Tuesday, December 25, 2007

Studying the Gurus:Eddie Lampert

Came across an old article about Eddie Lampert and his investment approach.It's a great article so do take the time to read through the entire article

Studying the Sage

If Lampert does turn Kmart into the next Berkshire Hathaway, he could simply follow Buffett's blueprint. Buffett started with an investment fund he founded at age 25, the same as Lampert when he started ESL. Then in 1962, Buffett started to buy shares of the textile company and by the late 1960s he was using the mill's excess cash to invest in other businesses -- first a Nebraska insurance company and then an Illinois bank. By 1970 he had dissolved the fund, selling off its investments and giving the partners a choice of cash or shares in Berkshire Hathaway. Many investors believe that Lampert is poised to do the same: using Kmart to make new investments while keeping ESL for his earlier investments, or alternatively dissolving it at some point by selling its assets.Lampert has carefully studied Buffett for years. He started reading and rereading Buffett's writings while working at Goldman after college. He would analyze Buffett's investments, he says, by "reverse engineering" deals, such as his purchase of insurance company GEICO. Lampert went back and read GEICO's annual reports in the couple of years preceding Buffett's initial investment in the 1970s. "Putting myself in his shoes at that time, could I understand why he made the investments?" says Lampert. "That was part of my learning process." In 1989 he flew out to Omaha and met Buffett for 90 minutes, peppering him with questions about his investing philosophy.Like the Sage of Omaha, Lampert targets mature and easily understandable businesses that have strong cash flows. Both focus on a company's ability to generate large amounts of cash over the long haul, so neither is particularly fazed by sharp ups and downs in profits and stock prices. In fact, says ESL President William C. Crowley, "Lampert would rather earn a bumpy 15% [return] than a flat 12%." And just as Buffett progressed from minority stakes, where his influence isn't guaranteed, to majority stakes, where he has control, Lampert is currently following the same path. Kmart marks his first majority play, and Lampert says it is the type of investment he plans for the future. "In a control position, our ability to create value goes up exponentially," he explains

Link to the entire article

Monday, December 24, 2007

How to earn 300% in a global credit crunch

Interesting articles about hedge funds were able to make billions during the recent meltdown in the credit derivatives market

Article 1

Article 2


Insights into Burlington Northern Play

Burlington Northern has been one of Buffett's biggest plays (estimated stake of nearly 5 billion USD)

Came across an excellent analysis of Burlington Northern and wish to share with the rest of the readers

1) Company has bought back shares since 1998 at an average cost of 37.50 and are aggressive in buying back their shares.This year after 9 months 11 million shares were purchased at an average cost of 83.50 .the total shares outstanding is 351 million and the company is still buying of course Warren owns 17.2% of the shares and with these buybacks and his "permissionn" to buy up to 49% the amount of "available shares" are decreasing and BNI is using "free cash flow" to keep buying back the stock.

2) Company's EPS only rose a couple percent in 2007 because of "fuel hedges" which helped them in 2006. This years EPS of about 5.20 should increase by 7-10% over the next 5 years in pricing power and increased volume growth and the EPS show grow by 9% or more when factoring in the repurchases .

3) companies revenues are about 35% consumer and container boxes and automotive 20% coal 25% industrial and 20% agricultrual .Look for consumer and coal to be higher growth areas. Of the earnings 50% come from international products and 50% are domestic

4) company had "excess capacity" for along time now they finally have pricing power

5 ) Bottom line is the company has 29000 miles of track which costs about 3 million dollars per mile to "replace" . which totals about 87 billion

Land which is on the book at 1.7 billion dollars has a "conservative"average cost basis of about 50 years ( some of the purcahses are on books pre1900) at a 3% annual appreciation the land is probably worth more than 8 billion and chances are that number is UNDERSTATED

The terminals probably are worth another 3 billion conservatively and the long term debt which includes leases is about 11 billion .So 100 billion dollars of assets -11 billion of debt is about 89 billion dollars.The whole company can be purchased for under 28 billion at todays closing price

the entire transcript of the message post can be found here

Buffett's stock picks in the aftermath of the Credit Crunch

In the aftermath of the credit crunch, speculation was rife that Buffett would purchase stock of ailing mortage lender country wide financials and come to the rescue of Bear Sterns.In fact,quite the opposite has taken placed.Looking at Buffett's most recent purchases in Wells Fargo and US Bankcorp, Buffett has stayed within his circle of competence and stuck with companies with good ,rational managements who avoided playing risky financial instruments.In fact, a line from the 2004 BRK Shareholder meeting gives us some insight into Buffett's thought process regarding his recent stock purchases...

On Wells Fargo and Its Derivatives Risk [A shareholder asked why Buffett felt comfortable owning Wells Fargo stock, and even buying more, given its exposure to derivatives. Buffett replied:]

WB:I don’t have Wells Fargo’s annual report here, but I’d bet that J.P. Morgan Chase is far larger [in terms of exposure to derivatives]. I don’t think of them [Wells Fargo] as being a big player in the derivatives game.

It's clear that Buffett has made use of Mr Market's recent mood swings to buy well managed good businesses at attractive prices.With his cumulative knowledge built up over the years reading annual reports, it seem almost intuitive to purchase these companies..

Here is a link to his most recent stock purchases

In addition, here are his most recent comments about the recent turbulence in the financial markets and how he approaches it

WB:It is the nature of capitalism to periodically have recessions. People overshoot. So, it isn't the end of the world. I mean, as a matter of fact, for an investor, you know, it turns out to be the times when you make your best buys. I made by far the best buys I've ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap.

Guess it's time to start digging through all those 10ks and 10qs


Michael Price on Sears

Michael Price talks about his biggest holding(Sears) and discusses why Eddie Lampert's strategy in remaking Sears.Price firmly believes that Lampert's push towards having Sears focus more on profitable merchandise and reducing volume sales.Such a strategy, make work as Sears is a much smaller entity compared to Target and Wal Mart and cannot rely on a large store base for a volume based discount business model.Moreover, Sears has aggressively been buying back its stock which augurs well for shareholders who are willing to wait out Mr Market's unduly pessimistic outlook on the stock at the moment.

The link to the video

A short bio of Michael Price (taken from Gurufocus.com)

A renowned money manager learned finance as a $200-a-week research assistant under Max Heine. Mr. Price earned reputation for buying undervalued companies, raising hell: tussled with management of companies held in his portfolios. He sold Heine Securities in 1996 to Franklin Resources for $670 million. Now manages private firm, MFP Investors: $1.6 billion under management, much of it his own money


Friday, November 30, 2007

Our Hero, Benjamin Graham

My Hero, Benjamin Grossbaum
On November 15 in Manhattan, the editor of Grant's spoke before the Center for Jewish History on the topic, "My Hero, Benjamin Grossbaum." Following is the edited text of his remarks.
It is a pleasure to be here this evening. I am under strict instructions from the rector of Grace Church, Brooklyn, not to let down the Episcopal side. Uphold the highest standards of the Episcopalian intellectual tradition, he told me. What that tradition might be, he couldn't say, and neither can I. But I'll do my level best.
My subject is Benjamin Graham: his life, his investment philosophy, his writings and his Jewishness. About his love life, I will say little, as my time this evening is limited—just three hours, I believe. Some years ago, Fortune Magazine, in a squib it published on the occasion of Graham's induction into the U.S. Business Hall of Fame, said that the thrice-married father of value investing "leaped from blonde to blonde like an Alpine goat springing from peak to peak."
I am a frankly worshipful admirer of Graham's. I love him for his heart as much as for his head. Between 1929 and 1932, his investment partnership lost 70% of its value. Not until 1936 did it recoup all it relinquished since the Crash. Yet Graham persevered and, along with his partner, Jerry Newman, went on to achieve a brilliant long-term investment record—not excluding those three disastrous years. We have all heard the platitude, "The first rule of investing is not to lose money and the second rule is not to forget the first." Very helpful. Well, Graham shows that a debilitating loss is no reason to give up. . . . Never quit.
Benjamin Graham was born Benjamin Grossbaum on May 9, 1894, in London, and sailed to New York with his family before he was two. He attended New York City public schools and excelled at every subject except gym. He read constantly and forgot nothing—the kind of child we wish we had, or, indeed, had been ourselves. With the untimely death of his father, young Benjamin early learned to do without and to work. He entered Columbia College at 17 in the Class of 1914 and majored in mathematics.
For Graham, the life of the mind was inseparable from the life of finance. He was a fluent and adventurous writer. At one time or another, he tried his hand at poetry, playwrighting, translations, textbook writing and—the highest form of literature—financial journalism. In 1915, the New York Times published a letter to the editor under his name. The subject was the city's sinking fund, for which Graham had no use. He was 20 years old at the time and was posting quotations by hand on the chalk board of the New York Stock Exchange member firm of Newberger, Henderson & Loeb. Graham wrote not only for money—which he could certainly use at that stage of his career—but also for glory, such glory, for example, as a signed piece in the Magazine of Wall Street might afford.
The modern journalistic convention calls for an author on an investment subject to sprinkle his article with validating quotations from acknowledged authorities—brokerage-house analysts, for instance. There was none of that in Graham's pieces. He himself was the authority, and his topics ranged from bankruptcies and arbitrage to orphaned value stocks. In the summer of 1924, on the eve of the great Coolidge bull market, he identified eight stocks that, seemingly for no good reason, were quoted in the market at less than their pro rata share of net current assets. Then there were eight—in less than a decade, there would be hundreds.
Ben's letter to the editor of the Times is the only published piece of his writing signed Benjamin Grossbaum—at least, the only one that my tireless and enterprising research assistant, Adam Rowe, has found. How Grossbaum became Graham is an interesting story. But it's one you won't find in Graham's posthumously published memoir. It’s a curious omission, for the book is otherwise notable for its utter lack of inhibition. Adam has pieced it together from the trove of New York City records housed in the Bronx County Civil courthouse.
Ben's immediate family applied to the municipal authorities for permission to change the family surname from Grossbaum in April 1917, shortly after the United States declared war on Germany. In German, Grossbaum means "big tree." It was Ben's uncles and cousin, more recently arrived in the Bronx from England and perhaps more eager to adapt to the alarming tide of rabid nationalism and anti-German hysteria in America, who elected to swap Grossbaum for Graham in November 1915. All American Grahams claimed they were following the lead of their British relatives.
It was the teutonic sound of the word that made it insupportable in that time of Germanophobia, the Grossbaums said. So Ben and his brothers and their mother rebranded themselves. In his petition to New York City authorities, Graham's uncle explained that Grossbaum had no genealogical significance. Rather, his grandfather had taken it up in the middle of the 19th century to conform to a Russian law requiring Jews to adopt a surname. Up until that ukase, the family had had no surname at all—and his grandfather’s brothers, either not approving of Grossbaum or simply not caring, assumed different last names for themselves. Besides which, the cousin's application form pleads, "the name Grossbaum results in confusion and discomfort in business matters generally." It's forever being confused with "Rosenblum," "Rosenbeim," "Goldblum," "Greenbaum," "Rosenbaum," "Rosetbaum," and "Goldbeck."
Ben’s application reads essentially the same as those of his brothers and mother, though it was more succinct than those of his uncles and cousin. “Our family name,” he writes, “is a distinctively German name and at the outbreak of hostilities between England and Germany, members of my family residing in England changed their name to `Graham.’ . . . I have been subject to considerable embarrassment in having my name differ from that of many of my relatives, and it is my desire to have it changed to conform with theirs.” The Grossbaums were hardly alone in seeking safe haven in a blandly Anglo-Saxon identity. In 1918, acording to Manhattan municipal courthouse records, six Goldsteins and two Greenbaums joined the fast-expanding Graham clan. In that same year—the last year of the war—at least three people shed the name "Kaiser." One wonders, Didn't they get the memo?
It happened that Graham once taught Sunday school. It was a small class in Beverly Hills. He was retired and living in California at the time. It was in the 1960s. His half dozen young charges were Jewish. He asked them about anti-Semitism. To his amazement, they said they weren’t familiar with the term—didn’t know what it meant. In his memoir Graham relates, “When I was their age, anti-Semitism was an important part of the air we breathed; it affected our plans for dealing with the outside world; it played the leading part in our literature and in our humor.” But he goes on to say that, as an adult, his relations with Christians were cordial and respectful. Never did he suffer “rebuffs or embarrassments because of my religion.” To be sure, Graham—through his mother, the grandson of the chief Rabbi of Warsaw, if you please—did not wear that religion on his sleeve. He seems not to have worn it at all. “I have a theory which is anathema to most of my Jewish friends," he wrote posthumously. "It is that the real mission of Jews is to intermarry and thus tocontribute their hard-won stock of talents and abilities to a much wider group. What a wonderful adventure in genetics that would be.” Let me say, on behalf of the worldwide Anglican Communion, that we welcome all the genetic support we can get.
Anyway, the bright-eyed Columbia graduate was, as he himself acknowledged, one smart cookie. He quickly developed proficiency in the kinds of investment activities that many find too complex to penetrate—arbitrage, workouts and market-neutral strategies (as we would call them today), among others. “My standard procedure,” Graham relates, “was to buy convertible bonds around par and to sell calls against them on the related common stock; or else—in a more elaborate variant—sell the common stock short and sell puts against our short position.” The amounts received on the put and call transactions were big enough effectively to guarantee a profit on the overall operation, wherever the price of the common traded.
So smart was Graham that he presently came to outsmart himself. This careful analyst and keen appraiser of risk had had a jolly and lucrative time of it in the Coolidge bull market. He was certainly no uncritical booster of the supposed new era. In his magazine pieces and to his class in securities analysis at Columbia University, he flagged the divergence of publlic market values from private ones. Before World War I, the typical analyst was a businessman who thought about stocks as he did about his own company. That is, he focused on property, plant and equipment, on cash and on liabilities. That is, he started with the balance sheet. The market of the late 1920s, in stark contrast, was single-mindedly concerned with the income statement. What would a certain company earn this year? What would it earn next year? Never mind “book value.” It was an anachronism.
So there was a CNBC market 50 years before CNBC. At the manic peak, investors were paying 8% to borrow in the call-loan market in order to buy stocks yielding 2%. Palavering with Bernard M Baruch, the great inventor and venture capitalist, Graham prophesied that before the cycle was completed, the public would be running from the chance to pay 2% in the call-loan market in order to buy stocks yielding 8%. And, by the way, that forecast was almost literally validated. The two out-of-sorts value investors agreed that a crash was in the offering.
Not that there was nothing for a value investor to do, even in that momentum- and earnings-crazed market. Graham continued to uncover cheap stocks, including some trading for less than their pro rata share of cash, or near-cash, in the company’s treasury. By now he was managing money and living what we might now describe as the Greenwich hedge-fund lifestyle. He kept a man-servant—one flunky among a troupe his wife retained—in his extra-commodious and extravagantly priced apartment at the newly opened Beresford on Central Park West. It was the first and only time in his life that he had a butler, Graham relates. Nor is it surprising that this experiment in self-indulgence was cut short. Value investors hate ostentation.
Then, again, value investors are supposed to have a deep-rooted aversion to financial leverage, but Graham and his partners went into the Crash in a highly leveraged position. He relates that he was operating with $2 ½ million in capital and that $2 ½ million of longs were hedged with $2 ½ million of shorts. So far, so good. But Graham had, in addition, as much as $4 ½ million in unhedged long positions, against which he had borrowed $2 million. "We were convinced," Graham explains, "that all of our long securities were intrinsically worth their market price. Although many of our issues were little known to active Wall Street hands, similar ones had previously shown a praiseworthy tendency to come to life at a decent interval after we bought them and give us the chance to sell them out at a nice profit, replacing them with other bargain issues which we were constantly digging up."
It might have been for penance that Graham, with the editorial assistance of David L. Dodd, began to write his magnum opus, "Security Analysis"—for penance and for money. Certainly, there was no money coming in from the money-management business. Graham's fund was down by 20% in 1929, by 50% in 1930 and by 16% in 1931. In 1932, the year the Dow bottomed at 41.22, he managed to achieve a kind of moral victory by losing a mere 2%. Still, there was but 30 cents remaining of each dollar entrusted to his stewardship at the peak only three years before.
Graham was in the throes of composition in the spring of 1932, though he was writing not for his book publisher, McGraw-Hill, but for Forbes Magazine. Under his byline, starting in the issue dated June 1, appeared a three-part series headed, "Is American Business Worth More Dead Than Alive?" To judge by the valuations then prevailing on the New York Stock Exchange, the answer was "yes." More than a third of all listed industrial companies changed hands at less than the companies' own net current assets. In other words, the business values of these companies—as distinct fromo their net cash and other liquid assets—was worth less than zero.
Graham treated this astonishing fact not only with wonder—who could have dreamt it?—but also with a well-reasoned measure of indignation. In the long-vanished boom, companies had raised billions of dollars from the public. Now they were liquid, while the public was struggling to pay the rent and put food on the table. The only rational way to explain the existence of so many cheap stocks, Graham proposed, was that the market, in its wisdom, was discounting operating losses for years to come. But if that were the case, he asked, "should not the stockholder demand liquidation before his money is thus dissipated?"
Well, the market wasn't wise, he judged. It was an ass. How could it be otherwise when the people who bought and sold—especially those who sold—refused even to look at balance sheets? "Much of the past year's selling of stocks has been due to fear rather than necessity," Graham wrote in Forbes. "If these timid holders were thoroughly aware that they were selling out for only a fraction of the liquid assets behind their share, many of them might have acted differently. But since valuation has come to be associated exclusively with earning power, the stockholder no longer pays any attention to what his company owns—not even its money in the bank."
If "earning power" was the boomtime cry, "losing power" was the motto of the bust. "Is it true," Graham posed, "that one out of three American businesses is destined to continue losing money until the stockholders have no equity remaining? That is what the stock market says in no uncertain terms."
And Graham answered his own question: "In all probability [the market] is wrong, as it has always been wrong in its major judgments of the future. The logic of Wall Street is proverbially weak. It is hardly consistent, for example, to despair of the railroads because the trucks are going to take most of their business, and at the same time to be so despondent over the truck industry as to give away shares in its largest units for a small fraction of their liquid capital alone."
The Forbes series bracketed the July 8 low in the Dow. Graham was never one for market calls, but he was bullish when one ought to have been bullish—in 1933, incidentally, he was up by 50%. Of course, at the bottom of the market, being bearish is what comes naturally, and that sinking feeling was highly contagiouos in the final summer of the administration of Herbert Hoover. Competing for the attention of the reading public at about the time the Graham series was running in Forbes was a new book from from Harper Brothers entitled "Is Capitalism Doomed?" Why yes, the author, Lawrence Dennis, replied to his own question. Fascism was the coming thing. It could "supplant the now disintegrating laissez-faire liberal capitalism of the past century."
It happens that the Dennis book got a good notice from the The New York Times book critic, Louis Rich. And it happens that, two years later, the same critic held forth on Graham-and-Dodd's "Security Analysis" for review. He liked it, too. "On the assumption," wrote Mr. Rich, "that despite the debacle of recent history there are still people whose money burns a hole in their pockets, it is to be hoped that they will read this book. It is a full-bodied, mature, meticulous and wholly meritorious outgrowth of scholarly probing and practical sagacity."
Seventy-odd years later, the critic's verdict still stands. "Security Analysis" is Graham's legacy and testament. It is a comprehensive guide to investing as investing was defined and practiced in the early decades of the 20th century. "Value investing" is the name posterity attaches to Graham's approach to seeking out securities that afford the buyer a margin of safety. Graham himself called it simply—"investing." It might trouble his shade to know that even after seven decades of financial evolution, only one Wall Street tribe—the one that styles itself value-seeking—consistently strives not to overpay. We are a kind of cult. For the mainstream, it is as true today as it was in 1929 that value is nearly the same as earning power. Certainly, to judge by the 2007 credit crackup, balance-sheet analysis isn't much more faithfully practiced today than it was in the days of Calvin Coolidge.
Graham was an educated man who happened to invest rather than an investor who, in order to get a job, happened to have gone to college. He wrote and read and thought his whole life long. And as an educated man, he could assume a certain detachment from the the times in which he lived. He could see, for example, that the Great Depression was an anomalous catastrophe, one not to be repeated in his lifetime and therefore one against which an investor need not armor himself. It was a fluke.
Yet Graham, a human being quite as fallible as the next very smart human being, sometimes lost his sense of perspective. He, too, could become historically disoriented. One sees it at the end of the second edition of "Security Analysis," which was published in 1940. Fresh in the author's mind was not only the Depression. Even fresher was the brutal, trap-door bear market of 1937-38. Graham had been through the mill, and he seemed to let it show in the words of advice he tendered to the managers of trust funds, mutual funds, endowments and other such institutions. How should they invest? Well, Graham proposed, if they could afford to, they should buy bonds—then yielding all of 2% or 3%. They should do themselves a favor and give wide berth to common stocks. What? Steer clear of the very asset class on which he had held forth for most of the preceding 725 pages? Astonishingly, yes. "We doubt," Graham writes, "if the better performance of common-stock indexes over past periods will, in itself, warrant the heavy responsibilities and the recurring uncertainties that are inseparable from a common-stock investment program." There you have it. Some of the worst long-term investment advice ever proferred by one of the best investors, and thinkers about investing, who ever lived.
Raise a glass, then, to Ben Graham, my very human hero.

Monday, November 26, 2007

Mathematicians' role in market mayhem

Interesting article about how quants are behind the chaos in the financial markets.Paul Wilmott is a leading authority and well respected figurehead in the field of quantitative finance with several widely used textbooks to his name

Here is an excerpt

"Paul Wilmott is someone with privileged access to the usually secretive world of the quants.

He runs a website where quants discuss mathematical problems and can watch lectures on quantitative finance 24 hours a day. He talks regularly to those working in a wide range of banks and hedge funds.

He believes the accusation that many banks use the same models is true: "The way in which quants are compensated encourages them to use the same strategies as everyone else."

He claims that many quants calculate that if they lose money as a result of following a novel strategy they will be fired.

However, if they lose money as a result of following the same strategy as everyone else, they will not get the blame.

"The problem with this," says Mr Wilmott, "is that if something bad happens, it happens across the board."

Consumer benefits

Another problem, according to Mr Wilmott, is that academically trained mathematicians are more used to modelling sound physical principles than difficult-to-predict financial markets:

With finance you are essentially modelling human beings which is much more tricky."

Here is the link to the entire article

Using the Graham-Dodd-Buffett framework,one gets a clear perspective into the psychology of financial markets and human behaviour.Instead of relying on overpaid quants, Buffett in a gist gives us all we need to succeed as successful investors.

Amazingly,Buffett reveals this priceless piece of wisdom when he was just 21 years old while lecturing a group of students at night time classes

"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."

Timeless piece of advice...


Saturday, November 24, 2007

Buffet wants Northern Rock

Dear readers, refer to link below:


Better and better,

Friday, November 16, 2007

Laws of compensation

Dear readers,

I recently found a very philosophical but interesting article on the laws of compensation as written by philosophist RALPH WALDO EMERSON. You reap what you sow. Every cause has an effect so on and so forth. Do have a read... It's volumes of wisdom is invaluable and practical.


Better and better,

Thursday, November 15, 2007

Mohnish on Youtube

Here is a video of Mohnish on Youtube.


Better and better,

Petrochina case study

This is a brief analysis on buffet's former stake in petrochina.


Better and better,

Fund manager extraodinaire Francis Chou

Francis Chou came to Canada from India with just $200 in his pocket. Without any form of investment experience in a money management firm, he went on to compound money that shames other portfolio managers. His record stands at 16% pa for 24 years.

Read this article to find out more....


Better and better,

Monday, November 12, 2007

The big picture...

"Focus on what is important and knowable"

....Warren Buffet

Check this next article out. It speaks about the value of simplicity and keeping the big picture in mind, in line with Buffet's above quote.


Also check out my previous article entiled "keeping it simple and stupid" at


Better and better,

Some of canada's best investors

Some of canada's best investors are retail investors. This shows that retail investors can thrive too. With small seed capital and the right philosophy, one can go a long way. Check this next article out:


Better and better,

Sunday, November 11, 2007

Are you overpaying for performance?

I would just like to make a comparison between the fee structure of a typical buffet investment partnership vs a typical mutual fund fee structure. Here is how it goes:

Buffet Partnership fees:

1) There is no management fees.

2) Performance fees are only charged if the return is greater than 6% per year.

3) 25% of excess over 6% is charged as performance fees.

Gross return : 10%
Performance fees = 0.25 x (10% - 6%) = 1%
After fees return = 9%

Mutual fund fees structure:

1) 2% management fees regardless of whether return was positive or negative for the year.

2) 20% cut of profits after 2% deduction

Gross return : 10%
After fees return = (10% - 2%) x 80% = 6.4%

As you can see from the above examples, with the same gross return, one would have gotten 9% after fees in the buffet partnership while one would have gotten 6.4% in a mutual fund. This reveals the fairness through which buffet operated his partnership. Besides it is also known that 80% of all fund managers underperform their benchmark indexes. Hence, are you overpaying for performance? Just something to think about folks.

Better and better,

Pavlov and investing? Any similarities?

"Common sense is the collection of prejudices acquired by age eighteen"

Albert Einstein

How true can that get? From a very young age, we were taught by our elders, by people to distinguish right from wrong, black from white, good versus evil and what not... Although most times, these teachings or values serve to protect us, to help us survive and thrive in society. But all too often, it builds within us a set of prejudices that goes beyond logic. Our reactions too become synchronised with the masses, being one with the crowd. Look at the division between the anglicans and the catholics in Ireland,the slavery and discrimination of the blacks in the US. Racism? Religious differences, racial differences and more all point to one thing and that is the different groups of shared ideology or herd mentality has been propagated throughout mankind for ages.

Pavlov, a russian scientist speaks about conditioning in scientific terms and his research included areas of temperament, conditioning and involuntary reflexes. When a dog hears the bell ringing with food placed outside the doghouse, it immediately knows that food awaits him. Through such conditioning, upon ringing of bells, the dogs start to salivate even without the aroma of food awaiting him. This is in fact a reflex action. Us human beings are like that too. We have been conditioned to react in certain manners due to the shared ideology that we have been brought up with. I take the Mass Rapid Transit to work everyday in singapore. Observe this and you will know that it is true. When there is a crowd of people alighting from the trains, there seems to be this mad rush for a few gantry exit points. Everyone squeezes out through these few gantry exits while you can spot other gantry exits available and unused. This, ladies and gentlemen is the herd mentality at work. Aren't we conditioned like dogs too if that's the case?

How does this apply to the stock market? It seems that as the indian and chinese stock markets are going up, more people want to join the band wagon. This effects a series of moves in the stock market that causes the stock market to be overvalued. India is trading at a PE of 55x while China is trading at a PE of 60x. Ridiculous but the higher it goes, the more the inflow of funds from investors, the herd. Contrastingly, when markets do correct everyone seems scared and panicky. In both scenarios painted above, it is most logical to underinvest when the markets are seemingly high and to be greedy when the markets are low for you get them at bargain prices.

Buffet speaks about this in his own way. He says: Be greedy when the market is fearful and fearful when the market is greedy.

Benjamin Graham too speaks about this. His analogy of Mr Market being a manic depressive is breeds familiarity among the value investing circles.

Tying it all together, i just like to put it in plain simple terms. Investing can be difficult because of social conditioning. It is more temperament that IQ. It reflects on the composure and awareness of an individual. The way a person looks at investments speaks volumes on a person's character as well. This game is simply a transfer of wealth from the person controlled by the herd to a person of awareness and composure. So ask yourself whenever you are about to make an investment decision. Am i part of the herd???? Just something to think about folks...

Better and better,

Questions on insider trading!

Recently, a friend asked me to write more on ths usefulness of insider trading indicators. Here are some findings which can be found in research conducted by insider trading expert , Nejat Seyhun.

The First most basic question is : Does insider trading help to predict any form of stock market returns?
It has been found that stocks with insider purchases actually outperform the market by 4.5% and stocks with insider sales actually underperform the market by 2.7%. But it is important to note that insider sales may not necessarily mean a bearish signal as sales by insiders can mean that they need the money to purchase a new home , car etc not indicative of stock moves to the downside entirely.

What kinds of stocks should i buy a longside the insiders?
One should buy stocks with insider purchases focused on small cap companies. On average, insiders earn 6.2% in small companies as opposed to 1.7% in large caps. Ahmet of Okumus capital has been getting astounding returns of 33% per annum. In fact in his earlier years, he had been doing way better and the reason for it i feel is that he focuses on beaten down small caps with insider purchases.

Does insider purchases predict dividend hikes or initiations?
No there is no correlation.

Does insider trading predict an upside in the coming earnings quater or upside surprises?
No there is absolutely no correlation.

Does insider trading predict the success of a merger or acquisition?
Nope it does not. Prices of target firms rise due to institutional participation and not insider purchases. Besides trading on information which have a material effect on price before it is disclosed is illegal.

One point to note is that although insider purchases are normally followed by stock moves to the upside, it is of my opinion that these stock moves are a "psychological" market phenomenon and not necessarily mean that the stock is undervalued. The market would reason it this way: since the insiders are buying it must mean that something good must be happening so lets hop on and join the band wagon. I feel that there are flaws inherent in such surfacial thinking to say the least and i do beg to differ. Firstly, insider buying may not necessarily mean that the company is priced at a discount to its intrinsic value. For example, i came across an alternative energy company(ener). it was trading at a forward PE of 60 and the insiders were scooping it up. I thought to myself that this guy surely does not know what he is doing and is going beyond logical reasoning. Hence, it is always important to combine insider trading with fundamental analysis to gauge the true value of a company before buying into one. Do not do it blindly!

Feel free to pose me and manpreet any questions regarding this.

Better and better,

Wednesday, November 07, 2007

Putting your money where your mouth is!

In my recent post, I quoted Barry diller. He claimed that he was confident of the company's future. Besides owning a considerable stake in expedia itself, he has also excercised options to get a larger stake in the company.

All in all, he bought 9,500,000 shares at a price of $8.59. Altogether, he spent approximately 81 million dollars in the company. Barry diller alone is worth 1.3 billion. To me, he just invested 6.2% of his net worth acquiring these shares.

Actions speak louder than words and it seems that he just means what he says. Do refer to my previous article on expedia. http://valueinvestorhaven.blogspot.com/search?q=expedia

Better and better,

Monday, October 15, 2007

Harvest Natural Resources

Harvest natural Resources is an oil and gas company headquatered in Houston, Texas. It's business activities lies mainly in oil rich Russia and Venezuela. Currently, it's prime asset is the right to drill for oil and gas in the fields of Venezuela and they have been operating under an OSA(operating service agreement) in Venezuela under which it would produce oil and deliver it to PDVSA(Petroleos de Venezuela)

The main risk investing in Harvest Natural Resources is that of a political one. This is due to the company being subjected to continuing expropriation through renegotiated contracts or broken contracts with the Venezuelan Government where the venezuelan Government acts to modify the property rights of the company under its sovereignity. During the last quater of 2004, the Venezuelan government witheld drilling permits and since then production levels were cut with large back taxes charged to these companies operating in Venezuela. Operating Service agreements were deemed illegal by the state government and companies which were operating in Venezuela had to be reorganised as mixed companies with majority stakes being controlled by the state. As an example, the Venezuelan Government recently converted 32 privately run oil field contracts into 21 state dominated joint ventures last year and this is exactly what is taking place in the backyard of Harvest Natural Resources. As i write this HNR is trading at a price of $12.55.

With regards to Harvest Natural Resources, the net effect is that Harvest Natural Resources now owns 40% of Petrodelta and PDVSA owns 60% of Petrodelta. PDVSA also owns 69% of Lagopetrol, Hocol owns 26% of lagopetrol, encopek petroleo owns 3.1% of lagopetrol and Carte De Inversiones Petrobras owns 1.6% of Lagopetrol. In case, you do not understand what i am talking about above, PDVAS(venezuela) now owns 69% of Lagopetrol and also owns 60% of petrodelta. Petrodelta and Lagopetrol which is an approved joint venture can then go on to set up a sales contracts with the PDVSA.(Get the picture?)Essentially, Chavez is doing this to generate addtional revenue for a poverty stricken country. Under the new changes, Harvest natural Resources can also operate in Venezuela till 2026 rather than 2012 under the operating service agreement. HNR has to pay taxes @ 50% and is also subjected to a 33% rolyalty. Subsequestly , HNR operating as Petrodelta will then invoice PDVSA from April 1st 2006 till 30th June 2007 and this will prove to be an estimated 275 million. After forking out its back taxes and operating expenditures and much needed working capital, Petrodelta will be expected to distribute the rest of the funds back to HNR. This has been revealed by Form 8K which was filed on the 18th of September.

Valuation(according to Q2)

Shares outstanding: 37.74 million shares

Market Capitalization: 473.6 million

Net cash(cash less debt): $1.71 per share

Enterprise Value per share : $10.84

Proved Barrels: 45 million

Probable Barrels: 31 million

Possible Barrels: 74 million barrels

Enterprise value per Barrel(proven, possible, possible): $2.72

Enterprise value per proven barrel : $9.09

Enterprise value per proven barrel is $9.09 while large integrated oil and gas companies frequently trade at an enterprise value of $15 - $18 per proven barrel. While using enterprise value may be subjective as there can be many unknown variables and it is too simplistic an approach.

Using Discounted cashflow with the following assumptions as per Ryder Scott Report:

1) 10% discount rate
2) 50% tax rate
3)Value of proven reserves:$616 million before tax rate
4)Value of Probable reserves:$317 million before tax rate
5)Value of possible reserves:$792 million before tax rate

Intrinsic value of reserves after 50% tax = approximately $24
Current price: $12.55
(The Ryder Scott group is actually an independent group of petroleum consultants that specializes in certifying and valuing reserves and they have been in business since 1937.)

In addition to the valuation metrics above, one can also spot a few catalysts:

1)Net of royalty income, Petrodelta will receive $275 million according to management. After costs incurred for the period of approximately 46 million, a 40% interest in petrodelta and 50% tax rate , HNR will obtain 45.8 million which is equal to $1.21 per HNR share. Any dividends distributed to HNR will be a catalyst to stock price moves to the upside.

2) Now that the mixed company has been reorganised, a huge part of the political risk has been removed. HNR can continue to operate in Venezuela. In the 3rd quater of 2006, despite having reported a negative number for earnings(-1.36 yield to date), HNR did in fact earn approximately $0.25 per share in Venezuela although it suspended drilling. Continued drilling in Venezuela would make a positive inpact to its income statement in the future, the extent of which cannot be estimated as yet.

3) 25 June 07 - HNR's board approves a $50 million buyback. This would enrich existing shareholders
Quote" Having achieved Venezuelan National Assembly approval for the formation of Petrodelta, we have eliminated much of the uncertainty that has negatively affected the value of our share price and hindered our plans for further development in Venezuela and elsewhere," Unquote
4)Removal of political uncertainty and future of harvest natural resources

5) Pabrai Investment funds have invested a substantial portion of their net worth into HNR. Activism may take place and we believe that as a substantial shareholder, Pabrai will be able to advise the management on what can be done to increase intrinsic value. This will help to narrow the gap between intrinsic value and current trading price.

Our opinions about the downside:
Now that the mixed company has been reorganised, it removes much of the uncertainty of operating in Venezuela. The downside is the complete seizure of assets by the Chavez Goverment in the future. But will that happen? As it is HNR has been operating in Venezuela for the last 15 years and has had a good track record of 'milking' the oil fields. Instead of doing it themselves, Venezuela which is a country lacking in technology and money would have to make use of HNR to pay for drilling of oil fields which can be rather capital intensive. In other words, i think they would prefer HNR around instead of themselves or some unknown and unproven company to do the oil drilling. This will bring in additional revenue streams for the Venezuela goverment.

What me and manpreet did:

We sold in the money current month put options @ strike 12.5 with the premium of each contract being $0.7. If the trading prices lifts above $12.5, we get to keep the premium. If it does not, our buy in price would have been $12.5-$0.7= $11.8 Buying in at $11.80 ensures that i have an approximate 50% margin of safety.

Friday, October 12, 2007

Moody's and Subprime Crisis

Moody’s main business model

It rates commercial and government entities based on their credit worthiness. It also performs rankings on such entities using a standardized ratings scale. It has a 40% market share worldwide in the ratings business.


During the 2003 to 2006, mortgages based credit securities became an important source for profits. Profits soared as the Moody’s began to rate such securities to feed the growing appetite of investors who sought higher returns.

After the bursting of the Internet bubble in 2000 and the events on September 11, the US economy seemed to be bad shape. The Federal Reserve sought to lower interest rates in order to simulate enterprises and make it easier for people to borrow money to invest in businesses. Hence, during the early 2000s, interests rate fell to about 1% and this soon began to create a massive liquidity bubble

The cheap money was soon used by entities such as hedge funds, banks, insurance companies and mutual funds to buy assets. Similarly, central banks across the world followed suited and soon a massive bubble began to form globally. During this time, the spread between the junk bonds and treasury bonds began to narrow, fuelling a boom in leverage buy outs led by a host of private equity firms.

Mortagages and Securitization

Investment bankers securitized mortgages and loan them as packages to investors. Ratings firms such as Moody’s played a part by rating them using their models to make it easier to sell them.

With the growing appetite of investors (i.e. hedge funds) who were willing to purchase such mortgage backed securities, mortgage lenders soon began chasing customers who had a poor credit histories and more likely to default by offering loans with variable rates. During this period, interest rates were low so customers were able to afford the interest on the loan. Some of the mortgage lenders were even more aggressive and introduced deferred payment schemes which offered low initial monthly payments and pushed interest further away into the future. Such aggressive practices allowed high risk customers who were likely to default to borrow money for acquiring new homes.

Subprime mortgage lenders then packaged such these loans and securitized them to generate revenue. However, one of the problems for Moody was how to rate such mortgage backed securities…

Moody’s devised several complex financial models to help rate such securities. However, this proved to be a Herculean task as many of these financial models use past historical data and assumed historical volatilities would be the same. Moreover, such complex models are difficult to understand and could never be 100% accurate as it’s often difficult to take in all the information especially in a dynamic marketplace. Lastly, financial models fail to take in account that much of the markets movements are driven by psychology (i.e. fear and greed) which can never be truly reflected in financial models. Hence, due to the mispricing of risk in these financial models, many of the mortgage backed securities were awarded dubious ratings.

Hedge funds, hungry for returns especially in the competitive world of money management, had scooped loads of such securities using leverage in order to juice their profits. Many of these funds had relied on ratings firms such as Moody’s to rate such bonds and tended to buy those of higher investment grade (especially in the sub prime market) for safety. Using leverage on such risky investment products only made the situation. Unbeknown to the rating firms, subprime mortgage lenders had adopted aggressive practices to boost securitization revenue.

In my next article, I will touch more on Moody’s and look at its financials.



Monday, October 08, 2007

Leverage is not for the faint hearted

Following the recent gyrations in the financial markets, one does worry about the degree of financial leverage some of these market players take to achieve better returns.One favorite play by such market players is the yen carry trade.What makes the yen carry trade so dangerous? Read on....

Highly leveraged yen carry trade makes the prospect of financial tsunami more real. Due to the thin spread between currencies, traders have to use leverage in order to realize profits to justify the enormous risks in currency trading. For example, a trader borrows 1000 yen from a bank and converts the funds into US dollars and buys a bond with that amount. Assuming that the bond pays 5.0% and the Japanese interest rate is set at 0.25%, the trader makes a profit of 475 bps. However, using leverage can reward the trader very handsomely. If he uses leverage with a factor of 10:1, he can stand make a profit of 47.5% provided if the exchange rate remains stable.

However, if the yen gains strength and gains from120 yen to 110 yen, the trader now makes a loss. His loss is now 8.3% (120-110/120).But in this case, he has used a leverage factor of 10, so his actually loss is 83%.Clearly this strategy is fatalistic if the Japanese Yen gains strength which can be worse if the investor has made investments into dubious financial instruments such as subprime CDOs, CDS.

In the financial markets, it’s often difficult to measure the size of such carry trades as they involve several currencies. Compounding the already bad situation is the use of swaps, derivatives and futures. Given the increasing diversity of the trades, even seasoned market watchers are unable to predict the next sudden unwinding of the yen carry trade.

The BOJ’s policy of keeping interest rates may cause “distortions” in asset allocations and flows of capital globally. Recently, the Bank of Japan decided to raise interest rate by 25 bps to 0.5 %.This created fears among government officials who felt any increase in interest rates may affect Japan’s slowly recovering economy which is estimated to grow at 2% this year. In Japan’s case, a weak economy needs to keep interests low in order to “stimulate enterprise and investment in economic growth”. Thus, any further increases would be "very gradual" according to the Bank of Japan, leading market players to continue borrowing yen to invest in higher yielding assets abroad. This will only further exacerbate the already worsening situation.

A recent study by Barclay capital raised a few eyebrows. In the study, Barclay stated that “"The magnitude of Japan-funded carry is reaching scary levels, in our opinion," and added that "even if the macro environment remains benign for carry trades, we cannot rule out the possibility of a sudden unwinding of positions that simply feeds on itself.". Even a small fluctuation in exchange rates would cause traders to unwind their positions as they would be unable to afford the losses due to the large amount of leverage that they have employed.

Types of investors

Japanese Insurance companies: Insurance companies make profits through 2 ways

1) Underwriting. Using actuarial science to help quantify risks and determine how much to charge for the insurance policy being underwritten.

2) Investing the premiums from the insurance policies. The insurance companies earn
returns by investing the “float” into a portfolio of equities and bonds

Given the zero interests rates environment, insurance companies were forced to invest abroad in higher yielding assets.

Japanese retirees: Due to the ageing population, more and more Japanese are living longer. However, these retirees need increased returns to meet their old age needs. Investing in the Japan would be difficult given the deflationary environment and low interest rates. Hence, these retirees are forced to invest abroad to seek better returns.

Speculators: The speculators borrow large amounts in yen and aim to use leverage to help generate large profits. Their investment horizon is normally short term and are quick to close money losing trades. This can have an adverse effect especially when the yen carry traders are rushing back to convert foreign currencies back to yen. This can cause the yen to gain in strength, causing further losses to traders who are still holding their position. A sudden influx of financial flow back to Japan can destabilize the foreign currencies and lead to sharp drops in the global financial markets as these traders unwind their positions suddenly.

Time to time,such fluctuations in the market will lead to good value investing ideas.Being patience and waiting for those fat pitches is what investing is all about.


Sunday, September 30, 2007

How to get Super Returns?

Hi all,i came across this interesting article from the Business times,which is a local daily newspaper that reports about the ongoings in the local stock market and regional happenings.In this article, the author describes how one can use a simple ratio such as ROE/Price to Book to generate excellent returns.The method is actually a variation of Greenblatt's magic formula.

The article

"But without any detailed analysis other than simply grouping stocks based on ROE/PTB, I found that investors can actually generate super returns.

By investing in the 10 per cent of stocks with the highest ROE/PTB every year between 1990 and 2006, and holding each portfolio for a year, one could have turned $100 into $34,000 over the past 17 years. That's a compounded return of 41 per cent a year. All the calculations exclude transaction costs.

If we assume that the investor had lost 10 per cent of the portfolio value to transaction costs every year, the return is still a respectable 27 per cent a year. But in absolute terms the portfolio value today, at $5,678, is significantly less than the $34,000 which excludes transaction costs."

The full article is here


Saturday, September 29, 2007

Breaking down Expedia

Expedia came into my radar screen when i read the financial times. In it, Barry Diller, the chairman of Expedia Inc actually announced a 3.5 Billion share buyback plan which was to take place through a dutch auction. This would mean that 117 million shares approximately would have been bought back by management. This, to me was an extremely bullish announcement and prompted me to dig further. Buying back 42% of all share outstanding is a fantastic way to create shareholder value when the company is trading below its intrinsic value. It also is a catalyst for moves to the upside. Well, just to illustrate, Expedia's net cashflow per share is approximately $1.95(545 million/279million) and after a buyback, this would value the net cashflow per share a $3.4(545million/160million). This drastic change would largely enrich the existing shareholders of the company.

For those who do not know what expedia actually does, it is an online travel company that focuses on the needs of the the traveling community. It empowers travelers by presenting in capsule format information that allows people to plan and efficiently research their travel itineraries. Its products primarily consist of air, hotel, car rental, destination services and cruise. Essentially, it is an online travel agent which solves all your travel needs.

A brief look at its financial results are not actually that fantastic. It has shares outstanding of 279.33 million. Return on equity for fiscal year is 4.7% and return on assets are 3%. Net income figures are not fantastic and earnings yield are considered too low by any standards too. When i first did research on this company i found that it was trading at a price earnings ratio of 36, extremely high and does not seem like an exciting opportunity.

But what made me dig further was Barry Diller. As i have mentioned in previous posts that management is the one factor that will actually determine the value of the company. Management can bring the company down and they can cause stock prices to soar. Effective management is important for a company's survival and profitability. The motives of mangement can actually be found in some of the SEC Filings.

I did some research on Barry Diller and found that he was extremely bullish about the company's prospects. In fact, in one of the artcles which was written, he mentioned, if i may quote him that he is "confident in the value of expedia and its long term nature" Coincided with the buyback of 117 million shares, this guy must mean something. Furthermore, Barry Diller has affiliations with Warren Buffet. And he firmly believes in a share buyback when a company is undervalued. Do refer to this.. You might get a hint of his philosophy here : http://www.ft.com/cms/s/0/b6eb1774-dd4e-11db-8d42-000b5df10621.html

A further look at his holdings made me excited. Barry Diller actually owns 24% of the company. Wow! Surely, there is this huge incentive for him to push stock prices up. The question is: Is there a margin of safety to be found in an internet stock. Is there really any margin of safety????

As it is, some of its competitors such as Travelocity, Orbitz and Priceline trade at extremely high multiples. For example, priceline traded at 53.7 times earnings when i first pounced upon it. If anything at all, staying away from the industry and the company would be the easier option. However, relative to its competitors, expedia does trade at an approximate discount of 40%.

A look at expedia's numbers suggest that the industry is actually still growing. From year 2004 to 2006, its diluted EPS was $0.48, $0.65 and $0.70 respectively. Its operating cash flow was 792 million, 859 million and dipped in year 2006 which was 617 million.

A look at expedia's cash flow also revealed that Net income was not reflective of the company's true value. For fiscal year 2006, its earnings was 245 million while amortization was 200 million. Operating cash flow was 617 million. This showed that expedia has got some hefty amortization charges and it almost felt that they were wishing to get rid of the amortization charges of the cash flow statement. Amortization was 230 million in year 2005. Clearly, the amortization charges were distorting the financial picture of Expedia. Also, a point to note is that amortization for definite lived intangibles was projected by management to be 78 million and 56 million for 2008. These numbers tell a story of financial engineering for if amortization figures do fall, this will make earnings per share increase assuming everything stays constant and if the market loves to value the internet companies based on earnings per share(P/E), this will be a boon to existing shareholders i feel.

So to sum up the picture:
1) Barry Diller is bullish about his company
2) The share buyback is a catalyst
3) This seems to be a case of financial engineering

Lets make some conservative projections for 2008(Assuming that the net cashflow remained on par to 2006). If earnings for 2008 was 245 million and amortization was 200 million and others being changes in working capital was 200 million, this would leave a net cash flow of 545 million if i do assume that investing and financing cash flow is a negative 100 million. After the 42% share buyback, this would cause cash flow per share to be $3.40. The industry's Price to cash flow is typically 37. Before the share buyback Expedia would approximately trade at a price to cash flow of 15 times.

Conservatively, if Expe traded at 25 times cash flow(which me and manpreet feel is not too demanding a cash flow multiple), the value of the company would be approximately $85(25 x $3.4) And this is ignoring any growth in cash flow that may result from the company's improved operations. Although growth of operating cash flow is expected to be at least 12% p.a for the next 3 years while taking into account the high cost of borrowing, there is still a possible growth in cash flow but for the purposes of conservatism it is extremely conservative to assume no growth in net cash flow within the company. Just for your information at this point, expedia earned $384 million ebit in FY2006 while it is projected to earn 697.8 million ebit in FY2007 . Hence, am i being super conservative in assuming a no growth situation. Yes! In a twist of events, Expedia decided to cut its share buyback programme to only include 25 million of all shares outstanding due to high cost of borrowing. This once again would affect the value of expedia. Recalculating the net shares outstanding after a 25 million share buyback, this would result in a net cash flow of $2.14(545mill/254mill shares outstanding) This would value expedia's price at $53.5 (25 x 2.14)

The price of expedia's stock was approximately $29 then leaving a 46% margin of safety. Me and Manpreet discussed and decided to scoop up expedia warrants(expez) at $17 a piece. Each warrant allowed one to purchase .969375 shares of Expedia, Inc. common stock at an exercise price of $11.56. Nearly every dollar move in the underlying would result in a dollar move in the expedia warrant. Whats better is that the risk reward ratio would drastically improve. For every dollar that i risk if i had bought stock, i might have only made a profit of $0.84 cents while if i had bought expedia warrants, for every dollar that i risk, i would have had the opportunity to make $1.44.(Upside of $53.5 - $29 stock price at which i bought the warrant/17) This made the situation compelling and we scooped the warrants up at approximately $17.

One last point to add though, it is so important to look at the motives of management. Poor numbers may not be poor forever. Things change. Management is the number 1 catalyst to stock moves to the upside and i cannot emphasize this more. John Malone was and still is a stakeholder in Liberty Media. For those who do not actually know his background, what he did was he turned 50 million into a billion in 2 years. How? Just by financial engineering through the spinning off Tele-communications while simultaneously pretending to not be interested in the spin off. Analyst shunned it for it was too difficult a transaction to understand. Numbers were also negative with liberty reporting a loss of $20 million. In the end the spin off took place and because John Malone had a large stake in these companies involved, he turned 50 million in 1 billion in just 2 years. Simple financial engineering. People wanto get rich don't they? For more, Do read Joel Greenblatt's book. Right now, John too owns a 23% stake in expedia and he is backing a new share buyback programme and things are beginning to be more exciting as it unfolds.

Sunday, September 23, 2007

Case studies by Sanjay Bakshi

Dear readers!

Check this out!


Better and better,

Thursday, September 20, 2007

Expedia Arbitrage

During these months of crisis, the market has taken a beating and most peopls's portfolios have actually been beaten down or affected without a shadow of doubt. Easily, most people might have suffered a 10% loss in the value of the portfolio due to the subprime crisis.

But if you do look hard enough, you can always find opportunities that can insulate your portfolio. For example, MCBF still remains an arbitrage play. It is currently trading at $11.90. Do refer to the link for more information


But what i would like to point to is a special situation that is probably not very much spoken about and which occurred very recently. Expedia came into our radar screen when Barry Diller the Chairman of expedia announced a 3.5 billion share buyback program. Essentially with shares outstanding of 279.33 million shares, buying back shares at a dutch auction price of between $27.5 to $29 dollars per share pushed the share prices right up as you can see from the charts above just before the middle of June. A dutch auction basically allows shareholders to tender their shares at the stated range and this will allow the company involved to buy back majority of the shares at the lower end of the rage depending on the prices which were tended. Now, this bullish announcement caused share prices to shoot right up from around $24 to $29. If all the shares were bought at $29 , a $3.5 billion buyback program allows the company to scoop up 43% of the company's shares outstanding which is an extraordinarily large amount of shares within the company. As it is, the Chairman himself Barry Diller owns around 22% of the company's shares outstanding and probably believes that expedia is grossly undervalued. This, i shall write about in my next article.

What happened next was that due to the high cost of borrowing money to fund the buyback, expedia cut their share buyback program by 80% !!!! Due to management's indecisiveness and lack of planning, the stock tanked to $25.75 in one fell swoop. Guess what? Management mistakes can prove to be pretty profitable at times. Here are the facts...

For one, the dutch auction will still take place at the stated range between $27.50 and $29. The only difference is that the share buyback program is only reduced to 20% of the original plan. To me a 10% share buyback program is still quite substantial and can prove to be a catalyst for moves to the upside.

The second factor is that since the dutch auction is still going to take place, the management is sending a clear signal to the market that the shares were worth at least $27.50 cause they were willing to buy back your shares at the minimum price of $27.50. Chances are that they would even buy it a higher price depending on the prices tendered by existing shareholders.

If you did the math, you find that if you actually bought those expedia common stock at $26 and held it, in just a month, it would have risen to $29 when the buyback took place. Today, expedia's price stands at $30. The profit is a decent 11% return($3/$26) assuming you sold out at $29. Even if you did sell out at $27.50, the profit would have been 5%($1.5/$26). Annualise those figures and you would have gotten a higher return.

One can always find opportunities like such. It is simply a matter of looking hard enough and being patient. This to me is like money from the skies, from the heavens!

Have a great day folks!

Better and better,


Monday, September 17, 2007

Saturday, September 15, 2007

Subprime crisis

The subprime crisis! Is it really a crisis?

Lets do some break down of what has been happening. The subprime market is basically the market of lending money to credit unworthy borrowers for their home loans. This group of people have poor credit histories and have often defaulted on their debts which makes this group of people very risk to lend to. Anyhow, the market values this group of people as higher interest rates are charged to them and hence these companies earn higher interest margins.

Well the market can actually be segmented into 2 types. There are actually fixed rates and variable rates. Variable rates have an inverse relationship to the housing index. When the housing index in US dipped, you find variable rates rising and hence leading to higher default rates which has led to the bankruptcy of certain companies.

Not all companies in the housing market offering subprime loans are affected. As a matter of fact and relativity, variable rates packages have been more drastically affected than fixed rate packages. Its not like the whole subprime market consists of only variable rate loans right? Is it a crisis? Not really in my opinion as the subprime market is only 7% of the housing loan market. Yes it has repercussions but me and manpreet actually believe that the whole subprime scare might have been overplayed. As it stands, The fed is expected to cut interest rates while Asia, remembering the impact of the Asian Financial Crisis has been building its reserves drastically. Also, in emerging markets, interest rates are on a down trend. Valuation levels in South East Asia remain attractive from about 8x to 17x from what i read in a report.

Hence, it is a fantastic time for bargain hunting people!!!!!

Better and better,

Sunday, September 09, 2007

Buffett Talk to MBA Students at Florida University 1998.

Excerpts from Buffett's talk to MBA students at Florida University

You were rumored to be one of the rescue buyers of Long Term Capital, what was the play there, what did you see?

Buffett: The Fortune Magazine that has Rupert Murdoch on the cover. It tells the whole story of our involvement; it is kind of an interesting story. I got the really serious call about LTCM on a Friday afternoon that things were getting serious. I know those people most of them pretty well--most of them at Salomon when I was there. And the place was imploding and the FED was sending people up that weekend. Between that Friday and the following Wed. when the NY Fed, in effect, orchestrated a rescue effort but without any Federal money involved. I was quite active but I was having a terrible time reaching anybody. We put in a bid on Wednesday morning. I talked to Bill McDonough at the NY Fed. We made a bid for 250 million for the net assets but we would have put in 3 and 3/4 billion on top of that. $3 billion from Berkshire, $700 mil. from AIG and $300 million. from Goldman Sachs. And we submitted that but we put a very short time limit on that because when you are bidding on 100 billion worth of securities that are moving around, you don't want to leave a fixed price bid out there for very long. In the end the bankers made the deal, but it was an interesting period.

The whole LTCM is really fascinating because if you take Larry Hillenbrand, Eric Rosenfeld, John Meriwether and the two Nobel prize winners. If you take the 16 of them, they have about as high an IQ as any 16 people working together in one business in the country, including Microsoft. An incredible amount of intellect in one room. Now you combine that with the fact that those people had extensive experience in the field they were operating in. These were not a bunch of guys who had made their money selling men’s clothing and all of a sudden went into the securities business. They had in aggregate, the 16, had 300 or 400 years of experience doing exactly what they were doing and then you throw in the third factor that most of them had most of their very substantial net worth’s in the businesses. Hundreds and hundreds of millions of their own money up (at risk), super high intellect and working in a field that they knew. Essentially they went broke. That to me is absolutely fascinating. If I ever write a book it will be called, Why Smart People Do Dumb Things. My partner says it should be autobiographical. But this might be an interesting illustration. They are perfectly decent guys. I respect them and they helped me out when I had problems at Salomon. They are not bad people at all. But to make money they didn’t have and didn’t need, they risked what they did have and what they did need. That is just plain foolish;

it doesn’t matter what your IQ is. If you risk something that is important to you for something that is unimportant to you it just doesn’t make sense. I don’t care if the odds you succeed are 99 to 1 or 1000 to 1 that you succeed. If you hand me a gun with a million chambers with one bullet in a chamber and put it up to your temple and I am paid to pull the trigger, it doesn’t matter how much I would be paid. I would not pull the trigger. You can name any sum you want, but it doesn’t do anything for me on the upside and I think the downside is fairly clear. Yet people do it financially very much without thinking.

There was a lousy book with a great title written by Walter Gutman—You Only Have to Get Rich Once. Now that seems pretty fundamental. If you have $100 million at the beginning of the year and you will make 10% if you are unleveraged and 20% if you are leveraged 99 times out of a 100, what difference if at the end of the year, you have $110 million or $120 million? It makes no difference. If you die at the end of the year, the guy who makes up the story may make a typo, he may have said 110 even though you had a 120. You have gained nothing at all. It makes absolutely no difference. It makes no difference to your family or anybody else. The downside, especially if you are managing other people’s money, is not only losing all your money, but it is disgrace, humiliation and facing friends whose money you have lost. Yet 16 guys with very high IQs entered into that game. I think it is madness. It is produced by an over reliance to some extent on things. Those guys would tell me back at Salomon; a six Sigma event wouldn’t touch us. But they were wrong. History does not tell you of future things happening. They had a great reliance on mathematics. They thought that the Beta of the stock told you something about the risk of the stock. It doesn’t tell you a damn thing about the risk of the stock in my view. Sigma’s do not tell you about the risk of going broke in my view and maybe now in their view too. But I don’t like to use them as an example. The same thing in a different way could happen to any of us, where we really have a blind spot about something that is crucial, because we know a whole lot of something else. It is like Henry Kauffman said, “The ones who are going broke in this situation are of two types, the ones who know nothing and the ones who know everything.” It is sad in a way. I urge you.

We basically never borrow money. I never borrowed money even when I had $10,000 basically, what difference did it make. I was having fun as I went along it didn’t matter whether I had $10,000 or $100,000 or $1,000,000 unless I had a medical emergency come along. I was going to do the same things when I had a little bit of money as when I had a lot of money. If you think of the difference between me and you, we wear the same clothes basically (SunTrust gives me mine), we eat similar food—we all go to McDonald’s or better yet, Dairy Queen, and we live in a house that is warm in winter and cool in summer. We watch the Nebraska (football) game on big screen TV. You see it the same way I see it. We do everything the same—our lives are not that different. The only thing we do is we travel differently. What can I do that you can’t do?

Sunday, August 19, 2007

Pssst...Buffett tells his secret to his incredible fortune

At the moment, i was rereading Buffett's lecture to Notre Dame students (in spring 1991) and wanted to share some insights in Buffett's thought process....Ultimately,the key to successful investing is really quite simple but tends to get lost in the frantic noises of the Market.In the following para, Buffett explains what's really successful investing all about...

"Now if I had some rare insight about software, or something like that – I would say that, maybe, other people couldn’t do that – or biotechnology, or something. And I’m not saying that every insight that I have is an insight that somebody else could have, but there were all kinds of people that could have understood American Express Company as well as I understood it in ‘62. They may have been...they may have had a different temperament than I did, so that they were paralyzed by fear, or that they wanted the crowd to be with them, or something like that, but I didn’t know anything about credit cards that they didn’t know, or about travelers checks. Those are not hard products to understand. But what I did have was an intense interest and I was willing, when I saw something I wanted to do, to do it. And if I couldn’t see something to do, to not do anything.

By far, the most important quality is not how much IQ you’ve got. IQ is not the scarce factor. You need a reasonable amount of intelligence, but the temperament is 90% of it.

That’s why Graham is so important. Graham’s book [The Intelligent Investor] talks about the qualities of temperament you have to bring to the game, and that is the game."

The link to the entire article


Thursday, August 16, 2007

Market Crash? Wait that sounds a little familiar....

The recent tumble in the stock markets brings me to reflect on one of Buffett's key tenets:Stay rational in an irrational world.Buffett has always viewed buying stocks as owning a stake in a business.So what does Buffett mean by that? Well, taking a quote from the '97 Berkshire Annual Shareholder letter, Buffett describes this aptly

"Selling fine businesses on "scary" news is usually a bad decision. (Robert Woodruff, the business genius who built Coca-Cola over many decades and who owned a huge position in the company, was once asked when it might be a good time to sell Coke stock. Woodruff had a simple answer: "I don't know. I've never sold any.)"

Now when the market is bearish,Buffett always never fails to remind us that opportunities lie ahead.In a recent interview on CNBC (Aug 15 2007), Buffett says this

"Generally speaking, when there's a certain amount of chaos in certain sections, it is unpredictable where the fallout will be, but the fallout offers some real opportunity"

In reality, to be a successful investor, one just needs to be a little patient and wait for the right time to buy pieces of fine businesses ; especially when everyone is panic selling and selling off their portfolios.For example, despite strong earnings growth in the credit card business,American Express stock is down from a 3 month high of $66 USD to about 57$ USD.Obviously, the concerns over the subprime mortgage market has hit financial stocks hard but this is irrational considering that American Express has little exposure to the subprime mortgage lending market.Now, buying a stake in a company with strong management and wide moat at a discounted price.... that sounds like a home run to me.


Saturday, July 21, 2007

Analysis of RAIL

Ladies and Gentlemen, recently, i came across a normally cyclical stock which has a high probability of becoming a growth stock and trades at a price to 2006 free cash flow of approximately 4.13 . It is a company within a sector that has been the talk of the town among value investor and Well known investors such as Buffet and Carl Icahn have taken notice of it. This sector is the railroads sector. Because the price of oil has skyrocket, investors are betting that transport within the US will take on the cheaper form of rail trains.

For a compelling analysis of one such company(RAIL), do refer to this link here:


Tuesday, July 17, 2007

Pabrai on Managing Risk and hitting 100% returns

Pabrai on Managing risk

I talk in the book(Dhandho Investor)about this concept of low risk, high uncertainty. So there’s a perception that entrepreneurs are risk takers. Well, in reality entrepreneurs avoid risk. They try to minimise risk… They do absolutely everything to absolutely minimise the downside. But they are also humans that are very comfortable with uncertainty. So they can believe a wide range of outcomes and be very comfortable.”

You don’t try and buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000 pound trucks across it. And the same principle works in investing

Pabrai believes that buying at a low enough price will help to mitigate the risk.We shall look into the Stewart Entreprise case study to get a better glimpse of his thought process.

Stewart Enterprises (STEI) is the second largest company in the “death care” industry worldwide. Stewart has about $700 million in annual revenues and owns about 700 cemeteries and funeral homes in nine countries, with the bulk of them in the United States.

  • Stewart was trading at about $2/share for several months during Q3 and Q4 of 2000.
  • At the time, Stewart had a book value of $8.50/share. It was thus trading at less than ¼ of book value.
  • At the time, Stewart’s free cash flow was about $0.72 cents/share. The stock was trading at less than 3 times cash flow
  • In a business with predictable cash flows


Highly leveraged company with 500 in debt due in 2002

Wall Street assumed company would default and market forces drove the stock down to $2

Possible scenarios

Over the next 2 yrs

1.Management decides to sell off the numerous family owned funeral homes it had acquired over the years. The company would raise enough capital to meet debt obligations

2. Based on the predictable solid cashflows the business was generating, it could ask bankers/ /lenders for loan extensions

3.Stewart Entreprises goes into bankruptcy and is forced by courts to restructure ( e.g. selling off assets to raise capital )

Pabrai believed that the stock was mispriced at $2/share and calculated an intrinsic value of at about $4/share based on higher P/FCF multiple (from 3x FCF to 5-7 x FCF) .He bought shares at $2/share in Q3 and Q4 of 2000 In Q4 2000, Stewart Enterprises announced plans to sell off the funeral homes and this drove the share price higher to $4/share by Q1 2001

Pabrai had made an almost 100% gain in Steward Enterprises(<9mths)


1.Understanding the business model is crucial
2.Distinguish between risk and uncertainty. There was high uncertainty surrounding Stewart Enterprises but it was a low risk to shareholders (i.e. Stock was trading at 3x FCF and ¼ of book value)
3.High uncertainty but low risk events such as Stewart Enterprises can provide v high returns (i.e. 100% gain <9mths)>

Monday, July 16, 2007

Singapore's Stock Guru on making millions

Here are some excerpts from an article on Peter Lim who is well known in Singapore for his investing prowess. Some of his better investing bests were FJ Benjamin and Wilmar International.The last part of the excerpt bears a striking resemblance to a key Buffett tenet which is invest in honest and excellent management.

1.An investment in fashion retailer FJ Benjamin, has grown from about $13 million to $60 million SGD over five years

2.An initial stake of $10 million SGD in Wilmar International(ard 1991) has grown to over 1 billion SGD

What Peter Lim Says:

"I can't say I invested in the right company, because at that time, there was only a vision. The potential palm oil plantations were just swamplands,' he said.

'It was at the Equatorial Hotel. I spent a few hours with Mr Kuok(Wilmar's founder). This man made me feel very inadequate. He had a vision, and could explain, step by step, how to attain this vision.'

But that 'quality face time' is in a nutshell how Mr Lim decides on all his investments.

'I must see his face. The person should be master of his trade, and should be honest."


Buffett explains how to hit 50% returns

Found an excellent post on Buffett and how he can generate 50% returns on smaller sums.Once again, one does not need any fancy finance theories to generate market beating returns but rather patience and a little bit of detective work.



Friday, July 13, 2007

Buffett on Managing Risks

Came across this excerpt from Buffett about managing risk and i feel it gives us an exceptional look into how Buffett views risk when buying stocks

"We bought all of our WPC holdings in mid-1973 at a price of not more than one-fourth of the then per-share business value of the enterprise. Calculating the price/value ratio required no unusual insights. Most security analysts, media brokers, and media executives would have estimated WPC’s intrinsic business value at $400 to $500 million just as we did. And its $100 million stock market valuation was published daily for all to see . Our advantage, rather, was attitude: we had learned from Ben Graham that the key to successful investing was the purchase of shares in good businesses when market prices were at a large discount from underlying business values"

Buying a stock/business at a huge margin of safety helps mitigate losses.Moreover, with the case of Washington Post,he had an excellent management running the business that had a local monopoly in where it was based.So by understanding the business well and buying at a huge margin of safety when the markets were bearish helped Buffett manage his risks and carve out his investment record.Indeed, the man is a genius!!