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Archive for February, 2012

On Fourth Quarter 13Fs

Wednesday, February 29th, 2012

I often look through 13F filings to get investment ideas.  The last time I did it, one of my readers asked a question like this:

It’s nice to see how large the positions are of the investors that you track, but wouldn’t it be better to track the changes in positions?  After all, new allocations are more indicative of better value than older holdings.

That’s probably correct, though for my own investing it might not be as accurate, because I rank current positions against challengers – my current positions have to justify their existence to stay in the portfolio.

But I thought it would be worth trying to do that, and also do it as a percentage of each stock’s market capitalization.

Now, there are difficulties in doing an analysis like this:

  • CUSIP changes
  • M&A (takeovers, spinoffs
  • CUSIP formats (some managers make it difficult to read)
  • Deliberately difficult formatting
  • One firm fills out the from wrong, swapping fields
  • Multiple holders within a given firm
  • You have to create a CUSIP/ticker database (paid my 13-year old assistant $50 to do that.)
  • In short, a lot of data scrubbing.

Now the results of looking at 13Fs can be valuable, and there is a small cottage industry doing so.  Mebane Faber has done good work with this, as has Insider Monkey, Manual of Ideas and Street of Walls.  Following the ideas of some of the best investors leads to better returns, even if there is a lag involved.

And the lag doesn’t matter much.  Most of these investors invest for years not months, so if you get a signal it should be valid for some time after it is received.

Anyway, I calculated the positions for 74 investors that I have some respect for (listed at the bottom).  My objective is to look at them as a group.  For the most part, I don’t care which of them is investing in a given company.

Following this are a variety of tables with some commentary on what might be going on.  I think you might find some valuable ideas in the companies where  there are large additions or holdings as a proportion of market capitalization.

Tables

Stocks with the most new investors:

NewTickerName

9

DLPHDelphi Automotive PLC

6

LVLTLEVEL 3 COMMUNICATIONS INC

6

LMCALIBERTY MEDIA CORP NEW

5

ORCLOracle Corp

4

TRIPTRIPADVISOR INC

4

KORSMICHAEL KORS HLDGS LTD

3

BACBANK OF AMERICA CORP

3

CVXCHEVRON CORP NEW

3

DELLDell Inc

3

EPEL PASO CORP

3

VRUSPHARMASSET INC

3

TDCTERADATA CORP

 

Stocks that had the most investors increase positions (including new owners):

IncreasedTickerName

15

GOOGGOOGLE INC.

9

DLPHDelphi Automotive PLC

9

AAPLAPPLE INC

8

ORCLOracle Corp

7

LMCALIBERTY MEDIA CORP NEW

7

CCITIGROUP INC

7

LOWLOWES COS INC

7

PEPPEPSICO INC

7

MSFTMICROSOFT CORP

7

VVisa Inc-Class A Shares

6

LVLTLEVEL 3 COMMUNICATIONS INC

6

INTCIntel Corporation

6

SYYSYSCO CORP

 

Stocks that have the most owners at the end of the fourth quarter:

OwnedTickerName

22

GOOGGOOGLE INC.

21

MSFTMICROSOFT CORP

17

AAPLAPPLE INC

14

CSCOCISCO SYS INC COM

14

WMTWAL-MART STORES INC

14

WFCWELLS FARGO & CO NEW

13

JNJJOHNSON & JOHNSON

12

ORCLOracle Corp

12

CCITIGROUP INC

12

MAMastercard Inc – Class A

11

BACBANK OF AMERICA CORP

11

BRK.BBERKSHIRE HATHAWAY INC-CL B

11

BRK.ABERKSHIRE HATHAWAY INC-CL A

 

Stocks with the most selling out entirely (including M&A-related):

SoldTickerName

6

EXPEExpedia Inc.

6

LVLTLevel 3 Communications

5

CCITIGROUP INC

5

SINASINA CORP

5

AcquiredNALCO HOLDING COMPANY

4

EBAYEBAY INC

4

CVICVR Energy Inc

4

CCECOCA COLA ENTERPRISES INC NE

3

LINTALIBERTY INTERACTIVE CORP-A

3

CVSCVS CAREMARK CORPORATION

3

AMZNAMAZON COM INC

3

VIABViacom Inc Cl B

3

EXCExelon Corp

3

DVNDEVON ENERGY CORPORATION

3

COVCOVIDIEN PLC

3

XOMEXXON MOBIL CORP

3

MOSThe Mosaic Company

3

RLRALPH LAUREN CORP

3

IRMIRON MTN INC

3

HFCHOLLYFRONTIER CORP

3

GRGOODRICH CORP

3

CTXSCITRIX SYS INC

3

AcquiredCEPHALON INC

3

ELNKEARTHLINK INC

3

TINTEMPLE INLAND INC

 

Stocks with the most decreases in positions (including selling out in entire):

DecreasedTickerName

12

MSFTMICROSOFT CORP

10

WFCWELLS FARGO & CO NEW

10

CCITIGROUP INC

8

BACBANK OF AMERICA CORP

8

PFEPFIZER INC

8

EBAYEBAY INC

8

NWSANEWS CORP

8

LINTALIBERTY INTERACTIVE CORP-A

7

AAPLAPPLE INC

7

CSCOCISCO SYS INC COM

7

WMTWAL-MART STORES INC

7

BRK.BBERKSHIRE HATHAWAY INC-CL B

7

CVSCVS CAREMARK CORPORATION

7

DELLDell Inc

7

AONAON CORP

7

AMZNAMAZON COM INC

7

EXPEExpedia Inc.

 

With a few exceptions, the above reads like lists of common large cap stocks, with a few midcaps thrown in.  It doesn’t look that much different when the lists are done by dollar amount of change.  But what if we do this as a fraction of market capitalization?

(Please note, the 13F filings measure as of 12/31/2011, and my market caps are from mid-February.  That induces some distortion, but I don’t think that much.  Also note that large holdings as aproportion of market cap often come from one hedge fund and not necessarily many.

Here is a list of new purchases, in declining order of percentage of market capitalization:

NewTickerName

16.50%

TRGTTARGACEPT INC

15.02%

DLPHDelphi Automotive PLC

10.73%

CMVTCOMVERSE TECHNOLOGY INC

10.54%

NTKNORTEK INC

7.54%

AROAeropostale Inc

6.41%

MTGMGIC INVT CORP WIS

6.21%

HIIHUNTINGTON INGALLS INDS INC

5.76%

IREBank of Ireland

5.64%

TRIPTRIPADVISOR INC

5.08%

LMCALIBERTY MEDIA CORP NEW

4.75%

AVYAvery Dennison

4.58%

SEMGSEMGROUP CORP

4.41%

VPRTVISTAPRINT N V

4.25%

MPCMARATHON PETROLEUM CORP

3.92%

CSTRCOINSTAR INC

3.49%

SBHSALLY BEAUTY HLDGS INC

3.44%

KMTKennametal Inc.

3.34%

SIROSirona Dental Systms

3.18%

EPEL PASO CORP

3.10%

HGGHHGREGG INC

3.06%

CVICVR Energy Inc

3.04%

NTAPNETAPP INC

 

Here is a list of position increases, including new purchases, in declining order of percentage of market capitalization:

IncreasedTickerName

16.50%

TRGTTARGACEPT INC

15.02%

DLPHDelphi Automotive PLC

10.77%

CPCANADIAN PAC RY LTD

10.73%

CMVTCOMVERSE TECHNOLOGY INC

10.54%

NTKNORTEK INC

8.55%

WBMDWEBMD HEALTH CORP

7.54%

AROAeropostale Inc

6.57%

NAVNavistar International Corp

6.41%

MTGMGIC INVT CORP WIS

6.21%

HIIHUNTINGTON INGALLS INDS INC

5.76%

IREBank of Ireland

5.74%

AVYAvery Dennison

5.64%

TRIPTRIPADVISOR INC

5.19%

LMCALIBERTY MEDIA CORP NEW

4.58%

SEMGSEMGROUP CORP

4.48%

EPAXAmbassadors Group Inc.

4.44%

CBGCBRE GROUP INC

4.42%

CSTRCOINSTAR INC

4.41%

VPRTVISTAPRINT N V

4.25%

MPCMARATHON PETROLEUM CORP

4.08%

PCLNPRICELINE COM INC

 

Here is a list of position decreases, including total sales, in declining order of percentage of market capitalization:

DecreasedTickerName

-17.83%

VGRVECTOR GROUP LTD

-13.66%

EMMSEMMIS COMMUNICATIONS CORP

-10.43%

DIODDIODES INC

-9.12%

CLXClorox Co

-9.02%

NEWPNEWPORT CORP

-8.93%

IWMISHARES TR

-8.61%

EXPEExpedia Inc.

-6.86%

GENGENON ENERGY INC

-6.60%

PANLUNIVERSAL DISPLAY CORP

-6.43%

LVLTGLOBAL CROSSING LTD

-6.32%

AAMRQAMR Corp

-6.22%

NIHDNII HLDGS INC

-6.15%

CVICVR Energy Inc

-6.03%

AMEDAMEDISYS INC

-5.85%

CISCAMELOT INFORMATION

-5.60%

SINASINA CORP

-5.46%

CQBCHIQUITA BRANDS INTL INC

-5.44%

STESTERIS CORP

-5.37%

CJESC&J ENERGY SERVICES INC

-5.30%

PDLIPDL BIOPHARMA INC

 

Here is a list of positions sold out in entire, in declining order of percentage of market capitalization:

SoldTickerName

-17.83%

VGRVECTOR GROUP LTD

-13.66%

EMMSEMMIS COMMUNICATIONS CORP

-10.43%

DIODDIODES INC

-9.08%

CLXClorox Co

-9.02%

NEWPNEWPORT CORP

-7.41%

EXPEExpedia Inc.

-6.60%

PANLUNIVERSAL DISPLAY CORP

-6.56%

IWMISHARES TR

-6.43%

LVLTGLOBAL CROSSING LTD

-6.32%

AAMRQAMR Corp

-6.22%

NIHDNII HLDGS INC

-6.03%

AMEDAMEDISYS INC

-5.85%

CISCAMELOT INFORMATION

-5.60%

SINASINA CORP

-5.27%

CQBCHIQUITA BRANDS INTL INC

-5.10%

CVICVR Energy Inc

-4.97%

ITGARTNER INC

-4.90%

ACFCAtlantic Coast Financial Corp

-4.73%

BIDZBIDZ.com Inc.

-4.55%

CVCCABLEVISION SYS CORP

-4.52%

SAFMSANDERSON FARMS INC

-4.32%

LEALEAR CORP

-4.31%

TINTEMPLE INLAND INC

-4.05%

WGOWINNEBAGO INDS INC

 

Holdings by Total Dollar Amount at the end of the Fourth Quarter

HeldTickerName
  15,763,863,000KOCOCA COLA COMPANY
  13,896,920,000WFCWELLS FARGO & CO NEW
  11,801,570,000IBMINTERNATIONAL BUSINESS MACHS
     7,498,749,000AXPAMERICAN EXPRESS CO
     7,124,564,000PGPROCTER & GAMBLE CO/THE
     5,561,149,000WMTWAL-MART STORES INC
     4,965,749,000KFTKRAFT FOODS INC-CLASS A
     4,828,136,000MSFTMICROSOFT CORP
     4,720,375,000GOOGGOOGLE INC.
     4,539,055,000NWSANEWS CORP
     4,504,224,000AAPLAPPLE INC
     4,007,205,000HPQHEWLETT PACKARD CO
     3,387,821,000MSIMOTOROLA SOLUTIONS INC
     3,285,855,000GLDSPDR GOLD TRUST
     3,261,413,000GSKGLAXOSMITHKLINE PLC-SPON ADR
     3,137,451,000JNJJOHNSON & JOHNSON
     3,106,083,000USBUS BANCORP DEL
     3,089,445,000FDXFEDEX CORP
     2,986,973,000COFCAPITAL ONE FINANCIAL CORP
     2,869,898,000EPEL PASO CORP
     2,836,729,000IEPICAHN ENTERPRISES LP
     2,809,578,000SLBSchlumberger Ltd
     2,807,657,000NVSNOVARTIS AG-ADR
     2,776,985,000BKBANK OF NEW YORK MELLON CORP
     2,762,244,000COPCONOCOPHILLIPS
     2,704,595,000PEPPEPSICO INC
     2,620,576,000CMCSACOMCAST CORP-CLASS A
     2,618,651,000PFEPFIZER INC
     2,524,873,000DELLDell Inc
     2,475,713,000GEGENERAL ELECTRIC CO
     2,321,383,000OXYOCCIDENTAL PETE CORP DEL
     2,314,288,000TWXTIME WARNER INC
     2,290,333,000MRKMERCK & CO. INC.
     2,252,588,000AONAON CORP
     2,246,712,000DTVDIRECTV-CLASS A
     2,205,486,000PCLNPRICELINE COM INC
     2,166,225,000MMIMOTOROLA MOBILITY HLDGS INC
     2,124,678,000SNYSANOFI-ADR
     2,075,367,000QCOMQUALCOMM INC

 

And the greatest holdings by percentage of market capitalization:

Held/MCTickerName

73.30%

IEPICAHN ENTERPRISES LP

71.98%

BAGLEINSTEIN NOAH REST GROUP INC

69.22%

HRGHARBINGER GROUP INC

65.92%

FDMLFEDERAL MOGUL CORP

51.38%

SPBSPECTRUM BRANDS HLDGS INC

46.89%

ARIIAMERICAN RAILCAR INDS INC

40.88%

CDCOComdisco Holding

38.77%

NOANORTH AMERN ENERGY PARTNERS

37.92%

DYNDYNEGY INC DEL

36.46%

BFLYBLUEFLY INC

32.11%

LEAPLEAP WIRELESS INTL INC

29.37%

QUADQUAD / GRAPHICS INC

29.34%

TXITexas Industries Inc.

28.92%

BIOFBIOFUEL ENERGY CORP

27.83%

ENZNENZON PHARMACEUTICALS INC

27.56%

HPPHUDSON PAC PPTYS INC

27.54%

BKUBANKUNITED INC

27.54%

OSTKOVERSTOCK COM INC DEL

27.35%

SIXSIX FLAGS ENTMT CORP NEW

26.41%

DINDINEEQUITY INC

26.27%

WPOWashington Post

26.04%

LORLLORAL SPACE & COMMUNICATNS INC

25.12%

LGFLIONS GATE ENTMNT CORP

25.00%

VSATVIASAT INC

24.85%

JEFJEFFERIES GROUP INC NEW

24.71%

INSINTELLIGENT SYS CORP NEW

24.59%

LVLTLEVEL 3 COMMUNICATIONS INC

24.21%

ZLCZALE CORP NEW

23.40%

ABHABITIBIBOWATER INC

23.19%

CTOConsolidated Tomoka Land Co

22.71%

XCOEXCO RESOURCES

22.34%

THRXTHERAVANCE INC

22.28%

MLIMUELLER INDS INC

21.96%

MSIMOTOROLA SOLUTIONS INC

21.49%

SNBCSun Bancorp Inc

 

I appreciate the analysis as a portion of market capitalization, because it reflects the limitations of what managers can do.  Again, I will look most closely at current holdings and additions as a proportion of market capitalization.

Investor list:

  • Akre
  • Altai
  • Ancient Art
  • Appaloosa
  • Atlantic
  • Bares
  • Baupost
  • Blue Ridge
  • BP Capital (Pickens)
  • Brave Warrior
  • Breeden
  • BRK
  • Capital Growth
  • Centaur
  • Centerbridge
  • Chou
  • Coatue
  • Dodge & Cox
  • Dreman
  • Eagle Capital
  • Eagle Value
  • Edinburgh
  • Fairfax
  • Farallon
  • Fiduciary
  • Force
  • FPA
  • Gates
  • Glenview
  • GoldenTree
  • Greenhaven
  • Greenlight
  • H Partners
  • Harbinger
  • Hawkshaw
  • Hayman
  • Hound
  • Hovde
  • Icahn
  • Invesco Private
  • Jana
  • Jensen
  • Joho
  • Lane Five
  • Leucadia
  • Lone Pine
  • M3F
  • Markel
  • Matrix
  • Maverick
  • MHR
  • Montag
  • MSD
  • Muhlenkamp
  • PabraI
  • Parnassus
  • Passport
  • Paulson
  • Pennant
  • Perry
  • Pershing Square
  • Sageview
  • Scout
  • Soros
  • Southeastern
  • Third Point
  • Tiger Global
  • Tweedy Browne
  • ValueAct
  • Viking
  • Weitz
  • West Coast
  • Wintergreen
  • Yacktman

 

Full disclosure: Long WMT, ORCL, INTC, VOD, HPQ, COP, Short SPY

Notes on the 2011 Berkshire Hathaway Annual Report, Part 3 (On Acquisitions)

Wednesday, February 29th, 2012

Though part of a series, this post is different.  I went back through the last 35 years of shareholder letters to analyze Buffett’s approach to acquisitions.  As Charlie Munger has said, Buffett is scary smart.  I say this because he adjusted through many different eras, while running a business that was part conglomerate, part closed-end fund.

In some ways the early years were different — more arbitrage, public investments take up more time in the shareholder letter.  But what I find fascinating is that from the earliest days, it didn’t matter to Buffett whether he owned whole businesses, or parts of them.

Part of this feeds off of Felix Salmon’s recent piece on acquisition language, where he contrasts tuck-ins and bolt-ons, correctly concluding that the difference is only one of size, even though that is an informal distinction.

But since the ’80s Buffett has always talked about acquisitions. Here’s a graph indicating Buffett’s use of the term acquisition(s):

 

You will note that his use of phrases like “tuck-in” and “bolt-on” occur only in the 2000s.  But the ideas were there long before that.  There were many cases in the ’90s, and to a lesser extent, the ’80s, where subsidiaries of BRK made acquisitions.  Buffett was always looking for ways to profitably deploy excess capital, and he knew that acquisitions facilitating organic growth was often far more effective than buying something totally new.  Buffett was doing tuck-in and bolt-on acquisitions for 15 years before he mentioned the terms.

Buffett always saw the public and private markets as being complementary.  He doesn’t care where he makes money; he just wants to make money.  Below there is a list of BRK acquisitions by year, with slight commentary.

One thing to understand about BRK is that full and partial ownership of private public businesses was always a part of the plan.  Growing out of a textile manufacturing business as a holding company, that should be obvious, as it should be when considering See’s Candies, BRK’s first acquisition.

Public and private, full and partial did not matter to Buffett.  He was simply interested in what could grow the intrinsic value of the the overall enterprise best, within the concept of a margin of safety.

1987-1989 was kind of an inbetween era for BRK, where Buffett would talk about his Sainted Seven private firms inside BRK, until he bought Borsheim’s in 1989, which gave him no good way to describe his private holdings with a simple moniker.

As it is, when he began doing more acquisitions, the 1991-1993 era included the “Shoe Group,” which was not among his finer moments.  But starting in 1995, with the purchase of the remainder of GEICO, is the start of the modern BRK.  Acquisitions become a regular part of the plan.  What makes that plain, was that post-1990 in years where BRK had no acquisitions, Buffett would discuss his theory on acquisitions for shareholders.  He did this because when there are few promising targets to invest in, it is usually a sign that valuations are stretched.

And in general, Buffett chose wisely with the private businesses.  Yes, there have been some that ended up being losers, or, not big winners, like the “Shoe Group,” and Scott & Fetzer’s untimely purchase of World Book, which was about to be obsoleted by Encarta, and then Wikipedia.

Buffett understood the need for sustainable competitive advantage.  He also knew how much he could afford to risk in acquiring private firms.  His “bite size” increased gradually until he could take down monsters like Burlington Northern.  He bought businesses that would be hard to obsolete.

One thing I found interesting about reading through the older letters of Buffett was that his ideas on acquisitions were developed early, long before BRK ceased to be predominantly a public company value investor, which is the way that many still regard BRK.

And as a result, it should be no surprise that as BRK grew, given Buffett’s desire for owning as much of great businesses as he could, that BRK became a conglomerate, albeit one dominated by its leading insurance businesses.

Though we can look at the different strategies employed by Buffett over the years, and see how some played a larger role early on like arbitrage and distressed investing, Buffett had a singular focus for the investments that offer decent returns in the size range that will make a difference for BRK investors.

Once BRK got big, that meant becoming a conglomerate, albeit a special one, was the logical outcome.  And I could be wrong, but that is the final corporate form for BRK.  There may come a day in a post-Buffett era when it may do many things, such as spin off companies, or centralize functions.  At present that won’t happen because BRK is the acquirer of choice for those that want to cash out, but don’t want the unique character of their organizations to change, which Buffett points at in the present Shareholders’ Letter as a unique competitive advantage.  BRK does not compete on price in acquisitions; it does compete by saying that unless something goes badly wrong, BRK will be more than happy to let the management do its thing.  It’s as if Buffett says, “Just make money, and send us back the excess.  If you have need of cash for promising opportunities, let us know.”

And then, it lets a thousand flowers bloom, and a thousand schools of thought contend, so long as you make money and grow the value of the business.  BRK is a unique business, and reflects the character of its founders (including Munger here).  No other large firm that I know of offers as much latitude to its operating units.

One final note: Buffett has also had a very good nose for sniffing out good insurance enterprises.  That’s the backbone of BRK.  It’s interesting to see over the years how he assembled the various pieces.  It would be interesting to see pre-1977 data on the insurance side, to look at how Buffett initially entered the insurance business, and transisted out of running a textile firm.

Tomorrow should have my final installment on BRK.  I will review the 10-K and provide commentary.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 2

Tuesday, February 28th, 2012

Picking up where the last post left off:

13) So Buffett told us he has a successor lined up, but won’t tell us who, but will tell us that the successor doesn’t know that he is the successor.  Really does not seem like much of an improvement over the past, except that the CIO function is getting better defined with Todd and Ted.

14) Todd & Ted share their performance 80/20 — 80% of their own and 20% of their colleagues performance.  Seems like a fair idea, balancing the team vs the individual.

15) The regulated subsidiaries, and manufacturing, services and retailing did well. That operating income growth is what drove the year.  The turnaround at NetJets was also a help, and that was fast.

16) We are still waiting to see what problems BRK’s decentralized system can develop.  To this point, the flexibility for managers within a structure that oversees reinvestment of cash flow is admirable.

17) The economic spread of BRK businesses is significant, and I would argue, unrivaled in terms of conglomerates.  It almost makes me think that Buffett is aiming for owning an extra-productive slice of US/World GDP.  It makes acquisition criteria #1 less relevant, because if you are small and private, and want to be acquired by BRK, it means that you analyze BRK, identify the portion of it that you are most similar to, and talk to the CEO of that segment, not Buffett.

18) That brings up my view of Buffett at present.  He has changed as the amount of assets under management has grown.  The last phase for Buffett is not large cap value manager, but private equity manager / conglomerateur.  He uses the float that his insurers produce to invest in a wide number of enterprises that will produce excess returns.  He does not run a closed end fund, but runs a conglomerate.

19) Interesting to see Nebraska Furniture Mart open its third store.  Logical to do, if the experience is replicable.

20) “We do not talk one-on-one to large institutional investors or analysts.” Bravo.  Would that this would be true of more companies.  When I represented a large holder of Safety Insurance, the management asked me what we wanted in terms o market disclosure.  I said that it did not matter to us, and that we would be happy if they never talked to the media/analysts, and only emitted 10-Qs and 10-Ks, even without notifying us as to timing.

21) Buffett notes that a decent number of borrowers that lost their homes did well in the crisis, because of all the money they extracted from loans.  That might be similar to a private equity manager profiting through deals to borrow where he pays himself a dividend.

22) Owning 11% of Munich Re gives Buffett additional influence over the reinsurance market.

23) Because of the need for collateral, BRK will not be making any more significant derivative bets.

24) Buffet repeats his screed that he issued to Fortune regarding bonds and gold.  I repeat my screed.  It’s all logical, Warren, but you have to think more broadly and read about the gold medal gold model.

25) It makes sense that flying to Kansas City is a better strategy than going to Omaha.  But as this becomes widely used, make sure you reserve a car early.

26) If you want to ask Buffett a question at the annual meeting, you can do it by e-mailing the following:

(In your e-mail, let the journalist know if you would like your name mentioned if your question is selected.)

27) There will be insurance analysts at the annual meeting, and they are Cliff Gallant of KBW, Jay Gelb of Barclays Capital and Gary Ransom of Dowling and Partners.  I have a lot of respect for Gary Ransom — listen to the questions that he asks.

28) Minus & Plus: Negative change in AOCI & comprehensive income of noncontrolled interests down.  Strong CFO, net of capex, supports goodwill.

29) At for BRK’s big options: BAC in the money, GS at, GE/DOW out of the money.

30) Do parts of all asbestos liabilities eventually go to Berkshire Hathaway for reinsurance?  Who don’t they reinsure?  “The liabilities for environmental, asbestos and latent injury claims and claims expenses net of reinsurance recoverable were approximately $13.9 billion at December 31, 2011.”

I know that Buffett thinks he can earn money off of the float on these claims in excess of the implied interest rate.  But when he begins to become the preferred habitat for reinsurance, he makes BRK more volatile with respect to legal judgments.

31) “Without prior regulatory approval, our principal insurance subsidiaries may declare up to approximately $9.5 billion as ordinary dividends before the end of 2012.” And that is because only 10% of the regulatory surplus of $95 billion can be released.

32) BRK, unlike many firms, has more reasonable assumptions on DB pensions: expected return: 6.9%, discount rate 4.6%.

33) To date, share repurchases have been insignificant.  Looks like $67 million from the Statement of Shareholders Equity.

34) “On January 31, 2012, we issued an additional $1.7 billion of parent company senior unsecured notes, the proceeds of which were used to fund the repayment of $1.7 billion of notes maturing in February 2012.”

Why not pay down short-term debt?  BRK has the cash, and you state that you have an aversion to debt, particularly at the holding company level, but you are not acting like you have an aversion to debt over the last 10 years.

To Buffett: is there a level of debt at which you would be uncomfortable at the parent company, or subsidiaries?  Also, would you ever make an effort to get the AAA rating back?

35) BRK has a very diversified reserving book if you look at page 84 of the annual report — impressive.

36) I appreciate acquisition principle 6, which deal with aspects of value that accounting does not capture.  Buffett takes the right position to value those fully, because you will eventually get that value, and others will not pay up for it.

37) Buffett makes a lot out of the virtues of deferred taxes and float. He argues “they are liabilities without covenants or due dates attached to them.”  This is true, though deferred tax liabilities assume that you will make money, and will continue to grow.  Float is similar, it assumes you will underwrite well, and it would be nice if you grew.

38) Buffett says toward the end of the annual report:

There is a third, more subjective, element to an intrinsic value calculation that can be either positive or negative: the efficacy with which retained earnings will be deployed in the future. We, as well as many other businesses, are likely to retain earnings over the next decade that will equal, or even exceed, the capital we presently employ. Some companies will turn these retained dollars into fifty-cent pieces, others into two-dollar bills.

I’ve written about this before.  Some managements teams with skill should retain all earnings, and not pay a dividend.  Management teams without skill should act like REITs and pay out 90% of taxable income (or free cash flow).

39) Buffett says he was wrong on housing.  I think he is still wrong on housing; it will take a lot longer for this situation to normalize.  The key variable is the proportion of houses with debts exceeding a 90% LTV.  Those houses are illiquid; can’t be sold except in a short sale.

40) One final wild idea: would BRK consider buying out the corpus of AIG?  I have better small insurance acquisition targets than that, but buying out AIG would be delicious given the comments Greenberg made to Buffett back when BRK was smaller.  He was very dismissive of BRK.  Also, Buffett could fold ILFC into NetJets (or vice-versa), sell off the life companies, and impose greater discipline on the P&C underwriting.  Personally, if BRK made a bid for AIG at $32, I think Buffett could make a lot out of it, and he would not have to worry about a lot of fuss, because the major holder is the US Government.

Notes on the 2011 Berkshire Hathaway Annual Report, Part 1

Saturday, February 25th, 2012

Start with the basics, this is on the Annual Report, not just the shareholder letter.  I may have a second report out after the 10K is released.

1) One thing that was fascinating was the large number of low level acquisitions happening in the subsidiaries, and the desire for more of them.  There is interest at Lubrizol, McLane, TTI, CTB, Marmon, etc.

2) With BRK and IBM, Buffett hopes that public buyers and sellers will be stupid, and sell their shares at levels far below what the eventual prices will be, allowing the remaining shareholders to do better, as management buys in shares at a bargain, benefiting the persisting shareholders.

3) Buffett makes it clear, though that no matter how much cash has has, if prices are dropping rapidly, he won’t put a floor under the stock.  He’ll let the stock fall, and buy bit-by-bit through the whole process.  Indeed, it might be to his advantage to let the price fall below the 110% of Book level for a time to unnerve those that may be gaming the situation.

4) BRK does not talk its book as a result.  They would rather have the stock cheap for buybacks.  (Eeenh… but wouldn’t they rather have the stock higher to aid acquisitions?)

5) And if they firmly know what the value will be in the long run, they would love it if other investors would be scaredy cats and sell out to management at cheap levels so that they could have more of the value as they do not sell.  (Buffett does not phrase it that way, but this is a zero-sum game as far as trading goes.)

6) Buffett talked a lot about goodwill this year, much more than in prior years.  Goodwill makes up about 30% of BRKs book value.  I appreciated his argument regarding goodwill at the insurance companies — if your underwriting profits over nine years exceed goodwill the goodwill is most secure.

7) That said, partly due to lower interest rates, underwriting profitability has been higher for the P&C industry as a whole.  BRK may be better in aggregate, but some of Buffett’s industry comments are not warranted.  BRK is better in degree, not kind.

8 ) Buffett has the key of good P&C underwriting/management when he says “be willing to walk away if the appropriate premium can’t be obtained.”  That’s the only way to do it, with the price that your company will shrink when the rest of the industry is nuts.

9) All that said, the insurance lines did not do well this year, particularly not BH Reinsurance Group, which is Ajit Jain’s baby.  Part of that was the large catastrophes this year, some of it seems to come from not knowing how to run a life reinsurer.

10) Retroactive reinsurance showed gains, because losses on Swiss Re’s P&C experience was better than expected.  However, that was wiped out by Swiss Re Life & Health America’s business doing much worse than expected.

In one sense, a big question for BRK is whether they will spend the money to get the expertise necessary to run a big life reinsurer profitably.  So far, the answer seems to be no.  In my opinion, they need to hire experts, or buy out RGA.  Why buy the line from Sun Life when you could have RGA?

11) On principle 11 — BRK distinguishes itself among private equity buyers by leaving distinctive corporate cultures in place , and not interfering with them.  That may not help the present, but it helps the future, as wealthy people selling out take less, because they know their friends in the business will be left intact.

That won’t attract all sellers, but it will attract some.

And note that BRK will cut their losses on hopeless subsidiaries, or those beset by labor woes.

12) As usual, BRK’s reserve development is good, with releases coming from prior years.

More in the next part on Monday.

Full disclosure: long RGA

Thinking about the Insurance Industry

Saturday, February 25th, 2012

Recently I decided to spend some time analyzing the insurance industry.  It’s a different place today than when I became a buy-side analyst nine years ago.  Why?

First, for practical purposes, all of the insurers of credit are gone.  Yes, we have Assured Guaranty, and MBIA is limping along. Old Republic still exists. Radian and MGIC exist in reduced states.  The rest have disappeared.  In one sense, this should not have been a surprise, because the mortgage and credit guaranty businesses never had a scientific model for reserving.  I’m not even sure it is possible to have that.

Second, the title insurers are diminished.  Some, like LandAmerica are gone. Fidelity National seems to be diversifying itself out of insurance, recently buying up a restaurant chain.

Third, health insurers face an uncertain future.  Obamacare may disappear, or Obamacare could slowly eliminate insurers.  It’s a mess.

But beyond all of that, valuations are depressed across the insurance industry.  Part of that may stem from ETFs.  Insurers as a whole are smaller than the banks, but not as much smaller as they used to be.  Now, if you are a hedge fund, and you want to short banks, you probably have the best liquidity shorting a basket of financials, which shorts insurers as well.

That may be part of the issue.  There are other aspects, which I will try to address as I go through subindustries.

Offshore

By “Offshore” I mean P&C reinsurers and secondarily insurers that do business significantly in the US, and who list primarily on US exchanges, but are not based in the US.  Most of them are located in Bermuda.

In 2011, many of them were challenged by the high levels of catastrophes globally.  But the prices of the reinsurers did not fall because pricing power returned, and investors expect higher future earnings as a result.

Before I go on, I need to explain that what I will use to give a rough analysis of value is a Price-to-Book vs Return on Equity analysis [PB-ROE].  For more details, you can read my article here.  The short explanation is that companies in the insurance business (and other financials) are constrained by the amount of equity (net worth) that they have.  The ability to earn a return as a percentage of the equity [ROE] drives the market valuation as a fraction of the equity [P/B].

Here is a scatterplot for PB-ROE for the Offshore group:

 

Companies above the line may be overvalued, and companies below the line may be undervalued.  ROE is what is expected by analysts for the next fiscal year, not what has been obtained in the past.

The fit is fairly tight, and indicates mostly logical valuations for this group.  The companies that are possibly overvalued are: Arch Capital [ACGL] and Global Indemnity [GBLI]. Possibly undervalued: Everest Re [RE] and Endurance Specialty [ENH].

Now, this simple model can fail if you have an intelligent management team that has a better model.  Arch Capital may be that.  But with an expected ROE of less than 10%, it is hard to justify their valuation, when the average stock in this group needs an expected 13% ROE to be valued at book.

Why such a high ROE to get book?  Earnings quality.  Reinsurers have noisy earnings due to catastrophes.  You don’t give high valuations to companies that run hot or cold.  But the trick here is to see who is accumulating book value the fastest – they tend to be the stars over time.

Life

The life insurance business would be simple, if it indeed were only life insurance.  Much of the industry is handed over to annuities, and all manner of asset gathering.  Even life insurance can be made more complex through variable and variable universal life, where assets are invested in stocks, and do not receive a rate from the company.

Part of the trouble is that variable products are not simple, but the insurers offer guarantees for a fee.  When I see those products, my reaction is usually, “How do they hedge that?!”

Thus I am concerned for insurers that are “equity-sensitive” as I reckon them.  Here is the PB-ROE scatterplot:

 

A very tight fit.  The insurers that are undervalued are equity-sensitive ones: Phoenix Companies [PNX], American Equity Investment {AEL] , Lincoln National [LNC], and ING [ING].  Those that are overvalued are FBL Financial [FFG], and CNO Financial [CNO].  CNO has issues from long-term care, a coverage I dislike a great deal.  FBL is worth exploring.

One more note: to get book value in Life Insurance, you need an 11.7% ROE on average.  That’s high, but I expect that is so because investors are skeptical about the accounting.

Property & Casualty

This graph gives PB-ROE for the entire onshore P&C insurance industry:

 

It’s a good fit.  Again, the casualties of the last year weigh on the property-centric insurers, but for the most part, this is logical.

Potential underperformers include Hallmark Financial Services [HALL], Hilltop Holdings [HTH], Eastern Insurance Holdings [EIHI], Old Republic International [ORI], and Erie Indemnity [ERIE].  Below the line: Hartford Financial Services [HIG], Allstate [ALL], Tower Group [TWGP], and Horace Mann [HMN].

Because of the lower risk in P&C insurers, a firm only needs to earn an ROE of 6.6% to have a book value valuation.

Health

With Obamacare, I don’t know which end is up.  It could end up being a giant sop to the health insurers, or it could destroy the health insurers in order to create a government single-payer model, rather than the optimal model for cost reduction, where first parties pay directly, or pay insurers.  You want reductions in medical costs, get the government out of healthcare, and that includes the corporate deduction for employee health insurance.

My rationale is this: it could mess up the private market enough that the solution reached for is a single payer solution. I’ve talked with a decent number of health actuaries on this. The ability to price risk is distinctly limited. Young people pay too much, older folks too little. That’s a formula for antiselection. I think Obamacare was badly designed. I will not achieve its ends, and when the expenses start coming in, they will be far higher than anticipated. That has been the experience of the government in health care in the US. Utilization is underestimated, the further removed people from feeling its costs.

There are many models for profitability here, which makes things complex, but here is the present PB-ROE graph:

It’s a pretty good fit, with the idea that the following companies might be undervalued: Wellpoint [WLP] and CIGNA [CI].  And the following overvalued:  Molina Healthcare [MOH] and Wellcare Health Plans [WCG].

I don’t regard myself as an expert on the health insurance sub-industry, so treat this with skepticism.  I include it for completeness, because I think the PB-ROE concept has value in insurance.  One more note, the PB-ROE model thinks of this as a safe investment subindustry, because to have a book value valuation, you have to have an ROE of 7.8%.

Other Insurers and Insurance-Related Companies

This is a group that is a non-group.  It  comprises brokers, service providers, title and financial insurers.  Here’s the PB-ROE graph:

Pretty tight for a non-group.  Perhaps it is because it derives off of a much larger group, some of which has died off, leaving behind profitable entities.

As it is the potential outperformers include  Assured Guaranty [AGO], the largest remaining financial guaranty insurer, Fortegra Financial Corporation [FRF] a third party administrator of sorts, and what remains of the title insurance industry, Fidelity National [FNF], First American [FAF], and Stewart Title [STC].  That is one beaten-down group, and, one that would benefit a lot if housing bounced back.  There is a lot of potential earnings power there, and it trades for little above book value.

Potential underperformers include AJ Gallagher [AJG] and E-Health [EHTH].  I’ve dealt with AJ Gallagher professionally, and have respect for their management team, but maybe the valuation is stretched there.  E-Health is a health insurance broker, and over its existence hasn’t done anything deserving of a premium valuation.

And, for this non-group, it is riskless enough that you only need a 4% ROE to have a book value valuation.  This is one beaten-down sector of the market, and one that I do not own any of, but that I will eventually return to, because I have owned I in the past.  Should residential real estate finally normalize, many of these companies will fly.

I write this as one that was bearish on housing-related stocks since 2005.  There is potential here.

Summary

Insurance is complex, and the accounting is doubly complex, which is a major reason why many stay away from it.  But insurers as a group have had reliable and outsized returns over the rememberable past, which should encourage us to do a little kicking of the tires when so much of the industry trades below its net worth and is still earning money with little debt.

In my opinion, this is a recipe for earnings in the future, and why I own a lot of insurers for myself, and for clients.

Full disclosure: long ENH, but I may take other positions for clients in the next month

Proposal to the SEC on Money Market Funds

Friday, February 24th, 2012

To readers at the blog, I have formally submitted this to the SEC.

-=-=-=-==–=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-==-=–=-==-=–==-=-=-=-=-=-=-=-

To those analyzing policy for money market funds at the SEC:

Greetings.  My name is David Merkel, and I run Aleph Investments, LLC, a Maryland RIA.  I manage stock and bond portfolios for upper middle class people, and for small institutions.  I am a Chartered Financial Analyst, and in the past, I was a life actuary, where I developed stable value products for pension plans.

It is much harder to assure a stable share price with longer dated assets, but I was able to do so via a variety of strategies.  Doing the same thing for money market funds is simple.

Before I continue, I want to make clear that I have no economic interest in money market funds, aside from being an investor in them.  At present, the SEC is proposing a variety of changes to money market funds that practically render them uneconomic.  No wonder the companies managing the MM funds oppose that.

But the companies managing the MM funds are unrealistic as well, they don’t see any reason for change.  I have a proposal that splits the difference, and is trivial to carry out.

My proposal says this: Funds calculate their internal NAV, but do not disclose it to the public.  They only disclose it in the rare case where the NAV drops below 0.995, and it would “break the buck.”

When a fund “breaks the buck,” it announces a credit event.  It tells shareholders that they have lost money, and to protect the interests of all shareholders, all shareholders will suffer a small capital loss.

Whatever the fairly calculated NAV is when a capital loss is announced, the new NAV would be 1.0025, and the number of shares reduced to the level that supports that NAV.  If the value of the assets has been accurately calculated, and there are withdrawals, the premium to NAV should rise, not fall, for the remaining shareholders.

As an example, imagine a fund makes bad decisions, and the internal NAV calculation reveals an NAV of 0.9825.  The fund would announce a credit event, and roughly 2% of all units would be lost, and the new internal NAV would be 1.0025.  Those leaving the next day would only strengthen the fund.

Few will like the concept of a credit event in money market funds.  That said, the idea would have many salutary effects on money market funds:

  • It would eliminate runs on the funds.
  • It would get people used to the idea that there is some risk in money market funds, though limited.
  • It would eliminate the need for the government to intervene and insure money market funds.
  • It would allow some money market funds to take more risk, and offer more return.  There would be less need to constrain maturity and credit quality of the investments in the MMFs so tightly.
  • The cost would be minimal, most of the time losses would be 1-2%, which would be paid for through interest in less than a year.

My proposal is better because it treats money market funds like ETFs — they are pass-through vehicles, and as such, do not need capital buffers.

And, my proposal is better, because it recognizes that credit events should be rare but acceptable aspects of how money market funds work.  Think about it: particularly when short term interest rates are so low, there is no way for interest to cover even the slightest discrepancies versus NAV.

Under my way of doing things, let there be stable net asset values, freedom in investment guidelines, but the possibility of credit events.  The present set of restrictions in investing does no one any good, because the problem is not length of maturity or credit quality, but issuer concentration.

But let money market fundholders analyze the tradeoff between yield and risk.  Guess what?  Short-term bond fund holders have to do the same thing.

But why are we going after money market funds?  When they fail, the cost is pennies on the dollar, and it rarely happens.  Why not go after banks?  They fail far more frequently, with much larger losses.  I say let money market funds fail, and do not increase regulations on them.  Rather, let them be like ETFs, and let them be constrained by the prudence of the free markets.  What? You can have investment without the possibility of loss?  Ridiculous.

Regulate the banks tightly, but let money market funds go free, but advertise that losses are more than possible.

I strongly urge that you adopt my proposal.  The money market funds will not like it, but they can live with it.  The SEC may not like it entirely, but it accomplishes all of goals that you care about.  This is a compromise proposal where everyone can win.

Sincerely,

 

David J. Merkel, CFA, MA

 

Recent Sorted Tweets

Friday, February 24th, 2012

Finance Business

 

  • Breaking Ranks: Former Broker Turns Bomb Thrower http://t.co/q1vpz9dh @reformedbroker interview previews his book: http://t.co/Yigg2sEE $$ Feb 24, 2012
  • Why CLO managers continue to struggle http://t.co/a13j8jVG Low issuance, warehousing is tough, need more subordination, fewer senior buyers Feb 24, 2012
  • My Favorite Quote from Baupost’s 2011 Annual Letter http://t.co/VOvbqab3 DIstressed bond mgrs get itchy in bull phase & buy new junk @ par Feb 24, 2012
  • SEC IFRS Plan Endorsement http://t.co/8xguvs2G IFRS is not worth giving up comparability or sovereignty for. Project is a total loser. $$ Feb 24, 2012
  • Very cool, congrats RT @Finovate: @AlphaClone to offer Alternative Alpha ETF from U.S. Bancorp http://t.co/srufb3qd Feb 23, 2012
  • SEC May Ticket Speeding Traders http://t.co/oNCbF7pa Worthy of an experiment like the kind they did to study the “uptick rule” $$ Feb 23, 2012
  • AQR’s Aaron Brown on Red-Blooded Risk http://t.co/ZM7hn5P4 When I was a bond mgr, could sense some aspects of risk listening 2 broker’s tone Feb 23, 2012
  • The Volcker Rule is not going to bring your house back http://t.co/ADKMABfE Prop trading was not a leading cause of the financial crisis. $$ Feb 23, 2012
  • Pimco Said to Quit Mortgage Bond Group http://t.co/YsQZs1IE Feels wrong parties (their clients) r paying 4 bad servicing,instead of banks Feb 23, 2012
  •  If you want, I can dig up an old research piece on analyst coverage — there are basically 3 factors that explain 70… http://t.co/tBinshJJ Feb 21, 2012
  • Stressed VAR is still a “protractor in the jungle” http://t.co/GRGgwvsd Risk management sh/not b done w/central measures but stress tests $$ Feb 21, 2012
  • How One Company Teaches Employees the ABCs of Finance http://t.co/fqO19foq More companies should do this, they would b more profitable. $$ Feb 18, 2012
  • Gross Fund at 66% Premium Shows Pimco Allure in Quest for Yield http://t.co/LY8Rv4SS Yield illusion distracts many investors. Avoid it. $$ Feb 17, 2012
  • Read:Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors? http://t.co/ZVoMPmQu Feb 15, 2012
  • The 400% Man http://t.co/nrRhYIZl Wish I could meet some of his disappointed investors who came to kick the tires and were disappointed. Feb 15, 2012
  • Contra:Foot-Dragging on IFRS Decision Could Strip SEC of Power http://t.co/VNUFhWD5 The US could lose representation on IASB. Good, drop out Feb 14, 2012
  • Notes from iGlobal’s Global Distressed Investing Summit: Part 2 http://t.co/9iOty0Iz Leveraged loan market seems to be in decent shape $$ Feb 14, 2012
  • Pimco: $25 Billion Foreclosure Deal to Hit Pensions Harder Than Banks http://t.co/DKFtMI9B Gives MBS buyers a reason 2 sue originators $$ Feb 13, 2012
  • Missing at MF: $1.6 Billion http://t.co/QSUMYbNO Included for the 1st time is roughly $700 million in client money residing in the UK $$ Feb 13, 2012
  • Stockbrokers: A Guide to Private Placement Due Diligence http://t.co/tbwtu6Jy Illiquid investments are ways to cheat average people. $$ Feb 11, 2012
  • Why illiquid? Can’t recover the commission otherwise.  Can deceive people that their investment is worth more than it… http://t.co/cYjvUhWx Feb 11, 2012

 

Market Strategy

 

  • Jim Stack was right, and he’s still bullish http://t.co/GfEqtTKl Basically a forward P/E plus momentum argument, & lack of sharp falls $$ Feb 24, 2012
  • S&P 500 Gets 9% Cheaper on Record Profits http://t.co/DWPGz5Y2 Makes a P/E argument; profit mrgns will eventually revert, may take a while Feb 23, 2012
  • The dangers of dividend-paying stocks http://t.co/FymTmAAi Hint: they are stocks. No maturity date, no certain cash flow, low BK priority $$ Feb 23, 2012
  • Falkenblog: Low Vol Commodity Timing Strategy http://t.co/M4FFRoCx Low volatility seems to work in a large number of areas, this is one $$ Feb 23, 2012
  • Retro Investing—Look Back to Get Ahead http://t.co/vYiPCu9J The 50s, w/post-WWII financial repression, recurs as a current investing meme $$ Feb 22, 2012
  • The Intelligent Investor: Are Index Funds Messing Up the Markets? http://t.co/VAoFtksw May also be traders following each other $$ Feb 21, 2012
  • If history is any indication, high dividend stock outperformance should continue http://t.co/C5GaWmW8 Uses 40s & 50s as analogy $$ Feb 20, 2012
  • Breakout or consolidation? http://t.co/GTSkBjIT Many market seem to be at inflection points. Which way will they go? Wildcards: EZone, China Feb 20, 2012
  • RE: @alea_ Interesting analysis.  I would be wary of teasing too much out of the cluster analysis of sector correlati… http://t.co/zirdOJ8v Feb 18, 2012
  • MORGAN STANLEY: January Exhibited This Tell-Tale Sign Of A Market Top http://t.co/IQqidpUE When everything rises at once, look out! $$ Feb 18, 2012
  • Apple Stock May Not Be as Cheap as It Looks http://t.co/2dgfjfPq Earnings quality has declined, and so has the PE multiple $$ Feb 18, 2012
  • @ampressman Common summary stat 4 acctg quality 4 $AAPL Net Operating Accruals / Assets, has been deteriorating 4 last 7 years + Feb 18, 2012
  • @ampressman $AAPL acctg used to be very conservative, now modestly liberal by that statistic. It’s a bad direction, not a bad position, yet Feb 18, 2012
  • Should the Rich Invest Like Colleges? http://t.co/M9OaPEPA Better question: what are your goals? Do you have an infinite horizon? $$ Feb 18, 2012
  • High Yield Bonds as Equity Indicator | The Reformed Broker http://t.co/OXUtZrWG Meet my friends & former colleagues Ed Meigs & Sean Slein $$ Feb 17, 2012
  • When Earnings Slow, Focus on Big Cap, Quality http://t.co/zjD3RPKA High quality is the place to be at present, credit cycle shifting some $$ Feb 16, 2012
  • A Lesser Known Indicator http://t.co/8oivTJFl Cash enters market through IPOs, employee grants, & exits through cash buyouts, buybacks $$ Feb 16, 2012
  • Parabolas have 2 end somewhere $$ RT @ReformedBroker: $AAPL sold off because people were getting impatient with how slowly it was moving up. Feb 15, 2012
  • FPA Capital’s Bryan Beats Peers Embracing Oil Volatility http://t.co/7ebuGmrb A clever focus on absolute retruns, w/a long horizon $$ Feb 15, 2012
  • Paulson Gives Activism a Go http://t.co/dkHb3cht Not as easy as it looks w/ $HIG. Acctg may not fairly capture variable liabilities $$ Feb 15, 2012
  • RE: @SoberLook DB hedges its bets.  Average years rarely happen in high yield, they are either good or bad. http://t.co/0C51uulu Feb 14, 2012
  • THE 1987 MYTH…. http://t.co/mHSU4nM3 “Illusion of stability within disequilibrium” Very well said, in one short phrase. $$ Feb 14, 2012
  • America Inc. Faces Margin Stall http://t.co/RbqvqbT9 US companies have begun to see rising costs eat into the bottom line. Finally. $$ Feb 13, 2012
  • Hulbert: Insiders Selling at Heavy Pace http://t.co/qOPk2cbY Just another straw blowing in the wind, but insiders usually have good sense $$ Feb 10, 2012

 

Greece

 

  • Greek PSI outcomes tree: credit event probability at 93% http://t.co/jcLBc04c Clever grraphic shows high likelihood of Gk CDS triggering. $$ Feb 23, 2012
  • The market is now pricing in Greek sovereign CDS trigger http://t.co/w5vJ42Fa Upfront prices for Greek CDS moving up $$ Feb 22, 2012
  • Despite Pact, Unease Lingers for Greece http://t.co/Urp7mmag “Many Problems Remain Even Under Best-Case Scenarios” Shrink, shrink… $$ Feb 22, 2012
  • Greek Rescue Is Not the End of the Story http://t.co/IOCVcCTb Won’t save Greece on its own & there r other fringe nations 2 deal with $$ Feb 20, 2012
  • ECB Greek Plan May Hurt Bondholders While Triggering Debt Swaps http://t.co/Aya9urfV ECB may get better treaqtment than private holders $$ Feb 20, 2012
  • So, what would your plan for Greece be? http://t.co/SAd2f28O Play the game, and let Keynes sneer @ u as u attempt 2 solve the impossible $$ Feb 18, 2012
  • Greek Economy Shrinking Rapidly http://t.co/VzXi375M And it may shrink more rapidly depending on what the rest of Europe does $$ Feb 14, 2012

 

Eurozone

 

  • ECB’s Mario Draghi magic corrupts bond markets http://t.co/r0ZCmYpb Banks become dependent on ECB, bank bondholders more subordinated $$ Feb 24, 2012
  • European Banks May Tap ECB for $629 Billion Cash http://t.co/Re5TjLR5 “There is a ‘lose-lose’ air around the ECB’s auction next week,” $$ Feb 24, 2012
  • The Eurozone should be prepared for a new government in France http://t.co/qGFPC20S And that govt will be more hostile to current actions $$ Feb 22, 2012
  • Spain Sinks Deeper Into Periphery on Debt Rise http://t.co/wkuef6tS As debts grow higher, the probability of escape gets lower. $$ Feb 22, 2012
  • Iron Lady Merkel Bucks German Street on Greek Aid http://t.co/Wc95xI47 Strategy working 4 now, but what if colleagues lose their seats? $$ Feb 20, 2012
  • Moody’s Cuts European Sovereigns http://t.co/GvJuES7t Spain, Italy, Portugal, Slovakia, Slovenia & Malta all cut. France & UK -> neg outlook Feb 15, 2012
  • Unlisted in euroland http://t.co/AQQrJMUf Didn’t catch this in Jan. Private bonds can offered 2 ECB as collateral; helps French banks $$ Feb 13, 2012

 

The Well-off Fringe Nations

 

  • Icelandic Anger Brings Debt Forgiveness http://t.co/P4BH8HKN If the debt problem is not severe, austerity. If it is severe (Iceland) default Feb 22, 2012
  • Nordic Currencies Stung in Crisis http://t.co/teorxG1P Much of the world, looking for a store of value, drive fringe currencies up $$ Feb 21, 2012
  • Canada housing market: poised 4 ‘severe correction,’ George Athanassakos says http://t.co/05kaVIAD Canada is used to the boom/bust cycle $$ Feb 21, 2012
  • @joshuademasi You’re right, but most of the fringe currencies are facing the same dilemma; who to favor, consumers vs exporters, etc… $$ Feb 21, 2012
  • Israel Safest as Investors Discount War Threat http://t.co/3oXTlILj Well-capitalized banks & balanced economy w/much high tech $$ #warrisk Feb 20, 2012
  • A hedge fund bets big on a Canadian mega quarry http://t.co/k7OZBC9u Property rights r tough here. What if an existing farmer tried this? $$ Feb 18, 2012
  • Australia’s Gillard Urged to Increase Mortgage Purchases http://t.co/ylsCuvq4 A mistake, far better to let the market fail. $$ Feb 17, 2012
  • You’re right, reminds me of an old piece I wrote: http://t.co/XkgO7z7A Thanks $$ RT @joshuademasi: The 5 stages of USD grieving ! Feb 15, 2012
  • Norway’s Rate Policy Dilemma Pits Household Debt Against Krone ‘Headache’ http://t.co/Ud4FCOsI Cut rates, asset bubble grows, Krone weakens Feb 15, 2012

 

 

China

 

  • Plan B for China’s Wealthy: Moving to the U.S., Europe http://t.co/X9jRPy6q Wealthy Chinese know their govt, thus the need for flight $$ Feb 22, 2012
  • China’s FDI and Trade Outlook Horrible Says Commerce Spokesperson http://t.co/LIlvmxIL Hard 4 Comm Party 2command domestic consumption up $$ Feb 18, 2012
  • ‘Mother of all bubbles’ will pop China stocks: GMO http://t.co/OMENKZOI Low prob: China successfully navigating soft landing out of a bubble Feb 18, 2012
  • China’s excess exports turn negative http://t.co/CiLgTKqC Key Q: how will China grow its economy by stimulating domestic consumption? $$ #uh Feb 18, 2012
  • Too many bearish on China, but I’m bearish also.  What to do? Seek out China bulls.  If their arguments sound dumb, d… http://t.co/vrhUIdsh Feb 17, 2012
  • The Silent Victims of the U.S.-China Currency War http://t.co/6DXAnE3m Smaller nations get caught in crossfire of competitive devaluation $$ Feb 17, 2012
  • China’s Military Spending to Double by 2015 http://t.co/5Va8kiLr I think it take some losses before DC takes this seriously. $$ Feb 17, 2012
  • China’s Tenuous Hold on Peace http://t.co/dOFr68tL Tibet is restive, China blames its problems on the economic mismanagement of foreigners Feb 14, 2012
  • Glimpses of a Chinese Town Under Lockdown http://t.co/AFoW0zsM some reporters managed to get there to document the heavy security presence Feb 14, 2012
  • Liu Mingkang Outlines the Reforms China needs to Undertake http://t.co/L0cXMoIf Will the communist party willingly reduce its power in China Feb 13, 2012

 

Japan

 

  • Japanese Equities Herald Return to Inflation http://t.co/rxlt5OhI If Japan bond market breaks, ructions will be felt the world over. $$ Feb 23, 2012
  • Energy imports will pressure Japan’s trade deficit http://t.co/lieDm3T4 But, Japan has a current account surplus from its net foreign assets Feb 23, 2012
  • Japan Suggests No Quick G-20 Deal on IMF Funding http://t.co/RZYF5EB2 non-European members of the IMF waiting on the Europeans to act $$ Feb 22, 2012
  • Tokyo Small-Caps Set for Longest Win Streak http://t.co/mD3ySrzh Unnoticed but true, look @ this CEF: http://t.co/VcdMQDxL FD: long $JOF Feb 22, 2012
  • Yen Slumps After Japan Expands Bond Buying http://t.co/L6yImwzC Competitive currency devaluations driving Forex $$ #beggarthyneighbor Feb 15, 2012

 

Iran

 

  • Japan Refiners Said to Stall on Iran Deals http://t.co/uEq1DYtb Life is harder on those that need Iranian oil, like India, China, Japan $$ Feb 21, 2012
  • Iran Says It Loaded Locally Made Fuel to Nuke http://t.co/6HkMaEFj Not sure I believe this, but if it’s true, the Israelis will know ;) $$ Feb 15, 2012
  • Iran presses ahead with dollar attack http://t.co/Hd4Qtnvz Unlikely to work, but it’s all they can do w/oil transport shut down $$ Feb 14, 2012
  • Letter Writers Break Iranian Taboo http://t.co/M3NMfmk1 They are so desperate that they write the Ayatollah and criticize conditions. $$ Feb 14, 2012
  • Iran Sanctions Tighten as Shippers Stop Loading http://t.co/ubEtI6om Risk goes up, shipping insurance premiums rise, shipping stops $$ Feb 13, 2012

 

Rest of the World

 

  • Record Redemptions Loom Amid Akbank $1.3 Billion Loan Talks http://t.co/x5iDTSwE Never knew Turkish firms financed w/so much Short debt $$ Feb 18, 2012
  • Chavez Missing $10 Billion a Month by Curbing State Oil Investment http://t.co/uTG1Z8d8 PDVSA falls behind Pemex? How low can you go? $$ Feb 15, 2012
  • Chávez Opposition Faces Hard Election http://t.co/YBWi9PaW Chavez controls media & oil wealth; tough for Capriles, but he can still win. Feb 14, 2012
  • Gunfights in Saudi Arabia Show Spread of Tensions http://t.co/dNxhg2ij Shia in Saudi Arabia fight the govt. Biggest split in Mideast $$ Feb 14, 2012
  • The Real Reasons the Rich Are Moving Cash to the Caymans http://t.co/gh7d85ZA Litigation risk, and US political risk; diversify yr govts Feb 13, 2012

 

Federal Reserve / Monetary Policy / Fiscal Policy

 

  • Those believing the Fed is on hold for the next 3 years will be in for a rude awakening http://t.co/VYggm431 FF futures & TIPS betray mkt $$ Feb 24, 2012
  • Exported Inflation to Return Home, but When and in What Form http://t.co/UHT61w4Y The Fed will find it hard to shrink its balance sheet $$ Feb 24, 2012
  • Healthcare expenses will overwhelm the US federal budget http://t.co/lLUABMYy Suspect a deal will b driven 2 reduce benefits somehow $$ Feb 23, 2012
  • “Fiat Money and Collective Corruption” http://t.co/lRAa2xnG Hard money would help, the bigger problem is light regulation of banks/credit $$ Feb 23, 2012
  • Fed Writes Sweeping Rules From Behind Closed Doors http://t.co/UtozNgly Q: Why? 2 avoid bank influence, or 2 hide bank influence? $$ Feb 21, 2012
  • The Race To Debase In All Its Glory http://t.co/rPtS9EqD Balance sheets of major central banks expand rapidly $$ #racetothebottom Feb 21, 2012
  • Wealthy Enriched by Double-Dipping U.S. Plan http://t.co/YtGTfakC Long article describing unethical use of SBA $$ . #eliminatetheSBA Feb 21, 2012
  • Over-regulated America http://t.co/uMKtg2W0 The home of laissez-faire is being suffocated by excessive and badly written regulation $$ Feb 18, 2012
  • Geithner: GOP Walked Away From Tax Overhaul – Bloomberg http://t.co/yupPqVeO Articles like this indicate another stalemate in the making $$ Feb 17, 2012
  • Potomac Divide Shows Foreclosures Thru Courts Slow Home-Price Recovery http://t.co/kilW75GM MD has slow foreclosures, housing mkt lags VA Feb 16, 2012
  • Sober Look: Regulate it all, ask questions later http://t.co/qnpfakfJ New regulations reduce the liquidity of the corporate bond market $$ Feb 16, 2012
  • FHA is almost broke. What will DC do when it goes critical? RT @HousingWire: FHA defaults up for ninth straight month http://t.co/TSZFHCeD Feb 15, 2012
  • Pentagon May Oust Troops Involuntarily to Meet Reductions in Budget Plan http://t.co/VnY4At7J Tough time 2b let go if you r a veteran $$ Feb 14, 2012
  • What a surprise! $$ RT @pdacosta: Bernanke’s big housing speech makes no mention of the Fed’s regulatory laxity in run-up to the crisis. Feb 10, 2012

 

Bonds

 

  • Contra: Should Mortgage Rates Even Be Lower? http://t.co/lODEFb1P Mortgages do not price off of Tsys, but swaps and bank bond yields $$ Feb 22, 2012
  • Wall Street Crowds Into Trader Joe’s http://t.co/dHZT83VK CMBS mkt getting heated; loans linked 2 retail rose to 45% 4 bonds sold in 2011 Feb 22, 2012
  •  Have a lot of friends who have lost a lot of money waiting for $TLT to break. FD: long TLT http://t.co/Lw6Rqn02 Feb 21, 2012
  • A $360 trillion confidence trick http://t.co/Kar0f3Cz I have argued that LIBOR should be based off of binding offers to borrow/lend $$ Feb 14, 2012
  • http://t.co/VOIG2gUk W/TIPS NY Fed concentrates on the long on-the-run & nearby, w/nominals opposite. Makes implied inflation look higher $$ Feb 10, 2012

 

 

Muni Bonds

 

  • Stockton, CA, to Weigh First Steps Toward Bankruptcy http://t.co/d2lsCmx8 Start of negotiations to reduce emplyee pensions & healthcare $$ Feb 24, 2012
  • Good piece, thx RT @munilass: Evaluating Chapter 9 Bankruptcy for City of Detroit: Reality Check or Turnaround Option? http://t.co/PxWo5qHA Feb 21, 2012
  • Yes. http://t.co/4DUVVTKi $$ RT @BarbarianCap: @munilass isn’t this the muni book that @AlephBlog reviewed very favorably a few days ago? Feb 20, 2012

 

Pensions

 

  • New Rules Wreak Havoc forRetirement-Plan Sponsors http://t.co/HzHWTTtL I would expect rules to be modified, else headaches 4 DC plans $$ Feb 24, 2012
  • @BarbarianCap Looking at the RFP, that is one of the few things *not* under consideration, pity too, because it is more important. #DumbOCPP Feb 23, 2012
  • @BarbarianCap The audit is a test of methods and data, not assumptions. That’s actually pretty normal unless you an assumptions outlier $$ Feb 23, 2012
  • @BarbarianCap I’ve said it many times b4, if life insurers have 2b conservative in accounting, DB plans s/b more so, but they r less so $$ Feb 23, 2012
  • @BarbarianCap Some cases, deals will be driven to reduce benefits, depends on state/muni laws, Ch 9 allowable; not protected by ERISA/PBGC Feb 23, 2012

 

Stocks

 

  • The Capabilities Premium in M&A http://t.co/9CdZIugk Long piece that explains why some mergers work; they aid organic growth & r small $$ Feb 22, 2012
  • Elemental to Raise $1.7 Billion Next Year to Mine Potash http://t.co/w7GNsA2H Potash pricing has been volatile lately, cross-currents $$ Feb 22, 2012
  • Gamestop to J.C. Penney Shut Facebook Stores: Retail http://t.co/zSui0fCf $FB may have a more difficult time w/retail than some expect $$ Feb 20, 2012
  • Hewlett-Packard’s Message: We’ve Been Here All Along http://t.co/vU8piGMt Note: long $HPQ . HPQ definitely sounds more certain now. $$ Feb 16, 2012
  • Icahn Pushing CVR’s Sale Means $1 Billion Gain for Shareholders http://t.co/TfBKGErf What refiner wants more capacity now & fertilizer? $$ Feb 16, 2012
  • Hedge Funds Switch Positions, While Paulson Switches Investing Style http://t.co/MznmLhci Issue w/ $HIG is value of Variable product biz $$ Feb 15, 2012

 

Miscellaneous

 

  • The Control Revolution And Its Discontents http://t.co/FY4XgPde There is a “sweet spot” for market efficiency, too much & things get chaotic Feb 24, 2012
  • The Decline In Inventory Right Now is NOT a Good Sign http://t.co/Ra1Iz65H Fall in seller confidence & decline in new distressed inventory Feb 23, 2012
  • Spring Lambing in UK Turns Deadly as New Virus Kills Young http://t.co/PrO4neT1 Infects pregnant sheep, cows and goats, 5% infection rate Feb 22, 2012
  • Midwest Farmland Prices Update for the Year 2011 http://t.co/se9DbEgB Good discussion after a good article; things r getting a little bubbly Feb 22, 2012
  • Finding Treasures Among Insurer’s Wreckage http://t.co/jiFZiydE Never bot Atl Mutual’s Surplus Notes, but historical curiosities, wow $$ Feb 18, 2012
  • @StockTwits Insurance is boring, but antiquities at the oldest companies are fascinating. Wonder what Nationwide did w/Provident Mutuals? $$ Feb 18, 2012
  • @StockTwits I would hold meetings every now and then in Provident Mutual’s underused antiquities room; would start good conversations $$ Feb 18, 2012
  • Why Is Violent Crime Declining in US Cities? http://t.co/SLgD8bEL & http://t.co/RRRI2m8X Smarter law enforcement makes DC safer. Wow! $$ Feb 18, 2012
  • Thanks, liked it. RT @onwrdnupwrd: you will like this one from this weeks economist http://t.co/DMqhgXBB Feb 18, 2012
  • Interracial Marriages in US Reach a Record http://t.co/RJjWnTso Interesting that it is more prevalent with college educated people. $$ Feb 18, 2012
  • Harvard Mapping My DNA Turns Scary http://t.co/m5stl0d2 Journalist learns hard things about his DNA. Would he be better off not knowing? $$ Feb 18, 2012
  • Groupthink: The brainstorming myth http://t.co/7VBlhzKC People do better solving problems on their own, and sharing ideas w/the group $$ Feb 18, 2012
  • Fear, Submission, and Authoritarianism; a Disturbing Trend http://t.co/0lb32tOw Negative social mood leads to loss of liberties $$ Feb 16, 2012
  • Santorum’s Electability Pitch Undermined by 2006 Senate Re-Election Loss – Bloomberg http://t.co/8xglQQPJ Shouldn’t be an issue, here’s why: Feb 15, 2012
  • As the late Bob Casey said, “You can’t lose if you are a pro-life Democrat.” This is true, and it is why Santorum lost to his son. $$ Feb 15, 2012
  • Cracking the Long-Jump Code http://t.co/MN9d9EdJ Fascinating science applied; the key seems 2b2 jump higher, not just longer $$ Feb 15, 2012
  • The Best Foods for Thought, Literally http://t.co/tMyLW9E2 Perhaps the Mediterranean diet can aid brain function, or a lowcal diet $$ Feb 14, 2012
  • Contra: Almost Half the Price of Oil is Speculative Premium http://t.co/z8t51JOl It should be impossible to so overprice such a large mkt $$ Feb 14, 2012
  • The Hunt Brothers thought they could corner a much smaller silver market, and were not able to do it.  The oil compan… http://t.co/MLYVH5w3 Feb 14, 2012
  • So, What’s Your Algorithm? http://t.co/lC4voWCI Being able 2 crunch large amounts of data can lead to more objective decisions $$ #ornot Feb 13, 2012

Five Years at the Aleph Blog!

Thursday, February 23rd, 2012

When Jim Cramer asked me to write for RealMoney, it was a dream come true, and I didn’t ask for it.  After year of writing him on bond issues, he told me I wrote better than most he knew.  Trouble was, in 2003, I had a new job at a hedge fund, and was doing well at it.  It took some doing, but eventually my boss (a good guy, generally) agreed that I could do it, and my public writing on investing began.

Writing for RealMoney, I always felt a little odd.  As I do at Aleph Blog, it is my goal to help you think better, not shovel “buy this now” ideas at you.  I wrote more comments relative to articles than any other writer; I was told that I was RealMoney’s most profitable writer, because people re-read my articles & comments.  Oddly, I had less feedback from Cramer than when I was an e-mailer.  That said, if I ever e-mailed him, which I did rarely 1-2 times/year, he would always give me a short gracious response.  Long before I actually did so, he encouraged me to start my own asset management shop, when I asked his advice in the matter.

Roughly one year before I left RealMoney (which I did unceremoniously, never said goodbye), I started Aleph Blog.  I did it for greater freedom of expression.  I also never read RealMoney anymore, and as such, did not feel the compulsion to contribute to a publication that I had loved.

I wanted to write more article-length pieces about issues that were deeper to investing, and not simple buy/sell this asset pieces.  So, beginning with the Shanghai Market crisis in February 2007, we were off and running.  Most of my initial pieces were shorter; I would write two per evening, six days a week.  That morphed into one longer piece once an evening.

It was my goal to try to take my generalist experiences and turn them into something valuable for the general public.  I did not want to be an “all crisis, all the time” blog.  When the crisis was hot, or promising to be so, I would write.  And though I have distinct views on how economic policy should be done, that is not what defines me.  We have to act and live in the face of suboptimal policies.

There are many pieces and series that I could never have done at RealMoney that I have done at Aleph Blog.  As a sampler:

  • Education of a Corporate Bond Manager (12 parts)
  • Flavors of Insurance (12 parts)
  • The Rules (30 parts so far, and may go to 60 if I do them all)
  • A Day in the Life of John Davidson (my one attempt at fiction, 8 parts)
  • Most of my articles dealing with flaws in institutional investment strategies, accounting rules, etc.
  • My occasional rants on how I thank neoclassical economics is wrong, and sometimes, very wrong.
  • Articles on accounting rules and the effect on investing.  In some circles, this is (wide eyes here) an accounting blog. (I’ve never taken an accounting course in my life.  I’ve had to create accounting statements for 12-18 years of my life corporately.  I have read through accounting standards, and theories on accounting polices repeatedly.)
  • Many of my quantitative posts they would have blinked at, and said, “Uh, who will benefit from that?”  My view is, you may not get any initial benefit from such a piece, but if you get some idea into how the markets interact, you may be better prepared when things get weird.
  • All of the book reviews. That was not an early goal of the blog, but has become 10% of what I do.
  • The interactions I have had with agencies of the US Government.
  • The (7 part) first blogger summit at the US Treasury.  It was a pleasure to meet Steven Randy Waldman, Yves Smith, Kid Dynamite, Accrued Interest, John Jansen, Michael Panzner, and Tyler Cowen.

That said, RealMoney gave me more room to run than most columnists.  They rarely turned down my ideas, but they did want me to become more “practical,” and crank out more investment ideas.  The hard thing for me was/is, I have no lack of investment ideas/opinions, but the response I get to giving them is far less civil than sharing ideas on how to think about investing.  To that end, I appreciate Tom Brakke, who does that in a very structured way.  We had tea together last June or so, and I started to write about it but could never get it out.

In late summer of last year, Josh Brown came through the area, and we had lunch together.  Great guy; a ton of fun and ideas.  A man like him in some ways is my pal Cody Willard, who is a fountain of ideas and connections.  Add in James Altucher, who is prolific, and has been willing to give me time on two occasions.

Last fall I had a late dinner with Miguel Barbosa of Simoleon Sense.  Very bright guy; great conversation.  During the same trip to Chicago, got to talk with Eric Falkenstein for a few hours.  Wish I could have met up with Tadas Viskanta then; maybe another time.

Yet that reminds me of those I interact with.  Though I have never physically met them, I appreciate Barry Ritholtz, Jeff Miller, Felix Salmon, Bruce Krasting, Howard Simons, Roger Nusbaum, Gonzalo Lira, Michael Pettis, Victor Shih, Carl Walter, jck at Alea, the crew at FT Alphaville, and more.

There was the Aleph Blog lunch in late 2010, and the relationships that engendered.  I am very grateful for all of the relationships that blogging has created for me, whether close or distant.

And, with all of the virtuality of blogging, the relationships are what make it for me.  I am happy to write bits on the sites of others, and give them content.  I appreciate those that I read and comment on.

And to the many who have written me, though I may have never responded, thanks for writing me.  I get fifty+ messages per day and can’t keep up.  So, thanks to all have interacted with me, that’s what has made it valuable to me.

PS — If I forgot you, my apologies, I have so many interactions that it is difficult to keep track of them all.

 

Individual Investing Can Be Tough, Redux

Tuesday, February 21st, 2012

I have many software robots that scan for responses to what I write.  Most come directly to me.  Some do not like this one at Seeking Alpha:

Merkel’s reasons are, to be blunt, stupid.

1: Its too crowded and there is too much competition: While his goals may be to outperform many of us just want to build wealth.
2: Too much information: Just ignore the stuff that is unimportant. More information the better it certainly beats how things were decades ago.
3: “We are in a macroeconomic environment where we are delevering. That is not the best environment for making money”
For someone claiming 20 years of experience that is incredible naive.

First, we build wealth in competition with others, and the competition has grown, not shrunk.  The anomalies the allowed smaller investors to prosper are for the most part well-known.  Whether they are over-fished is another matter.  I think that previously profitable strategies still have value to the degree that they are ignored as no longer valuable.

Second, yes there is way too much noise, and I even create some of it.  Yes, I try to filter the information I receive, but I receive a ton of it, and filters are not perfect.  Please tell me how to construct a perfect filter, because mine are imperfect.  If we could create perfect filters we would be very, very rich, unlike me and the commenter.

Third, I don’t get the last comment, except that the person does not understand that periods where lending is expanding usually offers the highest returns for risk assets.  Presently we are contracting.

If I am naive, it is that I am an idealist.  I want better economic policy, and see lousy governance at the Fed, Treasury, and State levels.  As a result, on average, I see low real returns for assets over the next 5-10 years, unless policy changes dramatically.

 

Musings on the “400% Man”

Friday, February 17th, 2012

When I read the following article at SmartMoney, I said to myself. “I have done almost as well, I am more diversified, and I am willing to explain more of what I do.”

Truth is, clever investors, or lucky investors can get an attitude, saying that they don’t have to explain themselves to outsiders.    Not a good place to be. I am not saying that the performance is due to luck but there is a certain amount of respect due to investors for investing with you.

Before I write more, let me state that I respect Allan Mecham.  He manages more money than I do, and has a better track record.  If I were in the shoes of the investors who were analyzing him, I probably would have placed $5 million with him, and would have watched what he did carefully.

Why would I take the risk?  It’s tough to find non-consensus views that make significant money.  I wouldn’t want to make it a huge allocation initially, but I would put a toe in the water to see what he would actually do.  If it didn’t work over 5 years, I would pull the plug.

All that said, when you run a very concentrated portfolio, it is possible for a few decisions to drive a lot of performance.  I would feel more confident regarding someone who had made more correct decisions, because it would indicate a higher likelihood of a repeatable process.

Let me give you an example from my own portfolio.  I own SABESP [SBS], one of the largest water utilities in the world, which provides water and other services for the city of Sao Paulo in Brazil.  I got the idea from Cramer.  It’s the only idea I have ever gotten from Cramer and acted on.  I have held it for eight years, and the stock has quintupled.  Beyond that, I have made trading gains, because it has been somewhat volatile, as most Brazilian stocks have been.  And what proportion has this been in my portfolio?  Around 3%.  The largest position in my portfolio over the last 12 years has been 8%, and it has been rare to have a position larger than 4%.

One strength of what I do in asset management is that I don’t force trades.  I’m patient.  I trade 3-4 times a year, swapping out 2-6 companies each time.  The portfolio turns over once every three years.   But that means that roughly one-third of the portfolio I have held more than three years.  It’s not that those companies are old friends, but they continue to survive the tests that I give the whole portfolio.  That said, when I sell one of those held longer, I do feel a slight sense of loss; it’s like losing a close friend.  I know I contradicted myself here, but that’s because my views are ambiguous here.  My summary would be that I love the companies that I have held for a long time, but they have to pass the test 3-4 times a year.  There are no free passes, and no sentimentality.

I know more about my own processes than I do of Mecham’s.  But I have felt the cold appraisals from institutional managers over the last five years, with the implicit complaint — “you have done well, but you don’t manage enough money, so we are not going to invest with you.”  This is the same response as “we don’t buy anything other than IBM.”

I can talk about my own processes until my face turns blue.    They will still work in most environments.  But the article tells a story of investors that are risk-averse, but without any good sense of what true risk is.

For those that are looking for the next great investor, he does not look like the next great investor, but he looks odd, like Buffett did in the 50s and 60s.  Take the chance, and invest with the odd value investor.  Invest with several of them, diversify.

If I were managing assets for a pension fund, I would assemble a stable of new-ish value managers, and that would be 70% of my portfolio, with 30% investment grade bonds.  Boring and beautiful.

Without reviewing Allan’s trades, I can’t say how certain I am of his abilities.  But I would have a bias in favor of small value managers with good track records, particularly those who have been diversified.

Full disclosure: long SBS

 

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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