Warren Buffett discusses his worst ever investment on CNBC...
Showing posts with label Value Investing. Show all posts
Showing posts with label Value Investing. Show all posts
Monday, October 18, 2010
Wednesday, September 29, 2010
Wisdom of Seth Klarman
Seth Klarman, of the Baupost Group, is one the greatest investors of all time. Here are some gems from his numerous letters to Baupost investors over the years.
One must understand the importance of an endless drive to get information and seek value.Literally draw a detailed map—like an organization chart—of interlocking ownership and affiliates, many of which were also publicly traded. So, identifying one stock led him to a dozen other potential investments. To tirelessly pull threads is the lesson that I learned from Mike Price.
Value investing works over a long period of time, outperforming the market by 1 or 2 percent a year, on average—a slender margin in a year, but not slender over the course of time, given the power of compounding.
The inability to hold cash and the pressure to be fully invested at all times meant that when the plug was pulled out of the tub, all boats dropped as the water rushed down the drain.
At the worst possible moment, when your fund is down because cheap things have gotten cheaper, you need to have capital, to have clients who will actually love the phone call and—most of the time, if not all the time—add, rather than subtract, capital.
When managers are afraid of redemptions, they get liquid. We all saw how many managers went from leveraged long in 2007 to huge net cash in 2008, when the right thing to do in terms of value would have been to do the opposite.
We spend a lot of our time focusing on where the misguided selling is, where the redemptions are happening, where the over leverage is being liquidated—and so we are able to see a flow of instruments and securities that are more likely to be mispriced, and that lets us be nimble.
Benjamin Graham wrote, “Those with enterprise haven’t the money, and those with money haven’t the enterprise, to buy stocks when they are cheap.”
Graham’s wonderful sentence as, an investor needs only two things: cash and courage. Having only one of them is not enough.
The prevailing view has been that the market will earn a high rate of return if the holding period is long enough, but entry point is what really matters.
It’s awful to have a depression, but it’s a great thing to have a depression mentality because it means that we are not speculating, we are not living beyond our means, we don’t quit our job to take a big risk because we know we might not get another job. There is something stable about a country, a society built on those values.
A tipping point is invisible, as we just saw in Greece. In most situations, everything appears fine until it’s not fine, until, for example, no one shows up at a Treasury auction.
There is an old saying, “How did you go bankrupt?” And the answer is, “Gradually, and then suddenly.” The impending fiscal crisis in the United States will make its appearance in the same way.
A commodity doesn’t have the same characteristics as a security, characteristics that allow for analysis. Other than a recent sale or appreciation due to inflation, analyzing the current or future worth of a commodity is nearly impossible.
If an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation.
Investors need to pick their poison: Either make more money when times are good and have a really ugly year every so often, or protect on the downside and don’t be at the party so long when things are good.
My experience is that short sellers do far better analysis than long buyers because they have to. The market is biased upward over time—as the saying goes, stocks are for the long run.
Typically, we make money when we buy things. We count the profits later, but we know we have captured them when we buy the bargain.
Never stop reading. History doesn’t repeat, but it does rhyme.
Jim Grant has a wonderful expression: In science, progress is cumulative, and in finance, progress is cyclical. Fads will come and go, and people will think we are on to a new thing in finance or investing; but the reality is that it is probably not really new, and if we have seen the movie or read the book, maybe we know how it turns out.
Monday, August 23, 2010
The End of an Era: Lou Simpson to Retire from Geico
Lou Simpson, the Chicago-based investor with such a stellar track record he once was considered the successor to Warren Buffett, is retiring at the end of the year after decades managing Geico's investment portfolio.
Geico is owned by Buffett's investment vehicle, Berkshire Hathaway. Simpson, 73, who grew up in Highland Park, is the only person other than Buffett who controls Berkshire investments.
"I wish he weren't" retiring, Buffett told me. "Obviously, I would keep him employed till he was 100. I was very surprised when he called me a month ago and said, 'At 74, I'd just as soon turn it over to somebody else.' It was not a happy day at Berkshire. But I'm happy for him."
The two have never delineated their stock picks; Geico's investments are described publicly as Berkshire's. So for about 15 years, reporters and Wall Street analysts often assumed Simpson's moves were Buffett's.
"People are always attributing to me what he's doing," Buffett said.
But here's how to figure it out: "If you see a purchase on a company in the $300- to $400-million range, odds are very good that's Lou's," Buffett said. "I'm going to want to buy at least $1 billion of whatever it is we buy. So Nike, those things are his, while Wells Fargo, Kraft, those will be mine."
While Simpson is not a household name, he is among the most well-connected men in Chicago's financial circles. He manages a $4 billion portfolio that posted annual losses only three times from 1980 to 2004, and outperformed the S&P 500 18 of those years. Berkshire has not reported Simpson's performance separately since 2004, but when pressed, Simpson said his stock portfolio has outperformed the S&P 500 in aggregate since then.
His monthly reports go to Buffett, 79, and Buffett will assume control of Geico's portfolio when Simpson retires, he said.
Buffett and Simpson have similar investing philosophies, although not on life. Both tend to buy and hold stocks. They scour for sturdy but sometimes obscure companies poised for growth. Any other method is considered "a fad."
As for whether Simpson runs investment decisions by Buffett, Buffett said never. But their value-investing approach has led to them on at least two occasions to make identical choices. Buffett said both began buying Tesco, a global food retailer, at the same time. And Simpson said both began selling Freddie Mac in 2001 because of concerns the company was overleveraged.
"My approach is eclectic," Simpson said. "I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management."
Simpson, unlike Buffett, avoids the spotlight. Since Berkshire bought Geico in January 1996, Simpson said he has given two on-the-record interviews, this one being his second.
"So many people broadcast what they buy or sell and it works against them," Simpson said. "I'm in favor of people not knowing what we're doing until the last possible time."
Simpson's priorities, friends say, have changed since he met his second wife, Kimberly Querrey, a chemical engineer, at a restaurant in Chicago. Neither was living here at the time; they were here on business.. She persuaded him to move from San Diego to Chicago, as she was looking for a city that offered her more consulting opportunities. They practiced yoga together until she ruptured her Achilles tendon, and now Simpson does so on his own. They intend to spend most of his retirement in Florida and use their Michigan Avenue condo as a second home.
Simpson attended Northwestern University for a short time and, unhappy there, transferred to Ohio Wesleyan and went on to graduate school at Princeton. (Today, he sits on the investment committee of Northwestern's board of trustees.)
Simpson had risen to chief executive of California-based Western Asset Management when his friend Leland Getz, the then-vice chairman of executive search firm Russell Reynolds, called on behalf of Geico in 1979. Simpson rebuffed him twice, acquiescing on the third try "only to get him off my back," he said.
"Geico, operationally, has made a profit most of the 31 years he has been here," said Geico CEO Tony Nicely. "That has given him great flexibility as to how to invest. He had the comfort of knowing he was not going to have to sell equities in an untimely way. But at the same time, his outstanding performance has caused our overall performance to look unbelievably good."
Simpson acknowledges that his more than 30-year association with Buffett and Berkshire has given him entre into circles that might otherwise have been inaccessible. He sits on the boards of two public companies and has been a director of at least nine others. He travels to Allen & Co.'s annual conference for "moguls" in Sun Valley every year.
Yet Simpson's life is simple. He supervises only two employees, an assistant and an analyst, working out of a small four-room office on Michigan Avenue. The walls are sparsely decorated with posters from art museum exhibits. He lives within walking distance of his office. His division's daily report covers less than one-quarter of a sheet of paper.
"Our dinner conversation, I think it's quite interesting, but some people will say quite strange," Querrey said. "Over the weekend, we actually talked about behavior in corporate America, and the behavior at Hewlett-Packard, and the arrogance of CEOs and why they think they are above enforcement of the board. I have investments in Vietnam. So we often talk about the economy in Vietnam versus the United States."
Simpson's compensation is not disclosed, but it is based on his returns over a three-year period. I told Simpson that Buffett often says there are Berkshire stockholders who should be on Forbes' list of the 400 wealthiest Americans but have been overlooked. I asked Simpson whether he is one of them.
"No," he said quickly. But with a sly grin, he added, "But I know who some of them are."
Chicago Tribune
Geico is owned by Buffett's investment vehicle, Berkshire Hathaway. Simpson, 73, who grew up in Highland Park, is the only person other than Buffett who controls Berkshire investments.
"I wish he weren't" retiring, Buffett told me. "Obviously, I would keep him employed till he was 100. I was very surprised when he called me a month ago and said, 'At 74, I'd just as soon turn it over to somebody else.' It was not a happy day at Berkshire. But I'm happy for him."
The two have never delineated their stock picks; Geico's investments are described publicly as Berkshire's. So for about 15 years, reporters and Wall Street analysts often assumed Simpson's moves were Buffett's.
"People are always attributing to me what he's doing," Buffett said.
But here's how to figure it out: "If you see a purchase on a company in the $300- to $400-million range, odds are very good that's Lou's," Buffett said. "I'm going to want to buy at least $1 billion of whatever it is we buy. So Nike, those things are his, while Wells Fargo, Kraft, those will be mine."
While Simpson is not a household name, he is among the most well-connected men in Chicago's financial circles. He manages a $4 billion portfolio that posted annual losses only three times from 1980 to 2004, and outperformed the S&P 500 18 of those years. Berkshire has not reported Simpson's performance separately since 2004, but when pressed, Simpson said his stock portfolio has outperformed the S&P 500 in aggregate since then.
His monthly reports go to Buffett, 79, and Buffett will assume control of Geico's portfolio when Simpson retires, he said.
Buffett and Simpson have similar investing philosophies, although not on life. Both tend to buy and hold stocks. They scour for sturdy but sometimes obscure companies poised for growth. Any other method is considered "a fad."
As for whether Simpson runs investment decisions by Buffett, Buffett said never. But their value-investing approach has led to them on at least two occasions to make identical choices. Buffett said both began buying Tesco, a global food retailer, at the same time. And Simpson said both began selling Freddie Mac in 2001 because of concerns the company was overleveraged.
"My approach is eclectic," Simpson said. "I try to read all company documents carefully. We try to talk to competitors. We try to find people more knowledgeable about the business than we are. We do not rely on Wall Street-generated research. We do our own research. We try to meet with top management."
Simpson, unlike Buffett, avoids the spotlight. Since Berkshire bought Geico in January 1996, Simpson said he has given two on-the-record interviews, this one being his second.
"So many people broadcast what they buy or sell and it works against them," Simpson said. "I'm in favor of people not knowing what we're doing until the last possible time."
Simpson's priorities, friends say, have changed since he met his second wife, Kimberly Querrey, a chemical engineer, at a restaurant in Chicago. Neither was living here at the time; they were here on business.. She persuaded him to move from San Diego to Chicago, as she was looking for a city that offered her more consulting opportunities. They practiced yoga together until she ruptured her Achilles tendon, and now Simpson does so on his own. They intend to spend most of his retirement in Florida and use their Michigan Avenue condo as a second home.
Simpson attended Northwestern University for a short time and, unhappy there, transferred to Ohio Wesleyan and went on to graduate school at Princeton. (Today, he sits on the investment committee of Northwestern's board of trustees.)
Simpson had risen to chief executive of California-based Western Asset Management when his friend Leland Getz, the then-vice chairman of executive search firm Russell Reynolds, called on behalf of Geico in 1979. Simpson rebuffed him twice, acquiescing on the third try "only to get him off my back," he said.
"Geico, operationally, has made a profit most of the 31 years he has been here," said Geico CEO Tony Nicely. "That has given him great flexibility as to how to invest. He had the comfort of knowing he was not going to have to sell equities in an untimely way. But at the same time, his outstanding performance has caused our overall performance to look unbelievably good."
Simpson acknowledges that his more than 30-year association with Buffett and Berkshire has given him entre into circles that might otherwise have been inaccessible. He sits on the boards of two public companies and has been a director of at least nine others. He travels to Allen & Co.'s annual conference for "moguls" in Sun Valley every year.
Yet Simpson's life is simple. He supervises only two employees, an assistant and an analyst, working out of a small four-room office on Michigan Avenue. The walls are sparsely decorated with posters from art museum exhibits. He lives within walking distance of his office. His division's daily report covers less than one-quarter of a sheet of paper.
"Our dinner conversation, I think it's quite interesting, but some people will say quite strange," Querrey said. "Over the weekend, we actually talked about behavior in corporate America, and the behavior at Hewlett-Packard, and the arrogance of CEOs and why they think they are above enforcement of the board. I have investments in Vietnam. So we often talk about the economy in Vietnam versus the United States."
Simpson's compensation is not disclosed, but it is based on his returns over a three-year period. I told Simpson that Buffett often says there are Berkshire stockholders who should be on Forbes' list of the 400 wealthiest Americans but have been overlooked. I asked Simpson whether he is one of them.
"No," he said quickly. But with a sly grin, he added, "But I know who some of them are."
Chicago Tribune
Saturday, August 21, 2010
Why It's Time to Buy Telkom (TKG)
A recent cover story in the Financial Mail (19 August 2010 edition) has cemented my thoughts on why Telkom is a buy.
The story:
Disclosure: I hold Telkom shares indirectly. I do not agree with Viljoen on Harmony Gold. I much prefer the Financial Mail to FinWeek.
The story:
- How Telkom Lost It's Way. I particularly like the conclusion of this piece - "Maybe Telkom is already lost".
- Telkom Chairman Jeff Molobela and his "interference". Such actions have been construed in the media as "government interference".
- Is there any future for Telkom? I must say I had a chuckle with the copy of this piece: "Is there any future in Telkom’s business? Analysts and the new acting CEO suggest some ways the company can compete despite political pressure." Be warned: Analysts put forward some ideas on how to run the company.
- Finally the cover concludes with the "Investment Case" for Telkom. The lead of this article, Khulekani Dlamini of Afena Capital, says: “If you remove the social imperative, it would do well in the hands of a private operator. They could buy it for what it’s worth and sell or shut down the non performing assets.” The social imperative? Buy it for what it's worth? Shut down non-performing assets after taking a R5 billion bath?
Disclosure: I hold Telkom shares indirectly. I do not agree with Viljoen on Harmony Gold. I much prefer the Financial Mail to FinWeek.
Monday, August 9, 2010
Walter Schloss on Value Investing
Value investing legend Walter Schloss on Value Investing. Click the link below:
"Look for companies with no debt. I hate to lose money so I always keep that in mind. Look for companies trading at new lows. Management owns stock. The company has a history about it."
Link to Walter Schloss Video
Link to Walter Schloss Video
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