Monday, October 13, 2014

Weekly Compilation of Value Links - Oct 13th



Here is my weekly compilation of the most interesting topics from around the web.

Feel free to reach out with questions or comments,

Alex

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Joel Greenblatt interview on CNBC – September 23rd: CNBC

Warren Buffett transcript discussing the Van Tuyl Group on CNBC Oct 5th: CNBC

Warren Buffett interview with Carol Loomis at the Fortune Most Powerful Women’s Conference: Link and a video of him signing to 400 women: Link

Buffett rolls out the Berkshire Hathaway Brand: CNBC

Buffett says getting a mortgage is a ‘No-brainer’: Bloomberg

Walter Schloss interview in OID from March 1989 with a letter from Warren Buffett: Link

Guy Spier discussing his new book The Education of a Value Investor: ValueConferences

Peter Buffett in the Washington Post October 10th: Washington Post

Notes of Charlie Munger’s Daily Journal Meeting from Phil Demuth of Forbes: Part 1, Part 2, Part 3, Part 4.

Interview with Prem Watsa with Chennai: Part 1, Part 2


Tuesday, September 23, 2014

The Best From The Web: Weekly Value Links

Notes from Charlie Mungers Daily Journal Annual Meeting held September 10th 2014 from Marketfolly, Valuewalk, Forbes and Motleyfool

Seth Klarman’s recent letter to investors: Valuewalk

Andy Kilpatrick released an expanded edition of his book Of Permanent Value: Amazon

Warren Buffet places his first sports bet in Las Vegas: CNBC, The Post Game

Global valuation figures by country: Star Capital

Coverage of the turmoil at Benjamin Moore: Fortune

Whitney Tilson’s thoughts on Berkshire Hathaway’s valuation: Tilson Funds

Mohnish Pabrai’s talk at Pan IIT Canada: Youtube

Authors@ Google talk by Guy Spier: Youtube

Wells Fargo CEO John Stumpf spoke at the NPC Press Club on banking, the economy and his relationship with Warren Buffett: National Press Club, Bloomberg

Buffett, Blankfein and Bloomberg on small business: Bloomberg

Friday, September 12, 2014

The Best From The Web: Weekly Value Links - Sept 12th



Interview with Joel Greenblatt in Barrons: (Link)

Interview with Wilbur Ross in Outlook Business: (Link

Howard Marks Memo to Oaktree Clients: (Link

Charlie Munger’s Letters to shareholders of Blue Chips Stamps 1978-1982. Compiled by Max Olson:

Blue Chip Stamps financials: (Link)  and letters: (Link

Jason Zweig interviewed Charlie Munger after the Daily Journal annual meeting on September 10th: (Link) and the second article (Link2)

More coverage of the Daily Journal meeting from Noah Buhayar at Bloomberg: (Link)

Notes from the Value Investing Congress in NYC: (Link) and (Link)

“How Guy Spier Evolved Into a Great Investor” on Bloomberg Radio: (Link)

Third Avenue Funds 3Q 2014 Shareholder Letter: (Link)

Salman Khan – The Learning Myth: Why I’ll Never Tell My Son He’s Smart: (Link)

So Bill gates Has This Idea for a History Class (New York Times): (Link)

Excerpts from Baupost’s Q2 Letter to Investors: (Link

Thursday, May 8, 2014

Notes from the 2014 Berkshire Hathaway Annual Meeting

Here is a link to a transcript of the comments made by Warren Buffett and Charlie Munger at the 2014 Berkshire Hathaway Annual meeting:



Tuesday, March 4, 2014

Yellow BRKers Meet and Greet at the 2014 Berkshire Hathaway Annual Meeting


You are invited to the Yellow BRKers Meet and Greet on Friday May 2nd, 2014 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:30.

This is a casual atmosphere. It's a "happy hour" type of gathering - not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.

Be sure to register if you are attending by clicking on the 'register' tab: http://yellowbrkers.com/

I hope to see you there!

Saturday, February 22, 2014

My Latest Investment Idea: Horsehead Holdings

Long time readers of this site will recognize Horsehead Holdings from a report I wrote back in March of 2009 when Horsehead was at $4 per share. The idea has worked out very well. I recently wrote a report on the company for a second time when the stock was at $14 back in December.  Although the stock has run up since then, I still think the idea is very compelling. 

Summary: 


Horsehead Holdings (ZINC) is at an inflection point as they shift production to new zinc recycling facility that will lower their cash breakeven price of producing zinc, making them one of the world's lowest cost producers. Horsehead's use of recycled electric arc furnace (EAF) dust feedstock sourced from the steel industry gives them an enduring and sustainable competitive advantage. Once the new facility is complete, Horsehead's cash breakeven cost of producing zinc will be below the lowest price zinc has traded for in the past 10 years and the second lowest cost of production of any zinc producer in the world. Unlike their competitors, the cost advantage will grow over time because as the price of zinc rises, their cost of goods sold remains stable whereas their competitors generally have costs that are linked to revenue. Horsehead currently trades at FY '15 FCF yield of 14%. Horsehead is worth at least $22 valuing them at FCF yield of 10% and potentially much more if zinc prices increase, which I view as very likely. In addition, the replacement value of their assets has been estimated at over $1.5 billion or twice today's market cap. Furthermore, the recycling fees Horsehead charges create a base of stable recurring cash flow of over $85 million per year regardless of the level of zinc prices. The market appears to be valuing this company as a traditional metals/ mining firm when this is not going to be the case once the new facility opens. Commodity companies can have massive moats if they have a sustainable low cost advantage, which Horsehead will have. Furthermore, Horsehead has long term contracts with steel mini mills to recycle about 70% of the dust produced in North America that date back to the 1980's, when the industry began. These contracts and long standing relationships as well as geographic advantages stemming from placing their plants in close proximity to their customers is the reason that competitors have not moved into North American market and aren't likely to in the future. Investing at today's price is also a free option on future increases in the price of zinc. Although this is not an element of my valuation, I believe due to market factors, increases in zinc prices going forward are likely and this creates massive upside to earnings. If zinc prices reach $1.30/ pound, Horsehead would be worth $35/ share valuing the company at 10x FCF. Further upside comes from a likely increase in steel industry utilization which would increase the amount of dust sent to Horsehead. Finally, super investor Mohnish Pabrai has been buying a significant amount of stock in recent months near the current price.





Monday, May 20, 2013

Meet One Of The Youngest And Brightest Hedge Fund Analysts That Isn't On Wall Street

Today I was profiled in Forbes. Thanks to Chrystan Paul for writing a great article: 

"22-year-old Alex Bosset is not your typical college student. A finance major at the University of Minnesota, he was recently ranked among the top 14 buyside analysts in a list compiled by SumZero, a social network for professional investors (co-founded by Divya Narendra and funded by the Winklevoss twins)."


Read the rest of the article here: http://tinyurl.com/payuo6w



Friday, March 22, 2013

2012 SumZero Buyside Analyst Awards

"The Wall Street Journal today presented SumZero’s 2012 Buyside Awards list, a list comprised of 14 of the best-performing members of SumZero between June 2011 and December 2012. Winners were determined based on average and median idea performance, average community rating, and other quantitative factors indicative of a consistent ability to pick winners and convince the community of the research quality. All winners authorized their presence on the list."

Click Here the Read the WSJ Article: SumZero 2012 Buyside Awards 


Monday, March 11, 2013

Yellow BRKers Meet and Greet at the 2013 Berkshire Hathaway Annual Meeting

Are you coming to the Berkshire Hathaway Annual Meeting?

You are invited to join as fellow shareholders unofficially gather on Friday, May 3, 2013 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:30.

This is a casual atmosphere. It's a "happy hour" type of gathering - not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.

Please register here: http://yellowbrkers.com/

I hope to see you there!

Thursday, December 20, 2012

Bank Of America Report


Bank of America was on the brink of Bankruptcy just a few years ago. Under prior management, growth in assets was pursued at the expense of sounds business practices. This combined with years of poor underwriting and the disastrous loans that came with the acquisitions of Countrywide Financial and Merrill Lynch, caused huge damage to the franchise. To this day Bank of America remains one of the most shorted stocks on the NYSE.

However, the problems BAC has faced are temporary. Brian Moynihan became CEO in 2010 and has made it a priority create a “fortress” balance sheet and clean up their legacy issues. The underlying business is very high quality and is producing 13-15% ROTE. The high earnings power of the underlying business is being clouded by a very high expense rate, high litigation costs, mortgage put backs, high cost long term debt, etc. These issues are quickly being resolved. I expect by 2014-2015, Bank of America will be mostly finished taking care of the financial crisis related issues.

Bank of America is currently one of the best capitalized banks in the United States. Their capital levels are already in excess of the Basel 3 requirements that come into full effect in 2019. Basel 3 requires them to be at a tier one common equity ratio of 8.5% by 2019. At the end of the 3rd quarter they were already at 8.97%.

At today’s price ($10) Bank of America is selling at one of the widest discounts to its tangible book value ($13.50) in its history. By 2015, I expect BAC to be earning in excess of $30 billion/ year pre-tax and potentially well in excess of this. At this level of earnings, Bank of America is worth at least $25 per share. In addition, in 2013 alone Bank of America could return up to $18 billion to shareholders based on Brian Moynihan’s statement during the 3rd quarter conference call where he indicated that nearly all capital going forward will be returned to shareholders.

Wednesday, June 20, 2012

Goldman Sachs Investment Report

Summary: 


Goldman is trading for the cheapest price in its history as a public company. Goldman is a great business that dominates just about every business segment they are in. Goldman has been hit from every angle recently. Some of the challenging factors include subpar loan demand, low M&A, IPO and other investment banking business, regulatory threats, market deleveraging, lower company leverage, constant criticism etc. This has resulted in one of the world’s premier investment banks trading at less than 75% of tangible book. Goldman is worth over $200 per share and investors are ignoring many positive factors going forward. Over the course of Goldman’s history they have been very nimble in shifting assets to the highest ROI areas, assuming that ROE will be at these very depressed levels forever is not an accurate conclusion. Goldman is trading at a large discount to the liquidating value of its assets that are nearly all mark to market. Investors are ignoring the opportunities and tailwinds that exist. There is a huge potential to grow significantly overseas and competition has been reduced from the financial crisis. In addition, the reduction of the firm’s temporary liquidity will add a few billion to the bottom line. Increased leverage and a return to more risk taking will also boost results.  Large share buybacks at such an advantageous price will further enhance value. Goldman is a low downside bet that could be worth up to $270 in a few years or 3x the current price.


Click here for the full report:

Goldman Sachs Investment Report

Wednesday, March 28, 2012

Berkshire Hathaway Annual Meeting

Are you going to the Berkshire Hathaway Annual Meeting?

If so please email me and let me know and register for this event.

The Yellow BRK'ers Meet and Greet is a great event for a first timer and anyone else:


Berkshire Hathaway shareholders from all online communities are welcome to an unofficial gathering on Friday, May 4th, 2012.

You are invited to join as fellow shareholders unofficially gather on Friday, May 4th, 2012 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:00 or 5:30.

This is a casual atmosphere, with light snacks available. It's a "happy hour" type of gathering - not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.

To register for the event: http://yellowbrkers.com/

Monday, September 12, 2011

Complete Pabrai Funds Annual Meeting Notes: September 10th 2011 in Chicago

Note: A recorder wasn't used and therefore the following is a summary of what he said rather than an exact transcript.


Prepared Comments:


$100,000 invested in June of 2000 would be $554,600 today. This is an annualized return of 17.3% since 2000 vs. 1.1% over the same period for the S&P 500.

Assets under management: $580 million


A few past ideas:


International Coal Group:


Purchased in February 2010 at $4.3

Sold April 2011 at $10.30

138% return in slightly over 1 year

Wilber Ross founded the company and sought to replicate his International Coal Group playbook. Mohnish discussed Wilbur Ross's history and why it made sense to figure out what he was doing now.

· Mohnish liked that the company was going into metallurgical coal

· Fairfax was buying

He found the investment from looking at Fairfax fillings

Reverse engineering other people’s ideas is a very powerful approach


Terex:


Purchased in April 2009 at $12.21

Sold April 2011 at $37.3

206% return in 2 years

Mohnish became interested when the stock fell 90%

Thesis: 100+ NYC’s to be built over the next 100 years. Places such as China and India are expanding rapidly.

Healthy balance sheet to ride out the storm

2-3 years out sales and FCF are likely to grow significantly due to fast growth in the Asia markets

Downside protection: selling below replacement cost

Terex was a 2% basket bet

At a price of $16 Terex is interesting to look into again


London Mining:


Purchased at $1.26 in December 2008

Sold July 2011 at $6.3

360% return in two and a half years

Found this idea by looking at John Burbank’s portfolio. They owned over 13% of the company.

The company was trading for $146 million and had cash of $300 million

This idea plays into the 100 cities thesis

Low probability of loss of capital

Management was unknown

Took comfort in the fact that it was a net net and John Burbank’s ownership


--------


Some large caps are quite cheap today

The fund has a large non US exposure. 55-60% of the portfolio has revenue/ assets outside the United States.

25% of the fund’s cash went into recent volatility. The fund was able to put meaningful capital to work. The fund still has plenty of dry powder.

10% of the portfolio has gone into Japan. This is the cheapest market in the world. Very cheap and consistently profitable. There is a wide discount to intrinsic value and Mohnish expects good returns.


Mohnish’s first ever stock tip:


Taisei Oncho (JASDAQ: 1904)

Founded in 1941

Design and manufacture AC/ plumbing equipment

$59 million market cap

Cash plus bonds minus unearned revenue minus debt is $114 million

Net Income $6.1 million

Pabrai Funds has been buying every share offered since December 2010

Pabrai Funds now owns 1.4% of Taisei at an average price of $4.28

Consistently profitable since 2006

Tangible book value of $16.78

This company is trading at ¼ of intrinsic value

30-40 similar companies in Japan



Question and Answer session:


1. Can you discuss you investments in Goldman and BYD?

He doesn’t discuss particular investments. But he did say that he got the ideas from Buffett.


2. Given Buffett’s investments in Bank Of America, what does he think of the company? Are the warrants more attractive than the common?

He will not comment if he is buying or not. But he cited a study written by a few professors that said if you buy what Buffett has bought at the end of the month that his holdings are announced. And purchased at that week’s high price, you would still do significantly better than the S&P. So Bank of America is probably a good place for investors to look.


3. Mohnish invested in Frontline in 2004. The shipping industry is very distressed right now. Is it worth looking into at this point?

Very large crude carriers (VLCC’s) have a lead time of 3-4 years between when they are ordered and when they are delivered. A large amount of orders were placed at the end of the boom. Because of the long lead times and unintelligent behavior by ship buyers (namely the Greek’s) this market is subject to huge boom and bust cycles. The smaller ships and dry bulk ships have less volatility.

Frontline had most of its ships on spot charters. Then rates collapsed. Across the industry the single hull ships were taken out of service and scrapped.

If Frontline liquidated its VLCC’s, the value of those ships only fell from $70 to $60 million. The stock priced the ships at $15 million.

He bought because the stock was really cheap but it’s a bad industry over time.


4. Why were the investments in 2008 so small?

Some were basket bets on commodities and those were 2% positions. Normal positions are 5%. 10% is the most he will put into a company. The Japan basket bet is currently 10% and could reach up to 20% of the portfolio.


5. How do you value Potash?

He won’t discuss current holdings.


6. When making investments in commodity companies, how do you handicap for the risk of more supply entering the market and low barriers to entry?

It’s important to know where the company is on the cost curve. They want to own the lowest cost producer. When the price of the commodity goes down, the highest priced mines will close but the lowest cost producers will continue to be profitable.


7. If a 5% investment quadruples and goes to 20% of the fund, will you trim that position?

He’s never trimmed a position. The portfolio is less concentrated now, so this is less of an issue. He will only sell if it goes above intrinsic value or he finds a better investment. He usually sells at 90% of intrinsic value.


8. How do you analyze Japanese companies when information might be difficult to get or only in Japanese?

Financial statements are always in English and that’s the first step. It’s a basket bet so he spends less time researching each company than he would for a normal position. He didn’t hire a translator because that would take too long. Japan has a very trustworthy culture. He would never do the basket approach in China, India or most other places.


9. What are some investments that have lost money in the past?

The Pabrai Funds have made mistakes. The frequency of mistakes has gone down. One mistake was Sears. Many smart people were buying. Lampert is a smart guy. But he should have realized that it was a poor business. The business continues to deteriorate over time and the company has no moat. The funds lost 60% on their investment in Sears. He added an item to his checklist to prevent this mistake in the future.


10. Why did he sell Berkshire Hathaway?

Berkshire is doing well and is likely to do better than the index over time. But he can find cheaper things to invest in.


11. Are placeholders still part of the portfolio?

He no longer uses them because they didn’t work. One of his mistakes going into the financial crisis was being fully invested. The placeholders went down a lot which hurt the portfolio. It’s a much better idea to have a cash cushion because it tempers a decline and it provides dry gun powder when stocks get cheap.


12. Why is he invested in alternative energy?

He doesn’t want to discuss his ideas so he wouldn’t answer this question.


13. How do you structure the portfolio to withstand a crisis?

The portfolio has become more diversified and he also holds a larger cash cushion.

Charlie Munger says if you can’t handle a 50% drop in your portfolio then you shouldn’t be investing because that will eventually happen.

Berkshire Hathaway has gone down 50% a few times even though it’s a great business. In a stock market decline the fund will most likely go down.

However, investments such as the one in Japan will not be correlated to the rest of the portfolio.


14. How do you deal with currency in foreign investments?

He said he has no great insight into currency and he didn’t hedge the Yen. Since he started buying Japan, the index is down 15% and the Yen is up 8%. So far his basket is profitable. He ignores the effect of currency.


15. When investing in distressed businesses, how do you distinguish between a temporary verse long term problem?

He admitted making mistakes on this in the past. This is one of the most important factors and he spends a lot of time on this question. But it comes back to finding the intrinsic value and comparing that to the stock price. Investors need to determine if the distress is justified or not. For example, London Mining was worth much more in a private transaction than the price the Pabrai funds were buying at.


16. When you interview corporate management how do you evaluate their decision making process?

Most CEO’s are very poor capital allocators. A good way to judge management is to look at what tangible book value has done over time. He doesn’t interview management or even talk to them because he doesn’t want to be convinced by their sales skills. Management is always optimistic and this could cloud his decision making process. It’s better to evaluate management on your own and look at their past decisions.


17. For commodity based businesses you look at the cost curve to determine a good investment. What metric do you use for other industries?

In a commodity business he wants to own the lowest cost producer. It’s different for each industry. In retailing he looks at gross margins. This shows how well the company is run. In banking it’s the return on assets. It depends on the industry.


18. I didn’t quite catch the whole question but it had to do with his philosophy on following great investors?

This strategy doesn’t always work. But it’s a great search strategy. He’s found it to be very effective. Mohnish follows Klarman, Burbank, Watsa etc.


19. At what point does creating a basket distance you from understanding individual companies?

He’s borrowing the idea from Ben Graham. The situation in Japan is similar to what Graham was doing in the 1940’s and 1950’s in the US. This basket won’t dominate the portfolio, it’s a temporary thing.


20. How do you manage tough times?

People lose sight of basic reality. Most people freak out when their job is lost. It’s important to focus on what’s most important in life and what makes you happy. Keep a balance between work and those things.

Friday, July 15, 2011

How To Generate Good Investment Ideas


With 15,000 or more public companies in the United States, how should investors go about finding undervalued companies? Finding companies to invest in is not easy considering there are around 10,000 hedge funds and 7,500 mutual funds scouring the stock market. One of the most important components of being a good investor is the search process. One of the most common questions I get is how I find the companies I invest in. Here are the ways I find companies to research:

1. Check what other successful investors are buying. If Warren Buffet, Charlie Munger, Joel Greenblatt or other great investors are buying a certain company then its always the first place I look. The best site to check what great investors are buying is Gurufocus. For funds not mentioned on this web site, checking the 13f fillings on the SEC web site is a great resource. For example, here are Berkshire Hathaway’s equity investments.

2. I’ve generated a few ideas by asking people I think are very smart, what they are investing in. This is one of the quickest and most effective idea generators.

3. Oftentimes successful money managers will discuss what they are investing in in their letters to investors. Here are a few web sites that post hedge fund letters: MarketFolly and Value Investing World. In addition to these, going to the web site of the fund may lead you to its letters. For example, here are Third Avenue’s letters.

4. I frequently scan the 52 week low list. This is a great way to find distressed companies that could be cheap. I use Morningstar’s 52 week low list.

5. I also read through online investment report sharing sites such as Value Investors Club and Sumzero.

6. Another great resource is scanning the Value Line Investment Survey’s list of “Bargain Basement Stocks, ” “Lowest P/E Ratio’s” and “Widest Discounts From Book Value.”

7. Joel Greenblatt’s Magic Formula screen is another source I use to generate ideas.

8. I subscribe to Forbes, Fortune and the WSJ. These publications are all a great sources for ideas.

9. I also set alerts online for specific events such as delistings, earnings misses, spin offs etc.

10. Blogs and message boards are also a place I go to generate ideas. Some of my favorite are: Corner of Berkshire and Fairfax, Greenbackd and Above Average Odds.

11. Here are some web sites I scan for spin Offs and other special situations: The Online Investor, Arbitrage View and Spinoffs. In addition, the SEC web site is useful for finding out about spin offs. Every spin off has to file a form called a 10-12b with the SEC. Searching the SEC web site for these fillings will give you a list of all the recent spin offs.

12. I don’t use stock screens very often but they can be a great starting point: Yahoo’s seems to be the best. Although, the only decent stock screeners I’ve found you’ll need to pay for.

Tuesday, July 5, 2011

A Conversation With Charlie Munger

On July 1st Charlie Munger held his final Q&A with Wesco Shareholders and admirers. This is some of the best reading I've come across all year and I recommend all to read it.





Friday, May 13, 2011

Most Valuable Takeaways From The Berkshire Hathaway Annual Meeting And some Other Useful Reading

I attended the Berkshire Hathaway Annual Meeting for the 6th time on April 30th. In my opinion this year's meeting was the best in terms of the quality of questions and answers by Buffett and Munger. There has been a lot of information published on the annual meeting and I've included the most important below:

Required Reading:

The best transcript of the Berkshire Hathaway Annual Meeting By Ben Claremon of Inoculatedinvestor.com


Official Releases:

Information Regarding Trading in Lubrizol Corp. Shares by David L. Sokol (transcript of comments made during the annual meeting and the audit committee report)

Berkshire Hathaway 1st Quarter Earnings


Interviews And Other Readings On Buffett, Gates, Munger:

Complete transcript of comments made by Warren Buffett on CNBC after the Annual meeting

16 minute interview with Charlie Munger on CNBC

Hour long interview with Warren Buffett and Ajit Jain while they were in India

Warren Buffett Watch From The Omaha World Herald

CNBC Transcript: Warren Buffett on Osama Bin Laden, the U.S. Economy, and the Sokol Scandal

NY Times coverage of the annual meeting

Buffett and Welch on Bin Laden’s death (CNBC)

CNBC interview with Buffett discussing the Sokol situation

CNBC interview Buffett on the future of Berkshire Hathaway

Charlie Munger discussing the Sokol situation on Bloomberg

Fox Business interview with Munger, Buffett, Gates and Decker on what books to read and leaving legacies

Fox Business interview with Buffett and Munger about the economy

Buffett and Gates on the economy with Fox business

Buffett says Bin Laden’s death not a market factor on Fox Business

Fox Business interview with Buffett and Gates on the Sokol situation

CNN Charlie Munger on Trump as President

Thursday, February 24, 2011

Yellow BRKer 2011 Gathering At The Berkshire Hathaway Annual Meeting

Berkshire Hathaway shareholders from all online communities are welcome to an unofficial gathering on Friday, April 29, 2011.


You are invited to join as fellow shareholders unofficially gather on Friday, April 29, 2011 at the DoubleTree Hotel in Omaha to meet and have fun, starting at 4:00 pm and you can linger until 7:00 pm (or longer). There will be a short program at approximately 5:00 or 5:30.

This is a casual atmosphere, with light snacks available. It's a "happy hour" type of gathering - not a formal dinner or anything of that sort.

The DoubleTree is located on 16th and Dodge. There may be some street parking, otherwise, one can use the parking garage with an entrance from the South at 16th & Dodge street, just east of the First National Bank.


Yellow BRKer Details and Registration

Tuesday, September 28, 2010

Pabrai Investment Funds Annual Meeting Notes

I attended the Pabrai Investment Funds annual meeting in Chicago last Saturday. Mohnish did a great job answering questions, as usual. I've been lucky enough to get to know Mohnish over the past few years. Mohnish is one of the best fund managers in the country. He is one of the most genuine people I know and like Buffett he is always enjoying his job and cracking jokes.

Here are my notes from the 2010 Pabrai Investment Funds Annual Meeting in Chicago:

Prepared Comments:

The meeting started with an overview of how the fund has performed. Since the fund was started in 2001, it has returned 15.1% annually compared to -1.5% for the S&P 500.

$100,000 invested in the fund in June of 2000 would be $408,000 today.

Mohnish’s goal is to beat the index by 3% annually.

This past summer 3 interns worked part time on the checklist 2.0. They identified mistakes by great investors that resulted in a permanent loss of capital and analyzed why the mistakes occurred. They looked for commentary by the fund managers on these mistakes. They found that these investors almost never discussed their mistakes.

The biggest mistake was an investment in AIG by the Davis Fund which resulted in a $2 billion loss for the fund.

Mohnish said that the checklist is a great weapon in the Pabrai Funds arsenal.

Mohnish then went through one winner and one loser in the portfolio.

The worst investment during the period was Ternium which was actually sold at a small gain.

The winner he discussed was Teck cominco. This is the best investment the fund has ever made. The Pabrai Funds made an 8x return in only 3 months. Mohnish invested because they have some of the lowest cost mines in the world. The reason they were so cheap was because of a liquidity mismatch on the balance sheet. It had a large amount of debt coming due in a year. Mohnish felt that if they weren’t able to refinance the debt that they could sell assets piecemeal because of their highly diversified operations. In the worse case, the company would be worth a lot even in reorganizations because its book value was so high.


Question and Answer:



How Long did you follow Teck Cominco before buying?

Mohnish said he spent less than 5 days researching Teck because there were so many bargains at this time. Teck had a very solid moat because it was the lowest cost producer. To find Teck he looked at industry cost curves and paid attention to the lowest cost producers. The most important question to figure out was the liquidity mismatch.

Thoughts on Fairfax?

He doesn’t discuss current holdings.

Why don’t you discuss current holdings?

If investors get in the habit of discussing their investments they may end up suffering from commitment bias. If they constantly talk about how great a company is, they may suffer from a bias that could impair their judgment.

What are your views on position sizing?

His allocation policy changed in 2008 to reflect slightly elevated investment risks of his investment baskets and prior mistakes. If he has 10% positions it’s very hard to recover from a mistake. He discussed his new allocation framework with Charlie Munger who disagreed at first. After Mohnish explained it further, Charlie agreed that Berkshire Hathaway has achieved success with a more diversified portfolio. Mohnish talked about basket bets. When the risk is slightly elevated he will buy a basket of companies with small weightings. For example, he said he is currently researching companies in Japan. If he ends up buying companies there, he will buy a basket of companies each with small weightings in the portfolio. He said stocks there are very cheap.

What attracts you to a business?

When he finds a company that looks interesting he starts by thinking as a skeptic. He looks for something that will prove him wrong. He looks for areas of extreme mispricing. It has to be very undervalued but he also has to be able to understand it. He thinks there may be value in Coke bottlers in Japan. The Nikkei has done nothing for 27 years.

Has the increasing size of the fund negatively affect performance?

The performance of the fund has not been affected by size or fund inflows. He said that the fund is sitting on a lot of undervalue assets.

Has the economic turmoil changed your model?

Mohnish said he has more of an appreciation for macro issues than he has in the past. He also said that some macro trends make sense to base investments on. But the majority of macros trends such as inflation and interest rates are very difficult to predict and he doesn’t make judgments on those.

What are your thoughts on the financial industry?

Understanding management is key. You want to look for competent and honest managers. Because of the high leverage, management cannot make any mistakes in reserving. Also, it’s very difficult for outsiders to understand reserving. He couldn’t understand Citibank.

How much time do you spend on the balance sheet of companies you invest in?

Before he invested in Teck Cominco he read the last 8 years of annual reports. He spends a lot of time on the balance sheet.

What’s your philosophy on timing buying and selling?

He expects to be wrong in the future on selling. He said its fine to sell to early. If a stock goes down after he buys it that’s fine as long as he is still right about intrinsic value and he has dry powder to invest.

What did you identify with the checklist project?

The mistakes were concentrated in 08-09 and included a lot of financials. A lot of the mistakes were similar so he just picked a few. He analyzed Longleaf’s investment in GM. Longleaf’s management discussed the GM thesis in its reports. The mistake they made was they missed the forest from the trees. They missed the big picture. They figured that because GM did so well in the truck market that that would carry them through. They missed the fact that gas prices would rise to $3. He also said that he greatly respects these managers but that it’s important to learn from them. Longleaf also made the mistake of looking at the wrong variables.

How do you know where the edge of your circle of competence is?

If you have to ask yourself that question when looking at a company, then it’s probably beyond your circle of competence. You have to be honest with yourself. In the case of the Japanese companies he is researching, he has no interest in American listed Japanese companies. He will use the basket approach to Japanese companies because of the unfamiliarity. He also said that these Japanese companies are extremely cheap.

A business owner in the audience said after analyzing his own mistakes he noticed many of his mistakes were repeated. He asked if Mohnish had made a mistake more than once and was susceptible to reoccurring mistakes in one area?

Chris Davis wrote about a mistake he made in 2002. He ended up making the same mistake again in 2008 with AIG. Buffett made the same mistake twice as well with the original Berkshire Hathaway purchased and later on, with the Dexter Shoe purchase. Leverage is a very important factor to consider. One item on the check list is whether or not he suffers from any personal biases. The checklist forces him to take a step back.

Do you see any bubbles today?

Bubbles are hard to spot. Real estate in certain parts of China is probably a bubble. There are many bubbles around all the time. He mentioned a book called Trendwatching.

What’s your philosophy on investing in foreign markets?

He said that investing in US and Canadian companies that are driven by Chinese factors would be of interest to him. It’s important to understand foreign growth. You have to watch out for bubbles. China and India have good prospects but there may be an overall bubble. He’s very reluctant to invest in China but he’s interested in benefiting from Chinese growth. He skips Chinese companies because of accounting.

What does he think about natural gas companies?

The industry may be subject to a disruptive shift because of technological changes. The low prices may be permanent but he has no idea. The only good way to invest would be at the bottom of the cost curve and he can’t find one. There is no choke point in natural gas unlike iron ore. Natural gas also has substitutes. Mohnish recommended the book, Rational Optimist. He talked about how cheap energy allows countries to create more fresh water which will allow more agriculture.

How do you prevent macro issues from blinding investments?

He’s learned to appreciate macro issues more than in the past. As an investor you can’t get a handle on all factors. So it makes sense to spread ideas out more. The micro factors trump the macro factors. The company has to be able to control its destiny. He looks for staying power so the company can withstand shocks.

This question came from an investor who has to pull out money for living expenses. He asked how he can get more visibility on what taxes will be?

Mohnish practices tax planning in the funds. He sells holdings between the funds to cancel capital gains. The statements sent to shareholders should give them a good idea what the expected tax rate will be. Mohnish is a big tax payer so he is very sensitive to tax issues.

Is your philosophy on portfolio allocation shifting more towards preserving wealth instead of growing it?

The Kelly Formula is only correct when making many bets. He always under bet the Kelly Formula. Since Mohnish is making few bets, the Kelly Formula doesn’t work. He never fully used the Kelly Formula because it would have told him to bet more heavily. Return of capital is more important than return on capital. If people redeem their money during down times that is permanently lost capital for those people.

Can you name some great companies that you’d love to own at the right price?

Ikea, In and Out Burger, Costco, the low cost mines owned by BHP and Rio Tinto. Great companies are all over the place across the world. There are great companies in India and China but and ownership issues exists over there. Pricing is also an issue. Ben Graham’s approach was to go to the store and buy what was on sale and Charlie Munger’s approach is to go to the store and wait for quality items to go on sale. He likes Charlie’s framework.

What extra work do you do to analyze financials?

He’s reluctant to own most financials. They do own Goldman Sachs. He’s read two books on Goldman. It’s a great business. He doesn’t have a problem with management ethos but it’s improving. It’s a very complex business. They have the potential to grow huge overseas because they have few offices overseas right now. Since it has opaque parts to its business he made it a basket bet.

Does checklist address good portfolio strategies?

No. The checklist deals with analyzing companies. Mohnish recommended that this person read the fundamental value investing books. Mohnish always tries to learn from others.

Would you be more interested in a more certain intrinsic value or a cheaper price?

Currently the fund holds a lot of cash as there is less cash in the fund he demands higher discounts for new investments. I wasn’t able to too write down most of his answer.

What’s your average cash level since 1999?

In a crisis, cash plus courage is priceless. Next times a crisis strikes, he wants more cash. Instead of jumping from his second best to his best idea he instead lets investments play out and clings to ideas instead of jumping around.

How does Mohnish spend his free time?

He does plenty of other things. He has a daily nap, plays racquetball and plays bridge.