Tuesday, September 30, 2008

The amazing life of Warren E Buffet

The first authorised biography of Warren Buffet by Alice Schroeder is out! Check out some excerpts below:

In fancy dress; a young Warren playing the ukelele in the late 1940s;
and teaching a class in investing at Omaha university in the 1950s

Below an excerpt from FT Series Part 1: Warren Buffett by Alice Schroeder

“We’d just steal the place blind. We’d steal stuff for which we had no use. We’d steal golf bags and golf clubs. I walked out of the lower level where the sporting goods were, up the stairway to the street, carrying a golf bag and golf clubs, and the clubs were stolen, and so was the bag. I stole hundreds of golf balls.” They referred to their theft as “hooking”.

“I don’t know how we didn’t get caught. We couldn’t have looked innocent. A teenager who’s doing something wrong does not look innocent.

“I took the golf balls and filled up these orange sacks in my closet. As fast as Sears put them out, I was hooking them. I had no use for them, really. I wasn’t selling them then. It’s hard to think of a reason why you had this multiplying group of golf balls in the closet, this orange sack that’s just getting bigger all the time. I should have diversified my theft. Instead, I made up this crazy story for my parents – and I know they didn’t believe me, but – I told them I had this friend, and his father had died. He kept finding more of these golf balls that his father had bought. Who knows what my parents talked about at night.”

The Buffetts were aghast. Warren was their gifted child, but by the end of 1944, had become the school delinquent. “My grades were a quantification of my unhappiness. Math – Cs. English – C, D, D. Everything Xs for self-reliance, industry, courtesy. The less I interacted with teachers, the better it was. They actually put me in a room by myself there for a while where they would kind of shove my lessons under the door like Hannibal Lecter.” When graduation day came and the students were told to show up in a suit and tie, Warren refused. With that his principal, Bertie Backus, had had enough. “They wouldn’t let me graduate with the class at Alice Deal, because I was so disruptive and I wouldn’t wear clothes that were appropriate. It was major. It was unpleasant. I was really rebelling. Some of the teachers predicted that I was going to be a disastrous failure. I set the record for checks on deficiencies in deportment and all that.

Part 2 of the FT series:

By August 1991, Warren Buffett’s investment company, Berkshire Hathaway, had held a large stake in Wall Street investment bank Salomon Brothers for about four years – he had helped to rescue Salomon from the attentions of the corporate raider Ronald Perelman in 1987 by investing $700m. The deal made Buffett a leading figure on Wall Street, whose excess and supposed corruption he abhorred.

On August 8, Buffett was informed of a potentially ruinous scandal at Salomon, in which Paul Mozer, who headed the government bond department, had secretly manipulated US Treasury bond auctions. Salomon – with $4bn of equity supporting $146bn of debt – faced possible indictment and sanctions from financial regulators that would almost certainly lead to a run on the bank. Buffett helped to orchestrate a change in management and agreed to take over as interim chairman to try to steer Salomon through the crisis

Extracts from ‘The Snowball: Warren Buffett and the Business of Life’ by Alice Schroeder

Buffet Buys Chinese Battery manufacturer

Below is the link to the article:

Buffett Buys Stake in Chinese Battery Manufacturer

Best regards,

Sunday, September 28, 2008

Thakral Corp : A cash bargain

Thakral Corp is a company that operates under the following business segments:

1) Supply Chain management
2) Electronic Manufacturing Services
3) Media Technology
4) Property
5) Investments

Recently the board room tussle has ignited media interests with the founder Katar Singh being attempted to be ousted by majority shareholder Hong Leong. Along with the recent drop in market prices and the system risk in our financial markets today, Thakral has fallen to a price of 4 cents oer share, a price low enough to warrant a closer study of its circunstances. The story goes that Mr Katar Singh was to take the company in a different direction by going full swing into the property market while Hong Leong was to pursue interests in the Electronics Business by focusing on controlling expenses and improving operating margins. I presume that these 2 goals are different in nature and hence the boad room tussle which has spilled over to the media.

Looking at its financials:

Cash and cash equivalents $111,980,000
Available for sale Investments $41,401,000
Debt $3,865,000
Outstanding Shares 2612113668

Looking at the above figures, Thakral Qualifies as a cash bargain as its net cash per share is 5.72 cents and definitely qualifies as a Benjamin Graham Stock with the net=net value being 6.1 cents according to the balance sheet.

However, despite the cheapness of the stock, i do urge readers and investors to be cautious because this company is literally bleeding cash. As of 30 June 2008 as compared to a year ago, its cash and equivalents position fell bled by 13 million. At such a rate, it could cease to be a cash bargain after bleeding more than 50 million in cash although i think that that is not likely to happen anytime soon.

But because it is so cheap, we should monitor it for any impending catalyst available that might unlock shareholder value because great things happen to cheap stocks due to the way the market reacts in an assymetrical way. The bad news should already be discounted into the stocks price.

Using inverted thinking, for it to be worth 8 cents which is its NAV, it must earn 1 cent per share which works out to 8 cents if i put a multiple of 8 times(it is debatable if this is a suitable multiplier) which works out to approximately 26 million of net income which it has been achieved before. Not entirely impossible but it has made such profits before. But because of a cyclical down swing, that would not happen any time soon.

But if it should sell any of its business segments for above book value, that is something we might look out for which could be a catalyst.

This write up is not a recommendation to buy but rather to illustrate the point that the market does throw you some bargains which are worth acquiring. For the true value investor, he must be salivating now for there is so much to choose from. The appearance of cash bargains also signals that the market is already in a recession, at least on a technical basis and we should take advantage of that.

In the meantime, happy searching for bargains and do contact me if you have any ideas to share!

Best regards,

Great investors can be wrong-Richard Pzena

One of the greatest things that will go down in history is the nationalization of Freddie Mac and Fannie Mae. It is still currently debatable as to whether the Goverment should have bailed out Freddie and Fannie Mae. Richard Pzena made such a convincing argument that Freddie Mac was a great company and i bought into that or was i not?

There are three stories here. One, Freddie and Fannie did not need goverment intervention and were still well capitalised enough to carry on as a going concern as per Richard Pzena.

The 2nd story was : Freddie and Fannie were bleeding and were suffering from liquidity problems.

The 3rd story is built upon the first and that both Freddie and Fannie were fine but the government had to bail it out as confidence over its assets from other goverments holding them were dwindling fast in this crisis. The Govt had no choice but to bail it out to restore confidence in the markets.

On hindsight i am more inclined to the 3rd thesis stated above and even if Richard Pzena's thesis was the 1st, a variation played out and this really made me think hard on scenario analysis. My take is this: Pzena was probably right on most counts including his valuation of the company but more vital than any sound valuation technology, he probably did not factor in the fed taking control of the company by taking on a preferred equity stake which nearly wiped out most of tht value in common equity.

For those who do not understand the case, taking on a preferred equity stake eventually wiped out the commons. Simplistically if a company had a book of $10 and later $9 of preferred were issued, it would have reduced the book value of common equity to $1. That was what happened to the saga.

Key takeaways would be:

1) Diversify sufficiently to protect your portfolio. WE are human and mistakes are inevitable in investing

2)Do your own research before you coat tail others.

For more read:

Fooling around with freddie and fannie by forbes

Best regards,

10% dividend yield on Goldman Sachs Preferred Stock

The guru has done it again. Another excellent deal with Mr Market presenting him a fine bargain by virtue of the credit crisis in the markets today. With the goldman sachs deal sealed Warren is getting 500 million of annual dividends on an investment of 5 billion in Goldman preferred stock. It does'nt get any better than that when one could invest at a 10% dividend yield and at the same time get warrants that are excercised at a strike price of $115.

With the franchise value of the Goldman still intact and growing, this investment might prove to be One of Warren's most shrewd deals ever with him potentially getting 10% of the company of the warrants are excercised.

For more, go to:


Better and better,

Constellation Energy: A closer examination

Constellation energy is a debt ridden company which has just been taken over by Warren Buffet's Mid American. Being a debt ridden company, it is no wonder that during a credit crisis and a crisis of confidence such as what we are experiencing today, its shares have plummeted to end december 2001 levels, a dramatic fall caused by liquidity concerns.

When a company like Constellation is taken over by Warren Buffet, it sure warrants a closer examination. It has approximately 5.7 billion in debt and it has a enterprise/ebitda of approximately 5 times. At a PER of 5.5, it has an earnings yield of 18% while a 20 year AAA Municipal Bond only has a yield of 4.97%. By Benjamin Graham's Standard, it has more than met the criteria of double a AAA Bond Yield. However, lots remain to be see about what this company can do to increase shareholder value.

Constellation Energy is in the business of providing energy for the masses and it operates through Baltimore Gas & Electric company and a merchant energy business. It happens to be a close fit in terms of its business model to that of Midamerican which also happens to be in the same industry and MidAmerican is a subsidiary unit of the ever famous Bershire Hathaway, Buffet's Baby.

Constellation has had an growing Ebitda of 1.4 billion to 1.9 billion in its latest financual year end, an impressive CAGR of 10 %. However, its debt too has been growing and its latest balance sheet figures show a debt of 5.7 billion dollars.

5.7 Billion dollars worth of debt is scary in a credit crisis like this but it will be comforting to note that it has an interest cover of approximately above 4 times. Plagued by downgrades in credit,what the analyst have forgotten is it has a huge asset base that it can sell off to provide for liquidity. Its asset base is 29 billion huge. And chances are under MidAmerican, we could see some deleveraging of its balance sheet taking place. We could take comfort in the fact that at today's prices, dividend yield is an excellent 7%. You are essentially paid to wait for the price value gap to narrow.

The company has a firm business model and should still be a going concern. The only problem right now that should be tackled is the problem of liquidity and working capital issues.

Possible catalyst:

1) Selling off of assets to pay down debt - When its substatial Plant, property and equiptment are sold off to pay down debt, we could see a reduction interest expenses.

2)Selling the energy trading business that causes further liquidity problems

3) Potential dividend hike and growth of book value when debt is paid down

So if you look at it carefully, what we have is an investment at attractive prices. Not only is it trading at approximately 5 times EV/Ebitda but you also have an inbuilt catalyst around Warren Buffet.

Warren Buffet is a "catalyst" to effecting any of the several above catalyst which would help in unlocking shareholder value. Besides, buying over Constellation would merge MidAmerican and constellation energy's balance sheet into one making it a stronger one.

One point to be wary of though is that Warren's Preferred equity stake in Constellation would be good for him but buying commom equity for us might be dilutive to a certain extent for the book value of common will dwindle. Preferreds always have priority for any form of dividends and hence you can expect some form of dilution of intrinsic value. Still this is an interesting play that is worth studying and learning from.

Best regards,

Monday, September 08, 2008

Psychology of Human Misjudgement By Charlie Munger

Dear readers,

here is a great read on the psychology of human misjudgement bu Charlie Munger and it also explains to me why there are such irrationalities in the stock market. Ben Graham talks about Mr Market being a manic depressive. Charlie Munger has gone one step further by breaking it down for us almost scientifically by explaning the different biases that we as humans have.



Best regards,