of DJCO's mystery South Korean exchange-listed security.  If we compare the index vs the 9/30/17 fair value of this holding with the calculated USD-value of Hyundai Pfd Series 3 (005389.KS) quarter-end prices converted to USD from South Korean won, you can see that the quarterly index values match exactly.  This makes it virtually certain that this is the South Korean-listed stock that DJCO owns. 

 

There's other circumstantial evidence that supports this hypothesis.  One is the Alfred Munger Trust holdings of Hyundai securities.  A second data point is that Li Lu (who manages Munger's money in his Himalaya Capital fund) presented South Korean preferreds (which are actually non-voting common shares) being mispriced versus their voting common equity pairs at a Sohn Conference in 2013 and has probably influenced Munger's thinking in this area (Munger first started buying Hyundai Series 3 Preferred for DJCO during late 2014).

https://www.marketfolly.com/2013/05/li-lus-sohn-conference-presentation-on.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MarketFolly+(Market+Folly)

 

And then again I could be wrong  8)

 

wabuffo

[Poor Charlie]

 

By isolating the quarter-end fair value dollar amounts and comparing the Q-to-Q change in fair values to quarter-end prices (converted to USD), I believe Munger has also purchased Hyundai Motors Preferreds in the DJCO portfolio.  Specifically, the 005389.KS ticker on the South Korean stock exchange.

 

It hasn't been a winner for him, so far.

 

wabuffo

 

The Hyundai investment is interesting.  The whole premise behind the small-size caveat is that it enables them to take their skillset to a bigger investment universe.  But if that’s the case, why did Munger buy Hyundai?  When he was making his investment (2013-2014), I remember finding many opportunities in Korea that looked a lot better than Hyundai.  I also know Munger knew about some of these because Li Lu presented one at CBS.  The fact that Munger had direct knowledge of these opportunities (via Li Lu) and had access to them (via the foundation’s smaller capital base) and still made a poor investment speaks to the fact that size isn’t the limiting factor here.  Compounding at 50%, whether it’s with $1 million or $1 billion, is tough.  That’s not to say it isn’t doable—it’s just tough.

 

[kiwing100]

Where can you see 005389.KS in the DJCO portfolio? Is there some filing?  FYI, I looked in the 10K and nothing was mentioned.

I believe what wabuffo is saying is that he has inferred the identity of the undisclosed foreign security by looking at the end of quarter marks for DJCO's entire investment portfolio and backing out the known, disclosed positions.  005389.KS lines up with those marks, which as more quarters are reported becomes less and less likely to be a coincidence. 

 

gfp is correct.  To my knowledge Charlie has never disclosed the identity of the South Korean manufacturing company in the DJCO portfolio.  He did disclose that the other foreign manufacturing company on the Hong Kong exchange is BYD (1211.HK) at the AGM last year:

https://www.sec.gov/Archives/edgar/data/783412/000143774918002649/djco20180215_8k.htm

 

Using publicly available information, one can easily identify the mystery South Korean stock.  Here's a table that shows the start of how to do that. 

 

http://i68.tinypic.com/2efpctk.jpg

 

DJCO has to file a 13F every quarter and outline its holdings of its four US-listed stocks (WFC, USB, BAC, PKX).  One can back into the quarter-end fair values of its two foreign-listed stocks by subtracting the amounts in the 13-Fs with their total holdings of common stocks reported in the 10-Qs, 10-Ks.  We can see that the bigger position is BYD.  We can use the BYD information to calculate the quarter-end fair values of the South Korean stock (and then figure out what stock it is).

 

http://i65.tinypic.com/2eoce55.jpg

 

To calculate the quarter-end fair values of DJCO's holding of BYD (1211.HK) we need to peg it to the quarter-end reported fair values of BYD by BRK Energy (a more-or-less permanent holding) in its 10-Qs, 10-Ks.  You can see that the annual values (9/30) declared in the foreign currency risk section in the DJCO 10-K tie with the calculated values using BRK Energy's fair values of its BYD holding. 

 

Using the fair value of DJCO's BYD holding, we can then back into the quarter-end fair values of DJCO's mystery South Korean exchange-listed security.  If we compare the index vs the 9/30/17 fair value of this holding with the calculated USD-value of Hyundai Pfd Series 3 (005389.KS) quarter-end prices converted to USD from South Korean won, you can see that the quarterly index values match exactly.  This makes it virtually certain that this is the South Korean-listed stock that DJCO owns. 

 

There's other circumstantial evidence that supports this hypothesis.  One is the Alfred Munger Trust holdings of Hyundai securities.  A second data point is that Li Lu (who manages Munger's money in his Himalaya Capital fund) presented South Korean preferreds (which are actually non-voting common shares) being mispriced versus their voting common equity pairs at a Sohn Conference in 2013 and has probably influenced Munger's thinking in this area (Munger first started buying Hyundai Series 3 Preferred for DJCO during late 2014).

https://www.marketfolly.com/2013/05/li-lus-sohn-conference-presentation-on.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MarketFolly+(Market+Folly)

 

And then again I could be wrong  8)

 

wabuffo

 

Wabuffo,

 

Many thanks to you for your very comprehensive response.

[Swedish_Compounder]

I think that he would be looking at share issuances in poorly marketed very small companies where it would be possible to find opportunities. For example Peter Lynch S&L strategy where you would need to open up accounts in the S&L:s to be allowed to participate in the share issuance taking palce far below market value. There might from time to time be similar situations in other companies, such as real estate companies etc, where you would need to have a savings account to participate. He might try to oversubscribe the share issuance in a huge way, which might be fruitful if it is poorly marketed. He might not be inclined to describe these sorts of situations, because there can be cases when the issuer does not expect someone to subscribe for 1.000 times more shares than everyone else and even though it is not illegal, it can be perceived as un-ethical, since it is against the intentions of the issuer.

 

There would also be share redemption situations where it can be possible to make 20-30% in a few weeks in a very safe way. I have encountered one such situation myself in a very small stock with no analyst or mutual fund coverage and made lots of money from it.

 

If I did not have a regular job and was planning to put 1 MUSD to work, I would probably try to read everything I can find in order to try to find these kinds of situations and bet hard when I find them.

 

[AdjustedEarnings]

Buffett has talked a lot about the 1950s as his best decade, so I would use that as a reference.  If you look at his holdings from back then, you’ll notice that most of them were (a) priced under 5x earnings, (b) growing at a decent clip (i.e., 10%) and © trading in some off-the-map market (think of the Atled example he’s talked about a few times).  Also, most of his large investments from back then were coattails—IDS (Murchinson); Western Insurance (Duboc); Philadelphia & Reading (Graham); Geico (Graham); North American Fire (Ahmanson); Rockwood (Pritzker); Crane (Evans); Eltra (Wattles); Getty Oil (Getty). 

 

Could he and Munger still find these situations today?  I think so.  Consider, for instance, the investments Himalaya has made overseas in the last twenty-five years.  Most of these were even cleaner (better business, capital structure, price, etc.) than the investments Buffett was making in the 1950s.  I would rank them up their with Belridge, which Munger often cites as one of the best investment opportunities of his life. 

 

That being said, just because it can be done doesn’t mean that they could do it.  Take Munger’s smaller pools of capital—The Daily Journal and his foundation.  What’s the return on the Daily Journal’s investments over the last five years?  Not 50%.  How about his foundation?  The only large investment he has made in the foundation in the last five years (Hyundai common and preferred) is probably down by 50%.  If it were indeed as easy as Buffett lets on, I think the returns in both these vehicles would’ve been a lot higher.

 

[From my own experience, the single-most important factor to earning high returns is knowing where to look.]

 

See also: WEB's investment in Seritage. Large, high conviction investment equaling over 10-15% of his non-BRK portfolio. It has under-peformed badly. Now he has more than $1mm in that portfolio, to be sure. But it's less than a billion. I believe that portfolio looks something like:

 

10-15% SRG

10-12ish% WFC

10-12ish% JPM

Some other REITs he uses for income

and US Treasuries

 

He could be in smaller investments, if he wanted to be, had time to find them, and actually found them.

[fishwithwings]

I think that he would be looking at share issuances in poorly marketed very small companies where it would be possible to find opportunities. For example Peter Lynch S&L strategy where you would need to open up accounts in the S&L:s to be allowed to participate in the share issuance taking palce far below market value. There might from time to time be similar situations in other companies, such as real estate companies etc, where you would need to have a savings account to participate. He might try to oversubscribe the share issuance in a huge way, which might be fruitful if it is poorly marketed. He might not be inclined to describe these sorts of situations, because there can be cases when the issuer does not expect someone to subscribe for 1.000 times more shares than everyone else and even though it is not illegal, it can be perceived as un-ethical, since it is against the intentions of the issuer.

 

There would also be share redemption situations where it can be possible to make 20-30% in a few weeks in a very safe way. I have encountered one such situation myself in a very small stock with no analyst or mutual fund coverage and made lots of money from it.

 

If I did not have a regular job and was planning to put 1 MUSD to work, I would probably try to read everything I can find in order to try to find these kinds of situations and bet hard when I find them.

 

I think you're on the right track...  Do you have an example of these situations with real estate companies?

 

Another thing worth noting down is that investors like Alphavulture are earning very high IRRs on special situation investments.  Not sure about the specifics tho...

[Swedish_Compounder]

I do know of an example where a company in the real estate / consultancy business wanted to spread ownership in advance of a stock listing. Therefore, they issued stock at a big discount to equity value to their 20.000 members who had "savings accounts" where they could save to invest in future properties. These savings accounts could be very small.

 

They did not put a cap to how many shares could be subscribed by each saver and one guy had shortly before the share issue become a "home saver" and subscribed so many shares that he got to own almost 10% of the whole company. This was made possible because the other "home savers" did not subscribe to enough shares to fill up the share issue.

 

The year after the stock listing, he sold his shares at a 700% profit.

 

[fishwithwings]

I do know of an example where a company in the real estate / consultancy business wanted to spread ownership in advance of a stock listing. Therefore, they issued stock at a big discount to equity value to their 20.000 members who had "savings accounts" where they could save to invest in future properties. These savings accounts could be very small.

 

They did not put a cap to how many shares could be subscribed by each saver and one guy had shortly before the share issue become a "home saver" and subscribed so many shares that he got to own almost 10% of the whole company. This was made possible because the other "home savers" did not subscribe to enough shares to fill up the share issue.

 

 

The year after the stock listing, he sold his shares at a 700% profit.

 

Thanks. Now if there was a way to find these ideas...

[DTEJD1997]

When they asked him about it years ago he said the return would go down dramatically as AUM went from 1M - 10M.  I take that to mean to look at things that are too tiny even for a $10M fund.  So look in small stuff, find something way out of line, and bet big, cause you're probably not gonna find them that often.

 

Look at the ethanex bankruptcy Thomas Braziel invested in,  Norilsk Nickel arb at kiddynamite's blog, mexican restaurants (CASA) which was a regular long from oddballstocks blog a few years ago (actually just read the whole oddballstocks blog archive).

 

I was privileged/lucky enough to be invested in 2/3 of the situations you mentioned.

 

As an interesting aside, it appears that the successor to CASA (Williston Holdings) is bidding to take out KONA from bankruptcy.

[cm2]

The guy that asked the question was John D'Urso from Kahuna Capital, he is a very smart, successful distressed and special situations investor.  At one point I believe he was MD of Special Situations for Bob Robotti.  I have personal knowledge of several situations that he has invested in where he has made 500%+ returns, including some secured real estate transactions. 

 

He's very gregarious as well, kind of like a Peter Cundill.

 

If anyone has anything interesting to share with him I can put you in touch - just send me a PM.