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Buffett Loves WFC and USB

Warren Buffett tells shareholders that “I would love to buy all of US Bancorp or I would love to buy all of Wells Fargo, if we were allowed to do it.” The problem, he says, is that Berkshire Hathaway would have to become a bank holding company.  Berkshire already owns substantial stakes in the two banks. Buffett’s bullish statement came in response to a question on whether shareholders should get wiped out when the government steps in. Buffett again singled out Wells Fargo for particular praise, calling it a “fabulous” bank that “will be a lot better off in a couple of years than if none of this had happened.” Recalling that Wells shares fell below $9 earlier in the year, he said at that price, “If I had put all my net worth in one stock, that would be the stock.”

BRK still “AAA rated” in Buffett’s Mind

Warren Buffett tells shareholders today that Berkshire Hathaway is “still triple-A” in his mind, but admits he’s irritated the company has lost its top credit rating from Fitch and Moody’s.He doesn’t, however, think the downgrades will materially hurt the company. Buffett says no matter how Berkshire is rated, there “can be no stronger credit” for any other company.

Buffett: Intrinsic Value for Most Newspapers Is Zero

Warren Buffett says Berkshire Hathaway would not buy most of the newspapers in the United States “at any price.” He says the changing media environment now means newspapers “have the possibility of unending losses” and he does not “see anything on the horizon that causes that erosion to end.” Buffett says the days when a newspaper could have a monopoly in a large city and make a lot of money are over. But he promises Berkshire will not sell the Buffalo News, even though it had opportunities to do so in the past at higher prices than it would bring now: “On an economic basis you should sell this business.  I agree 100 percent but I am not going to do it.”  Buffett says the union at the Buffalo newspaper has been cooperating on building a model that will generate “a little bit of money” for Berkshire.” Berkshire also has a stake in The Washington Post Company that it bought in the 1970s.

Moats Rare and Eroding

In response to a question, Munger warned that businesses with truly sustainable competitive advantages are increasingly rare and noted, “Unfortunately, a lot of moats are filling up with sand, such as daily newspapers and network television stations.”

Berkshire Purchased Cheap Corporate Bonds

Warren Buffett revealed the company had “got a chance to buy some corporate bonds very, very cheaply a few months back.” He also says he bought some bonds for his own personal account. Buffett’s partner Charlie Munger added that some of the corporate bonds purchased by Berkshire are already up between 20 and 25 percent.

No Buybacks for Now

Warren Buffett says there are no plans for a buyback of Berkshire Hathaway stock right now, although he did not rule out the possibility in the future. He did, however, set a very high bar.  The stock price would have to be “demonstrably below” a conservative estimate of the company’s intrinsic value. That implies Buffett does not think the stock is clearly undervalued at its current level of $92,511 a share.  It’s down about 30 percent over the last twelve months. He also said that shareholders would be informed in advance if the company did decide to go ahead with a buyback. Buffett says he think many companies make a mistake when they buy back shares, by paying too much.  He pledged that Berkshire would never make that particular mistake, although it might err by not buying when the price is low.

Berkshire Will Not Be Spinning Off Any Subsidiaries

Warren Buffett promises that Berkshire Hathaway won’t be “spinning off any companies” in the future.He joked that anytime someone suggests the company could get a short-term gain from a spin-off, he throws them out of the office. “We’ve listened to presentation after presentation” over the years from bankers proposing various deals, and “there’s always a fee” involved. Buffett says it’s important the companies bought by Berkshire can trust they will remain with Berkshire.

Berkshire Succession Plan

The four candidates to potentially succeed Buffett as chief investment officer did not “cover themselves in glory” last year, failing to outperform the benchmark S&P 500 stock index.  But Buffett remains confident in their long-term track records. As Munger said, “they got creamed”. But he adds, “I did not either.  I am very tolerant in that respect… But their average over 10 years has been modestly to significantly better than average, and I would say that would be the case over the next 10 years.” None of the four, some Berkshire insiders and some outsiders, beat the S&P 500 last year. The three CEO candidates previously identified, but not revealed publicly, are all Berkshire insiders.

Buffett says there are still three internal candidates to take over his CEO role, including one who would step in immediately if he died suddenly. “If I drop dead tonight … the board knows who … and they would feel very good about that (person). Not too good I hope.”

Buffett also praised Ajit Jain, chief of insurance operations. We think Ajin is a top contender to replace Buffett.

Buffett told shareholders today that “it would be impossible” to replace Ajit Jain as the chief of Berkshire Hathaway’s insurance operations. Buffett says he wouldn’t give the same latitude on risk to any other executive. “Ajit is needed, and we won’t find a substitute for him”, Buffett emphasized.

Why won’t Buffett or Berkshire disclose the candidates’ names?  Buffett cities General Electric’s experience, when Jeff Immelt was named the next CEO and the other two candidates left the company.  “I don’t see any advantage in having some crown prince around.”

Preview of Q1 Results

 

Warren Buffett started during the meeting’s question-and-answer session with shareholders by giving them a preview of next Friday’s earnings report for the first quarter.

Buffett says operating earnings will be about $1.7 billion, after taxes.  That compares to around $1.9 billion last year, and works out to a decline of almost 11 percent. He partially attributes the drop to losses in Berkshire’s investing portfolio and to losses on credit default swaps.Book value fell about six percent during the period. Berkshire’s float has increased by about $2 billion due to a Swiss Re transaction.

Utility earnings are “reported down” a bit, partially due to a prior benefit from Berkshire’s now discarded deal with Constellation Energy Group.  Buffett says he was disappointed that deal didn’t work out. He expects Berkshire’s utility and insurance businesses will do “quite well” unless there is some “huge natural catastrophe.” Aside from insurance and utilities, all of Berkshire’s other businesses “are basically down.”

Buffett reports that Berkshire ended the first quarter with about $22.7 billion in cash, but it spent $3 billion the very next day on its Dow Chemical transaction. Buffett also notes that Berkshire’s credit default swaps have gotten worse since he wrote his annual letter to shareholders earlier this year.

IQ is Irrelevant

 

Buffett commented that “Picking bottoms isn’t our game. Pricing is our game. It’s not so difficult, whereas picking bottoms is impossible.To be a successful investor, you don’t need to understand higher math or law. It’s simple, but not easy. You do have to have an emotional stability that will take you through almost anything. If you have 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius. What’s most important is inner peace; you have to be able to think for yourself. It’s not a complicated game.”

 

Munger added: “There is so much that is false and nutty in modern investment practice. If you just reduce the nonsense, you’ll do well. If you think your IQ is 160 but it’s 150, you’re a disaster. It’s much better to have a 130 IQ and think it’s 120.”

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Friday Events

 

3:30 p.m. to 5 p.m.: Free panel discussion on Value Investing.

Location: Creighton University’s Harper Center, 620 N. 20th St.

 

Panelists are:

 

John Maginn, former chief investment officer of Mutual of Omaha

Charles Heider, president, of Charles Heider Co.

Bruce Greenwald, Columbia School of Business

Frank Reilly, Notre Dame University

Thomas Russo, Semper Vic Partners

James Crichton, Scout Capital Management

Ryan Sailer, Union Investment Management Group

Mark Wynegar, First National Bank of Omaha.

 

6 p.m. to 10 p.m.: Shareholder cocktail reception at Borsheims in Regency Court.

 

8:30 p.m. to 10 p.m.: Free ice cream cone to those presenting credentials at Dairy Queen, 404 N. 114th St. Authors of books on Warren Buffett and Charlie Munger will be on hand.

 

Saturday Events

 

7 a.m. – Doors open at the Qwest Center in downtown Omaha.

 

8:30 a.m. – Movie begins.

 

9:30 a.m. to 3 p.m. – Question-and-answer session with Warren Buffett and Charlie Munger. Questions had to be submitted in advance. Lunch break at 12:45 p.m.

3:15 p.m. to 3:30 p.m. – Shareholder meeting.

9 a.m. to 4 p.m.: Borsheims Regency Court brunch at 9 a.m. Entertainment will include two-time U.S. chess champion Patrick Wolff, playing blindfolded against all comers; magician Norman Beck of Dallas; and top bridge players Bob Hamman and Sharon Osberg.

 

3:15 p.m. to 3:30 p.m.: International Meet & Greet.

 

5:30 p.m. to 8:00 p.m.: Warren’s Western Cookout at Nebraska Furniture Mart.

 

7:30 pm to 9:00 p.m.: Peter Buffett concert and conversation at the Rose Theater.

 

Sunday Events

 

 

9:30 a.m. to 4:00 p.m.: Borsheims shopping day.

 

1 p.m. to 10 p.m. – Shareholders evening at Gorat’s Steak House. Reservations required.

 

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Yesterday we wrote about the 1989 Fortune article titled “The New Warren Buffetts”, which identified the best young investors at the time. The article included the names of what seemed to be unknown and obscured investors at the time.  However, today they are among the best investors around. Investors highlighted in the article included value investing luminary Seth Klarman, hedge fund manager Eddie Lampert, and TV personality Jim Cramer.

 

Today, we identify the most promising young investors (under 45). This new generation of investors never had a chance to personally meet or study under Ben Graham, but some have been lucky to work with some of Graham’s former students. In other words, the investors we highlight today may be considered Graham’s grandchildren, but they are not necessarily dogmatic Grahamites. Some of them may not even see themselves as value investors, but they do follow two fundamental principles of value investing:

 

1)     Stocks are not just moving tickers; they are businesses whose fundamentals have an impact in long-term stock performance.

2)     Great investments are those purchased at bargain prices relative to their true worth.

 

This group is smart and confident enough to ignore short-term market fluctuations for the sake of long-term return. A lot of them already enjoy great success, but for one reason or another they may not be well-known outside the investing circles. Some will fail. But the odds are that, just as those highlighted in the original 1989 Fortune article,  a few will go on to investing fame, and most likely lead their clients to great fortunes. Our picks are:

 

 

David Einhorn, 39, Greenlight Capital

 

Einhorn, a soft-spoken poker guru, is President of Greenlight Capital, a “long-short value-oriented hedge fund”, which he began with $1 million in 1996. Greenlight has historically generated greater than 25% annualized net return for partners and investors. Einhorn is also the Chairman of Greenlight Capital RE, Ltd, a Cayman Islands-based reinsurance company and one of its major shareholders.

 

He has been a critic of investment-banking practices, saying they are incentivized to maximize employee compensation. He cites the statistic that investment banks pay out 50 percent of revenues as compensation, and higher leverage means more revenues, making this model inherently risky.

 

In May 2002, Einhorn made a speech about a mid-cap financial company called Allied Capital, and recommended shorting it. The stock opened down 20% the next day. Starting July 2007, Einhorn became a short seller in Lehman stock. He believed that Lehman was under-capitalized, and had massive exposures to CDOs that were not written down properly. He also claimed that they used dubious accounting practices in their financial filings.

 

In May 2008, Lehman CFO Callan had a private call with Einhorn and his analysts to give Callan a chance to explain discrepancies Einhorn had uncovered between the firm’s latest financial filing and what had been discussed during its conference call about that filing. Ms. Callan is said to have fumbled some of her responses to questions on Lehman’s asset valuations. When Einhorn went public with the conversation, the declining Lehman share price took a further knock and Callan was fired a few weeks later. Lehman went bankrupt in September 2008.

Einhorn is a graduate of Cornell University, where he graduated summa cum laude with a BA in Government. He currently serves on the board of the Michael J. Fox Foundation.

 

Paul D. Sonkin, 39, Hummingbird Value Funds

 

Paul D. Sonkin has served as the Chief Investment Officer to Hummingbird Value Fund, L.P., a Delaware limited partnership, since its inception in December 1999. The fund has achieved a 17% annual return since inception. Mr. Sonkin also serves as an adjunct professor at Columbia University Graduate School of Business, where he teaches courses on securities analysis and value investing. From May 1998 to May 1999, Mr. Sonkin was a senior analyst at First Manhattan & Co., a firm that specializes in mid and large cap value investing. From May 1995 to May 1998 Mr. Sonkin was an analyst and portfolio manager at Royce & Associates, which practices small and micro cap value investing.

 

Mr. Sonkin was the youngest investor profiled in the book “Value Investing: from Graham to Buffett and Beyond” written by his former professor at Columbia Business School Brunce Greenwald.

 

According to Greenwald, Paul Sonkin isn’t going to impress anyone at cocktail parties by discussing the companies he owns. He would probably impress with his returns, however.

 

Sonkin finds value in small-caps and micro-caps: companies so small, that value can often be found for one of several reasons:

1) Many funds can’t own them
2) Fewer analysts following the company

Sonkin often indicates that he likes small companies because they are easier to understand. Their business models are far simpler, and thus value can be found without having to understand several lines of business or complex financial statements.

 

Whitney Tilson, 42, T2 Capital Partners

 

Whitney Tilson is the founder and Managing Partner of T2 Partners LLC, a $100 million hedge fund based in New York City. Mr. Tilson was one of five investors included in SmartMoney’s Power 30, was named by Institutional Investor as one of 20 Rising Stars. T2 Partners has achieved an annual return of 8.6% since inception, compared to -1.4% for the S&P500 and 1.7% for the Dow. Mr. Tilson received an MBA with High Distinction from the Harvard Business School, where he was elected a Baker Scholar (top 5% of class), and graduated magna cum laude from Harvard College, with a bachelor’s degree in Government.

 

Prior to launching his investment career in 1999, Mr. Tilson spent five years working with Harvard Business School Professor Michael E. Porter studying the competitiveness of inner cities and inner-city-based companies nationwide. He and Professor Porter founded the Initiative for a Competitive Inner City, of which Mr. Tilson was Executive Director. Mr. Tilson also led the effort to create ICV Partners, a national for-profit private equity fund focused on minority-owned and inner-city businesses that has raised nearly $500 million.Before business school, Mr. Tilson was a founding member of Teach for America, a national teacher corps.

 

Mr. Tilson is also the co-founder, Chairman and co-Editor-in-Chief of Value Investor Insight an investment newsletter, and is the co-founder and Chairman of the Value Investing Congress a biannual investment conference.

 

 

Karen Finerman, 43, Metropolitan Capital Advisors

 

In 1992, while still in her late 20s, Karen Finerman co-founded hedge fund outfit Metropolitan Capital Advisors. Before launching her hedge fund, she was a lead research analyst for the risk arbitrage department at Donaldson, Lufkin & Jenrette, and before that a trader at First City Capital, a risk arbitrage fund for the Belzberg family.

 

Metropolitan Capital Advisors is a special-situations, long-short hedge fund which Ms. Finerman assembled with her partner Jeffrey Schwarz. The fund, currently has $400 million in assets and has produced 14% percent annualized returns since its 1992 inception.

Ms. Finerman received a B.S. in Economics, from the University of Pennsylvania’s Wharton School in 1987, with a concentration in Finance. She is the Chairwoman of the Development Committee of the Michael J. Fox Foundation for Parkinson’s Research and serves on its board. She is also a Trustee of the Montefiore Medical Center in the Bronx, N.Y. where she serves on their Investment Committee.

 

Curtis Jensen, 36, Third Avenue Funds

 

Alongside Martin Whitman, Curtis Jensen is Co-Chief Investment Officer of Third Avenue Management. He also manages the Third Avenue Small-Cap Value Fund and several sub-advised portfolios. Additionally, Mr. Jensen is Co-Manager of Third Avenue Variable Series Trust.

 

Mr. Jensen received an M.B.A. from the Yale School of Management, where he studied under Third Avenue Management’s founder, Martin Whitman. He joined Third Avenue Management in 1995. Previously, Mr. Jensen held various corporate finance positions with Manufacturers Hanover Trust Company and Enright & Company, a private investment banking firm.

 

Jensen’s work at Third Avenue Management takes on a number of roles that have grown as the company has become a major Wall Street investment firm. “The first and probably biggest piece of it is working as an analyst,” he often says. In an interview with the Yale School of management, Mr. Jensen outlined his responsibilities at Third Avenue:

 

 

“Whether it’s property-casualty reinsurance, semiconductors, oil and gas, we need to figure out the businesses we’re invested in, or looking to invest in. The second piece would be as a portfolio manager. I manage one of our funds here. So that’s taking those ideas and constructing a portfolio out of the ideas, and managing that portfolio on a day-to-day basis. For us, we tend to be very long-term oriented in our investing. There is no furious buying and selling of securities here”

 

 

Since its inception, Third Avenue Management’s returns have been among the highest on Wall Street. The six-year old International Value Fund has earned more than 20% per year, while the flagship Value Fund has averaged more than 16% returns since 1990. Jensen manages the firm’s Third Avenue Small Cap Value Fund, which has consistently outperformed the S&P 500, delivering annualized returns over five years of just over 19% and about 12% per year since the fund was founded in 1997.

 

 

Mr. Jensen currently serves on the Board of Opportunities for a Better Tomorrow, a nonprofit organization, which provides academic support, job training and life skills primarily to disadvantaged and at-risk youth.

 

Thomas S. Gayner, 45, Markel Corporation

 

Tom Gayner is the Executive Vice President and Chief Investment Officer Of Markel Corp and President, Markel Gayner Asset Management, Inc., the investment subsidiary Of Markel Corp since December of 1990. The asset under management is about $2 billion. Over the last 10 years, Mr. Gayner has averaged an annualized return of 14.3%.

 

Since 1990, Gayner has served as president of Markel Gayner Asset Management; he also served as a director of Markel Corporation from 1998 to 2003. Previously he had been a certified public accountant at PricewaterhouseCoopers and a vice president of Davenport & Company of Virginia.

 

As the CIO of Markel Corp, Tom Gayner is certainly a value investor. He thinks stock is part of a business and the business is worth what the present value of the future cash flows are. He often says that his portfolio operates with a Margin of Safety and that he has also relatively concentrated portfolio. As Buffett, he believes that he can earn the best returns by concentrating his focus and portfolio in promising areas where he has the best understanding and knowledge.

 

Gayner serves on the Board of Directors of The Davis Funds in New York City and First Market Bank and Colfax Corporation, both in Richmond, VA.

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I recently came across a 1989 Fortune Magazine article titled “Are these the New Warren Buffetts” which highlighted some of the best young investors at the time.  The article highlights what seemed to be obscure investors at the time, some of who are well established names today. The list includes Seth Klarman (Baupost Group), Glenn Greenberg and Jason Shapiro (Chieftain Capital), Eddie Lampert (ESL Investments), Jim Cramer (CNBC), among others.

 

The article demonstrates the importance of developing a reputation for brains, ethics, and great returns during the early stage of one’s career. Equally important, it shows that the best investors are those who develop a consistent and conservative investment strategy and resist the temptation to deviate from it over the long haul.

 

The investors highlighted in the 1989 article are now 20 years older, so tomorrow we will be posting our version of “The New Warren Buffetts”, where we will highlight the best young investors currently around.
 
 

 

The original 1989 article is included below.

 

 

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ARE THESE THE NEW WARREN BUFFETTS?

The dozen young investment managers you’ll meet here are brainy, ethical, and good at making money grow consistently.


By Brett Duval Fromson REPORTER ASSOCIATE Susan E. Kuhn

October 30, 1989

 

(FORTUNE Magazine) – Wouldn’t you like to become partners with someone who would double your money every three to four years ad infinitum? To put it another way, wouldn’t you like to invest with the next Warren Buffett? Riches come to investors who, early in their lives, find great money managers. Buffett is certifiably one of the greatest. His early clients are now worth tens of millions of dollars (see box). He achieved that by compounding money consistently and reliably at about 25% per annum. The young investors you will meet here show signs of comparable talent. But even if they can return only 20% a year — most have done at least that well so far — $10,000 invested with them today would be worth $5.9 million in the year 2025. What reveals their potential? ; Strong investment performance, of course. But that is not conclusive, especially among young managers who generally lack a ten-year record. More important are certain character traits. Buffett himself starts with ”high-grade ethics. The investment manager must put the client first in everything he does.” At the very least, the manager should have his net worth invested alongside that of his clients to avoid potential conflicts of interest. Those profiled here have put the bulk of their assets with their customers’.

Buffett says he would invest only with someone who handled his mother’s money too (as he did). Brains help, but above a certain level they are not the salient distinction among investment managers. Says Buffett: ”You don’t need a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” The size of the investor’s brain is less important than his ability to detach the brain from the emotions. ”Rationality is essential when others are making decisions based on short-term greed or fear,” says Buffett. ”That is when the money is made.” More often than not, the best money managers, like Buffett, are ”value investors,” intellectual descendants of the late Benjamin Graham. He emphasized buying securities of companies selling for less than their true worth.

The dozen young managers presented here are Graham’s grandchildren, in a sense, but they are not necessarily dogmatic Grahamites. A few dredge for average companies at rock-bottom prices — Graham’s specialty. Others follow Buffett’s approach and buy great companies at reasonable prices to hold for a long time. Two practice arbitrage, buying stock in companies about to be taken over or restructured in publicly announced deals. One prospers by selling overvalued companies short. Most do some of each, especially in a market where value is increasingly hard to find. Surveying these relative rookies, a reasonable man should ask, ”How will they do in a bear market?” Probably better than other money managers because they comprehend the basic rules of investing: No. 1, Don’t lose money. No. 2, Don’t forget the first rule. Each searches intently for discrepancies between a security’s price and its worth, whether measured by asset value, earnings, cash flow, or dividend yield. If they are wrong about a security — and everyone is sometimes — the difference between price and value provides a margin of safety. The best way to spot a potentially outstanding investment manager is to ask another one. Each of the 12 presented below was named by his or her peers as someone they would entrust money to. They tend to handle money for the rich and the famous; each has at least one investor whom any reader of Fortune would recognize — if the clients allowed their names in print. With the ) exception of the two who manage mutual funds, the required minimum ranges from $250,000 to $5 million. Most of these promising players will succeed. Some will fail. But the odds are that at least a few will go on to investing fame and their clients to fortunes. In order of how long they’ve been managing money on their own:

The Bargain Hunter It hardly seems possible that Michael Price is only 38. He has been picking stocks at Mutual Shares, the estimable no-load mutual fund based in Short Hills, New Jersey, for 15 years. He came to investing immediately after graduating from the University of Oklahoma. ”I was a mediocre student,” he says. Perhaps, but Price gets nothing but A’s for his work on Wall Street. If you had invested $10,000 with Mutual Shares ten years ago, you’d have $62,289 today. Before taxes but after all fees and expenses, that works out to a 20% average annual compound rate of growth. ”I like cheap stocks,” says Price. ”I’m basically a guy who looks at a company’s balance sheet and asks, ‘What is the company worth? Give me a number.’ If the answer is, ‘Substantially more than the price,’ then I get interested.” Price usually holds about 350 securities in his $5.7 billion portfolio. He spreads his holdings because many of his picks are small-capitalization issues whose prices would surge or collapse if Price bought or sold heavily. His largest holding, however, is TIME WARNER, parent of FORTUNE, which he bought at an average of $60 a share starting in November 1986. Time was languishing because the government had nailed Ivan Boesky and scared away many a speculator investing on takeover rumors. Price saw a good media business at a cheap price and accumulated 1.9 million shares. Time Warner traded recently at around $135.

A Freudian Grahamite Randy Updyke remains virtually unknown, even to his peers. Perhaps that’s because he is a solitary soul who rarely talks to other money managers. ”Investing is about survival,” he says. ”I stay away from the herd.” And how. When the bright lights of Philadelphia get too distracting to him, the 46-year-old Updyke removes to his ranch in Idaho or his plantation in South Carolina. Solitude seems to serve him well. If $100,000 had been invested in his partnership ten years ago, it would be worth about $850,000 today. That works out to a 24% average annual compound rate of return. Updyke is a decidedly unconventional investor: He combines the teachings of Benjamin Graham with those of Sigmund Freud. ”I like to buy things for a lot less than I think they are worth,” he says. ”But to me the psychology and mood of the market are more important than anything.” Updyke uses a variety of gauges to measure its state of mind — for instance, whether corporate insiders are buying or selling. If he thinks the market or a sector of the market is headed south, he unloads stocks en masse (some 60% of his portfolio was in cash before the October 1987 crash). ”I don’t care how good the fundamentals are. Very few people make money in down markets,” Updyke says. What does he think of the market’s prospects? Recently, 32% of the $225 million currently under his management was in cash.

The Passionate and the Skeptical Warren Buffett would be proud of the two young men who run Chieftain Capital Management. They scout for a few excellent companies selling for reasonable prices and loose their arrows only at robust businesses with top-notch management. This style has served them and their small tribe of investors well over the past 5 1/2 years. If you had invested $100,000 with them early in 1984, it would be worth $409,000 today. That’s a 28% average annual compound rate of growth. Glenn Greenberg, 42, and John Shapiro, 36, work as a team, much as Buffett does with his partner, Charles Munger. Greenberg, son of Hall of Fame slugger Hank, is usually passionate one way or the other about a stock. Shapiro is more the detached skeptic. Their stock selections are joint decisions. Says Greenberg: ”That way we avoid blaming each other for our losers. We try to be competitive with the rest of the world, not with each other.” This duo likes to be wedded to their stocks for years. That is why they check them out thoroughly before investing and then put as much as 20% of their money into a single investment. Their biggest position is in BURLINGTON RESOURCES, an oil and gas producer spun off by the Burlington Northern railroad in late 1988. They bought in at an average price of $27. It traded recently at $47.

Seeking Subtle Signs of Value at 32, Seth Klarman is already a legend among colleagues and competitors. ”Seth is as good as they come,” says his former boss, Michael Price of Mutual Shares. Certainly no one in his generation has a better investment record. From his offices at the Baupost Group just off Harvard Square, he invests for a small group of affluent families who snagged him to run their money soon after he graduated from Harvard business school in 1982. A $100,000 stake entrusted to Klarman at the birth of Baupost today is worth on average $500,000 — a 28% average annual compound rate of growth. Klarman’s exceptionally quick and subtle mind allows him to see value in many different guises. With stocks high, he looks for ”market-insensitive opportunities.” By that he means companies whose financial performance depends on bankruptcies, announced mergers, liquidations, restructurings, or spinoffs — corporate events largely independent of the vagaries of the financial markets. For example, he bought the senior bonds of the ailing discount chain PAY’N SAVE for 62 cents on the dollar. They yield 23% to maturity in 1996 and are backed by assets far in excess of bondholders’ claims. Klarman also has clear ideas about what isn’t value. A vocal critic of junk-bond financing, he says he would never buy a new issue of a highly leveraged company. Klarman’s insistence on protection from market fluctuations served his clients well in the October 1987 crash. For the fourth quarter of 1987 his portfolios broke even, and for the year as a whole they earned an average of 20%. Says Klarman: ”I focus on what could go wrong. Before buying, we always ask ourselves, ‘What would we pay to own this company forever?’ ”

A Scientist on Wall Street At Fidelity Investments, where he runs the Capital Appreciation Fund, they hail Thomas Sweeney, 33, as the second coming of Peter Lynch, legendary manager of Fidelity’s Magellan Fund. This shy workaholic lives across the street from his downtown Boston office to put in 80 hours a week more conveniently. In almost three years of steering Capital Appreciation, Sweeney has sailed right by Lynch’s more celebrated ship. That is no mean feat, even if Sweeney’s $2.4 billion fund is one-fifth the size of Magellan. Anyone who invested with him 2 1/2 years ago has seen the stake double. Average annual compound rate of return: 28%. Sweeney picks stocks like a scientist. Says he: ”Where I came from — Wappingers Falls, New York — business was looked down on. Smart people were supposed to go into the sciences.” He almost became a geneticist, and calls his approach ”pattern recognition,” after a discipline geneticists use to predict behavior under specific conditions. His favorite pattern? ”People always panic,” he says. ”If you study this phenomenon over time, you see that eight times out of ten you make money by buying into a panic.” Sweeney was eyeing Monsanto in early 1988, but the price, about $86, was too high for him. In September a federal court ordered the company to pay $8.75 million to a woman hurt by a Copper-7 intrauterine contraceptive device manufactured by a subsidiary. The news prompted a wave of selling by those who failed to recognize that the company was fully insured. Sweeney bought 940,000 shares at an average cost of $77. He sold in 1989 at $110 a share for a 65% annual rate of return. He has recently loaded up on electric utilities, especially those with extra generating capacity and high- powered cash flow that are near regions lacking adequate sources of energy. One of his favorites is DQE INC., formerly Duquesne Light Co.

Turning Value Upside Down You have to marvel at shortseller Jim Chanos. After all, he makes money on a stock only when it goes down — and the Dow has gone up 250% since the bull market began in August 1982. Even more amazing, the Milwaukee-born Yale graduate has kept his sense of humor. ”I’m a great market timer,” says Chanos, 31. ”I wrote my first short recommendation on August 17, 1982.” Pointing to a combat helmet on a shelf in his Manhattan office, he adds, ”On really bad days, I put it on and hide under my desk.” He is too modest. If you had invested $100,000 with Kynikos (cynic in Greek) Associates back in October 1985 when it began, you’d have $173,119, an annual compound rate of return of 15.7%. That may not sound so hot until you understand that people who invest with Chanos think of his services as insurance against a bear market. Says Chanos: ”The difference between my policy and Aetna’s is that their clients pay for the insurance and my clients get money from their insurance.” As long as he earns more than the riskless rate of return on T-bills, his clients are satisfied. Chanos is in truth a perverse kind of value investor. Using the same techniques as the others, he looks for overvalued stocks. He stays mainly in large-capitalization issues. That way there is more liquidity and thus less chance of a short squeeze, which would force him to liquidate his position because he could no longer borrow shares from brokers. Last winter Chanos made a big bet against HARCOURT BRACE JOVANOVICH, the troubled publishing company that was trying to sell its Sea World amusement parks to avoid drowning in debt. Chanos figured HBJ wouldn’t get as much as management hoped to. Lo and behold, when it finally sold the parks to Anheuser-Busch in September, the price was some $400 million less than most analysts anticipated, and HBJ shares tumbled. Chanos sees no reason to take his profit yet. Says he: ”We think the common is worth zero.”

Mr. and Mrs. Aggressive In a windowless lower Manhattan office, a young married couple with matching desks furiously buy and sell stocks. ”Sell at three-quarters,” she says to a broker at the other end of her line. ”Terrific. I want to participate,” he says to his broker. Karen and Jim Cramer, 31 and 34, are the quintessential Eighties couple, equal partners in work and at home. So far, the Mr. and Mrs. have succeeded in both venues. They recently celebrated 12 months of excellent financial performance — and their first wedding anniversary. Their investors are toasting both. Someone who placed $100,000 with them in April 1987 would now have $165,000 — an annual compound rate of return of 23%. The Cramers divide the labor. He generates most of the investment ideas; she handles the trades, using techniques she learned at the feet of master trader Michael Steinhardt, head of Steinhardt Partners. Their strategy is nothing if not aggressive. They place about 50% of their $19 million portfolio in stocks chosen with an eye to long-term value. A current favorite is WILLIAMS COS., a natural-gas pipeline and telecommunications company. The Cramers bought 65,000 shares at an average price of $39. It traded recently for $42 a share. They commit the other half to intraday trading. ”Our goal is to make money every day. That is why we trade,” says he. ”I never want to write a letter to our investors saying that we didn’t participate this quarter because we think the market’s too high. That’s none of our business.”

Pairing Value with Arbitrage Two years ago, at 25, Edward Lampert left the safety of Goldman Sachs to go out on his own. He had a bright future in arbitrage there, but after meeting dealmaker Richard Rainwater, a Goldman alum, on Nantucket, he decided he wanted more than becoming a Goldman arb. Says he: ”I wanted to set up my own business to invest in undervalued securities as well as arbitrage situations.” Rainwater, maybe seeing a bit of himself in the young man, helped him get started in April 1988. ESL Partners of Dallas started with $29 million under management. Lampert’s strategy gives him enormous flexibility. Says he: ”Arbitrage helps our value investing. If we can earn 20% to 25% annualized returns in arbitrage, then for the long term we can buy only stocks that we think will earn comparable rates of return. Conversely, if deal stocks get overpriced, we will begin investing in companies with good long-term prospects at low prices.” Like Buffett, he doesn’t talk about his current holdings in case he decides to buy more. His results, however, are eloquent. Had $100,000 been placed with Lampert a year ago April, it would be worth $165,000 today. That’s a plump 44% average annual rate of return.

Mr. Preservation of Capital This teddy bear of an investor is living his boyhood dream. As a boy in Glencoe, Illinois, John Constable, 33, took Warren Buffett as his hero. ”It amazed me that by simply thinking and being careful you could make money in stocks,” he says. Constable followed his dream to Harvard, where he took night-school extension courses and worked all-day as a block trader for the university’s endowment fund to pay tuition. He went on to apprentice at some of the most successful value-oriented investment shops, including three years at Ruane Cunniff & Co., managers of the redoubtable Sequoia Fund. Constable went out on his own in August 1988. He has $28 million under management. As befits a value player in a pricey market, Constable is cautious. He owns a few stocks involved in publicly announced deals where he can make, say, 10% in 90 days if the deal goes through. But he prefers to buy ”wonderful companies” like NESTLE for the longer haul. He owns 160,000 shares, bought at an average cost of $24. Why? ”It was one of the world’s superb food companies selling at 9.5 times earnings,” he says. Nestle traded recently at $25 a share. In large part because Constable has kept 30% of the money entrusted to him in T-bills, his limited partners are only 16% richer than a year ago. That’s not quite up to his 20%-a-year target, but he’s prepared to wait patiently for the day when prices come down and he can accumulate an entire portfolio of Nestles. His clients aren’t restless. ”First and foremost, my investors want preservation of their capital,” he says.

A Formula for Deals Like his friend Eddie Lampert, Richard Perry, 34, is a veteran of Goldman Sachs’s arbitrage unit. He too chose to leave Goldman because of its size; there are 132 partners. ”I wanted something smaller, where a few partners could work closely together,” he says. After asking the advice of his uncle, James Cayne, president of Bear Stearns, he established Perry Partners in September 1988 with $50 million to invest in publicly announced risk arbitrage deals, including mergers, tender offers, and bankruptcies. His investment approach? E(V) = P(UPx) + (((1-P) (DPx))) / (1 + COF). That simply means he values a deal by calculating the odds that it will go through, how long it will take, and what the investment is worth with and without the deal. Why all the effort to quantify? Says Perry: ”There are no lay-ups in the arbitrage business. This helps us maintain clear, high standards for buying a deal.” It seems subjective, but so far it seems to work: $100,000 invested with Perry ten months ago is worth $120,000 today, an annual compound return of 24%. Like his confreres, Perry is having a devil of a time finding great value in the stock market. One of the few good deals he found recently was NWA, the parent of Northwest Airlines, which became the object of a takeover attack this past spring. In June he bought 82,000 shares at $115 a share. Using his special equation, he estimated an expected annualized return of 27%. When he sold in July at $121, his return was 50%. Today, however, deals are pricier, and he does not anticipate such quick profits. He is buying one deal for every five he looks at. Says Perry: ”To be consistent over a long time, you have to know when to say no.” Mr. Buffett would approve.

 

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