Purchased Goldman Sachs

Since 2008, Goldman has struggled to return to an acceptable ROE figure. Significantly reduced leverage and a poor economic environment are compressing profitability and returns. Operating income now stands at only 14%, far below historical levels in the low 20s. 

It's not all bad though, in 2008, when Goldman changed into a bank holding company, it gained a valuable source of liquidity in the Fed discount window. Also, with Goldman passing the stress test, the threat of a government mandated capital raise has decreased. In fact, Goldman was actually allowed to buyback more shares and increase the dividend.  

Will Goldman return to an appropriate level of profitability in the long run? I think so, when you try and regulate a market you usually have unintended consequences (higher spreads and pricing which should help compensate for the reduced leverage). If the diner can’t charge for ketchup they might just charge more for the hamburger.

That being said, if the current form of the Volker rule, which includes "key exemptions to allow banks to hedge risk and make markets for customers seeking to trade securities" was to change (as a reaction to JP Morgan's recent screw up) it would hit Goldman's future profitability far harder than their competitors. If you can't sell hamburgers at all, the diner has a bigger problem. 

Also, if we enter a period of prolonged economic contraction this investment will hardly be a winner. 

At 76% of tangible book (70% of stated) I feel the risk is priced in. But investors must realize that with any highly leveraged institution the potential of losing your entire investment is very possible.   

Goldman Sachs

Risks:

Prolonged economic contraction

Government regulation (Volker rule, Dodd Frank)

Inability to earn an appropriate return due to new capital requirements and reduced leverage

Opaque balance sheet 

Nick Leeson loss (system failure)

Further debt downgrades & capital raises 

Goldman Sachs P/B

Disclosure: Long GS

Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Mohnish Pabrai Bets Big

Mohnish Pabrai, one of my favourite investors, released his Q1 13F filing (it now seems to be released under Dalal Street in SEC filings). I was very curious about his BofA stake. In his 2011 Q4, 13F Mohnish reduced his BofA holdings by 70%, which seemed very strange to me. However, his Q1 filing showed that he purchased loads of BofA increasing his stake from 2.1m shares to 7.5m. His BofA stake is now a massive 22% of his US holdings. 

Mohnish manages about $600m, so his actual allocation is likely about half or around 11% of his total portfolio (including assets outside of the US) but BofA is now his number one US position.  

It's also extremely interesting to note that Mohnish appears to have clearly switched back to a very concentrated investment style. In 2010 in a Forbes interview Pabrai stated "The typical allocation now at Pabrai Funds is 5%... And once in a blue moon, we'll go up to 10%." 

Now, 3 US stocks are at 10% of his overall portfolio and he holds only 8 US stocks in total. Overall, I love the concentrated approach and I hope it works out well (for both of us). 

It's also interesting to note how Mohnish is trending to the 'riskier US banks' Bank of America and Citigroup while giving up a Buffett favourite, Wells Fargo. (My approach as well.)

Other Q1 Additions: 

Citigroup was significantly increased to 20% of his US holdings.

Goldman Sachs was increased to 19% of his US holdings. 

Q1 Reductions. 

Terex, Potash, Horsehead Holding, Capital Source and Pinnacle were reduced. 

Q1 Sells: 

Wells Fargo

Berkshire Hathaway

Directv 

Cresud

Brookfield Residential Properties

To summarize: Mohnish has bet big on US financials. 

Clearly BofA is out of favour, just check out the price to book over the past 10 years (including intangibles)

Bank of America

Disclosure: Long brk.b, bac, hhc, aapl, jnj

Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Globe Article on Ackman

On the CP rail proxy contest:

A successful vote next week, he says, means “we are not going to have to run another proxy contest” because directors will not want to risk a similar humiliation. Full article

Tom Gayner On Value Investing

Mason Hawkins Letter To Chesapeake

Aubrey K. McClendon
Chairman of the Board and Chief Executive Officer
Chesapeake Energy Corporation Board of Directors
c/o Jennifer M. Grigsby, Corporate Secretary
6100 North Western Avenue
Oklahoma City, Oklahoma 73118

Dear Aubrey and Board of Directors,

We urge the company to take action in three areas: debt targets, management
focus,  and strategic options.

Pic of the Day

Full Article on Smart Money

Shaw Industries' CEO Vance Bell on Housing Market and Building the Moat

long brk.a, hhc, bac Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Warren Buffett Infographic Source

I love infographics, its a great way to make sense of large data. Here is one on Warren Buffett that is fun to read. However with any infographic I'm always curious who the author is. These things can take serious time to create and are often intended to go viral. This one was created by trustablegold.com, a website that rates and compares  providers of vaulted gold (revenue is a commission model from the providers). The site naturally promotes the shiny metal as as an investment "Investing in gold can help to preserve value by reducing the risk of severe losses." (no comment there!) 

Leaving gold as an investment aside, its very confusing that they decided to include Warren Buffett's views on gold, specifically: "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

If I'm reading this right, the infographic they created to try and get you to buy gold is actually negative on gold. Seems like a contradictory sales approach but I guess whatever increases your web traffic works. 

See also: Is Gold An Investment? Einhorn vs Buffett 

Disclosure: Long brk.a

 Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Tilson on Panic Investing

Playing Catch Up In A Complex Ecosystem

Microsoft is throwing its weight around trying to catch up in the mobile market. However, the mobile market is far more challenging than prior Microsoft battles like the internet browser wars in the late 90s with Netscape. 

With Microsoft Internet Explorer they were providing access to universal content like HTML webpages on the internet. However, one of the best features of mobile products are Applications. Apps are generally operating system specific. It can be difficult to  create an app that runs for both Apple and Android (Much like you can't run a window's designed program on a mac). Therefore, for a late entrant to be competitive in the mobile market they have to create both a great product to access the ecosystem and artificially create a comparable ecosystem. 

The New York Times had a great article on the lengths Microsoft is going to create an app ecosystem. 

"It is even going so far as to finance the development of Windows Phone versions of well-known apps — something that app makers estimate would otherwise cost them anywhere from $60,000 to $600,000, depending on the complexity of the app. The tactic underscores the strong positions of Google and Apple, neither of which have to pay developers to make apps."

System	Apps
Apple	600,000
Andriod	400,000
Microsoft	70,000

Assuming Microsoft needs an additional 50,000 apps to create a competitive ecosystem and a cost of $100,000 to transfer an app. Microsoft is looking at a potential $5 billion in developer subsidies. 

Cnet recently wrote an article about Microsoft's new Window's Phone. Here is the author's conclusion:

"At the end of the day, I was impressed with the Lumia 900. I like the Windows Phone OS. And I definitely liked the $99 price tag from AT&T. But for someone like me who is already locked into Apple, it's simply not worth it to go through the struggle of re-establishing my life in Windows Phone for this device." 

Not only do you need a great ecosystem but for pre-existing users, switching ecosystems can be difficult and is one of the reasons that 94% of iPhone users plan on staying with Apple.

It's very difficult to catch up in a complex ecosystem. 

Disclosure: Long Apple

See also: Apple: Buying At A High
Aswath Damodaran: Selling Apple

Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Candor From Thorsten Heins

First off, there's no way to try and spin these results positively. Revenue is tanking and was down by 25% compared to the prior year. Inventories remain nearly double last year's level. These products are stale and depreciating daily, another impairment charge wouldn't surprise me. The new BBX phones aren't due until the second half of 2012. Financial results are going to get worse before/if they get better.

Heins' opening sentence in both the press release and conference call stressed that he had only been on the job for 10 weeks. Initially I thought this was the set up for another delusional conference call where management stressed the company's plans were working in the face of brutal financial results. However, I saw a CEO that talked honestly about his company's problems and seemed open to the drastic changes that are needed to ensure what's best for shareholders. 

Here are some of his quotes:

It is now very clear to me that substantial change is what RIM needs.

We plan to refocus on the Enterprise business and capitalize on our leading position in this segment. 

We were delayed to the bring-your-own-device movement and we saw a significant slowing down in our enterprise subscriber growth rate as a result. 

We believe that BlackBerry cannot succeed if we try to be everybody's darling and all things to all people.

(in reference to international markets): However, this success did not go unnoticed by our competitors, and there are now a number of handset vendors targeting this segment using price as their primary competitive tool. 

The question is what is the right business model for RIM to participate...? Is it our own hardware? Do we have to do everything ourselves? Do we license BlackBerry 10? ... Do we partner? Do we ODM? That is currently under investigation, and I will report back to you in due course in what the decision is that we're going for.

There's no question RIM has a very tough future ahead of it. The ecosystem is lacking, execution has been terrible and the company is betting heavily on the BBX operating system which is still probably half a year away (an eternity in the smartphone world). However, I'm impressed with Thorsten Heins' candor, focus on the enterprise market and putting all strategic options on the table. This is a step in the right direction, however it's a shame it took the company this long to wake up and smell the coffee. 

Disclosure: None

PS: The lower this stock falls the better the chance is that Microsoft will make a bid. They are desperate to grow their mobile share to critical mass, they have the cash and relative to Ballmer's last deal with Skype, the valuation is far more reasonable.

I'm not buying any shares because I still see RIM as a sinking ship (and very possibly a value trap) but at least they have a captain who acknowledges the problem. 

pic of the day

Q4 2011

disclosure: long aapl

Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

The Canadian Real Estate Bubble? Part 2

Ok, so far I've been wrong on my view of the Canadian residential real estate market.  My first article, the Canadian Real Estate Bubble? was back in March 2011. I also wrote back in October 2011 that the CMHC was a key player in inflating the bubble and likely to come under stress when prices fell. However, its March 2012 and prices (and debt) continue to rise. 

I want to address the most common argument against a bubble. 

"Mortgage service costs are affordable therefore housing prices can't be a bubble."

This is a fair argument but it assumes record low interest rates going forward. Also, debt per family is at an all time high, any increase in rates (or a recession) will send shock-waves through the real estate market. Eventually, house prices will return to a function of the region's income per family. 

To judge current prices, Analysts often use historical housing over the last 25 years. Although that seems like a fair amount of historical data it places the base year in the late 1980s which was the last time Canada had a real estate bubble. Obviously prices don't seem very expensive when you compare them to a prior bubble.

It becomes more difficult to find data as you go further back than 1980 but there was an article from the Toronto Star in 2008 that looked at Toronto's historical house price to income ratio. It's shocking to know how low real estate prices can go relative to incomes. Looking at 1979, housing prices were only at 1.11x price to household income. Of course interest rates were far higher at the time and a mortgage would have been difficult to pay but that's my point, interests rates and house prices eventually return to a normal level. Be greedy when others are fearful and fearful when others are greedy. 

(* denotes estimated data)

To update the data to 2012, Toronto's average price to family income ratio is 6.7x (Canada's is 4.9x, source: BMO special report January 2012.)  Can it go higher? Sure, Vancouver's ratio is 10x! But that's not the point. When making what is likely to be the single biggest investment decision in your life you should buy based on a reasonable long term value not what you can afford given ultra low mortgage rates.

I still think Francis Chou's advice is best for potential home owners:

"Based on ratios such as rent-to-house-price and disposable-income-to-house-price, Canadian house prices are out of line with historical standards. In addition, household debt as a percentage of disposable income is unprecedentedly high. This does not mean that Canadian real estate prices will decline soon, but it does indicate that valuations are stretched. We would be cautious in this environment. If there is a choice, it is better to rent rather than buy a house. However, if you are determined to buy a house, we would urge you to do so without borrowing too much money."

See also: George Athanassakos's article: Canada's housing bubble: This time is not different. 

Howard Hughes Corp on CNBC

Whitney Tilson talks up the bull case for HHC on CNBC.


Disclosure: Long HHC


Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Dollar Shave Club Ad

Ok, apparently this is a real company. The video is hilarious and extremely well done. Obviously there's some inspiration from the old spice ads. These viral videos are a huge advantage for companies as it saves them paying for a multi-million dollar ad campaign.

To be honest the $1 blade they offer is a simple twin blade design. The 6 blade design is $9 per month but the price is not the point. Just watch the video.

Sold GM

I sold my GM position recently. The stock is up about 20% since where I bought it in late 2011.

Here are my reasons:

Pensions: GM is attempting to 'de-risk' the pension plan by boosting its bond holdings. I understand matching assets to liabilities but if there is a bubble in government bonds this could cause plan assets to plummet. Theoretically discount rates would benefit but you have to have some serious faith in GM's investment team given the massive numbers involved.  Also, any miscalculation of benefits would be material given the $133b in planned benefit obligations.  

Lack of Action in Europe: I don't get the GM-Peugeot alliance. Maybe it's partially meant as a tool in union negotiations but from my view this isn't going to move the needle for either company, especially GM. Capacity needs to be taken out and wages lowered, similar to GM's bankruptcy in the US but I don't see this happening anytime soon.

Inferior Products: Their product line is still heavily dependent on gas guzzlers and rarely rank as high as other automakers in quality reports. 

Insiders Selling: There were 5 insider sales by officers disclosed this week, all were for 6 figures. This never instills confidence in me, regardless of reasons given by investor relations. 

Poor Industry: I knew this one in advance and felt I was more than compensated by the 6x earnings level. But let's face it, its a tough industry. 

I still think GM is likely undervalued but the size of the company's pension plan, my lack of faith in management, dislike for the economics of the auto industry and the higher stock price have caused me to move on. 

Disclosure: None

Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Solid Article on Berkshire and Net-Nets

This article from the 'Science of Hitting' sums up my thoughts on Berkshire and net-nets pretty well. Click here for the full article. But first, here are my thoughts.

I like net-nets but it can often be very frustrating waiting for them to hit intrinsic value. Sometimes (but not all the time!) net-nets are poor businesses and intrinsic value isn't growing (the effects of compounding are working against you). Fortunately, in today's environment Berkshire is selling below $80 per share.  Even if the price takes a while to catch up to intrinsic value, I can sleep well at night knowing the intrinsic value is increasing at a solid rate.

Time is the friend of the wonderful business...

Highlights from the article:

“As investors, we like asymmetric risk/reward; up 50%, down 8% [to 1.1x book, where Buffett can repurchase shares in size], I’ll buy that all day long. We have encountered periods where the stock has traded for whatever reason… there’s no obvious catalyst here, we’ll concede that for sure; but we’ve always been rewarded if we are just patient and here we think we’re going to be rewarded sooner rather than later.” (Whitney Tilson)

....

"One of the problems you have with net-nets is that you have only one side of it. You have downside protection. You don’t have the upside. I really try to look for ones where I can get both. And it’s few and far between but that’s what we try to do.” (Mohnish Pabrai)

Disclosure: Long (an obscene amount) of brk.b 

PS I know the 'Buffett Put' isn't concrete, he made that clear in the annual letter. That being said, I wouldn't want Buffett only to be able to buy just one stock in the event of a distressed market. 

Disclaimer: The content contained in this website represents only the opinions of its author(s). We, or clients we advise, may hold long or short positions in securities mentioned in the website. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision.

Cost Structure Thoughts: Seeking Alpha Vs Motley Fool

Just a random thought, but I really admire Seeking Alpha's cost structure over traditional content publishers like the Motley Fool. Their costs are significantly lower (usually free content from users) and you get a very deep database of obscure stocks where the traditional publishing model fails due to low reader interest and thus low revenue. 

Since Seeking Alpha allows nearly anybody to publish on its website, quality can be hit or miss but I feel that given reader demand, quantity is more important than quality. Seeking Alpha's platform approach leads to dramatically higher readership and has a slight network effect. Even former Motley Fool writer, Whitney Tilson decided to publish his short thesis on Netflix on Seeking Alpha. Not only that, but Netflix CEO Reed Hastings actually responded to Whitney on Seeking Alpha (that would have helped out readership numbers!) 

The Motley Fool does have premium services that Seeking Alpha does not, but premium stock services are a tough industry. You've got to really deliver to your readers to make it worth while and top quality analysts don't come cheap. Anyways, there's really no point to this article and I really enjoy both websites but I admire Seeking Alpha's cost structure more. 

Buying At A High

Warren Buffett looks at the company first and then compares it to the price, something most investors (including myself) rarely (but should) do. If it's a great company and its stock price is significantly below intrinsic value, he buys. He doesn't look at the stock chart, he doesn't go by technical analysis he just makes his decision regardless of past price movements.

I've always preferred looking at stocks trading at new 52 week lows. There is usually huge pessimism on the stock and often the industry is unfavoured. Possibly a great chance to be greedy when others are fearful. However, I recently bought one very popular company with massive analyst coverage and near an all time high. 

But first let me ask you a question:

Here is stock XYZ: Earnings per share has increased over 700% in five years, there is no debt, they develop product categories that never existed before and it trades for 12x forward earnings and less than 10x ex-cash. Would you buy? I did. 

What A Value Investor Does

I thought I would keep this meme going...

The 400% Man

Great article.

The 400% Man

Smart Money

By: Brett Arends 

On a fall day in 2010, half a dozen wealthy investors and portfolio managers converged on an office in midtown Manhattan. These were serious Wall Street moneymen; in aggregate, they handled more than a billion dollars. They had access to the most exclusive hedge funds and investment partnerships and often rubbed shoulders with the elite of New York, Greenwich and Palm Beach.

But on this day, they had turned out to meet an unknown college dropout from Utah -- and to find out how he was knocking them all into a cocked hat.

The unknown, Allan Mecham, had been posting mind-bogglingly high returns for a decade at a tiny private-investment fund called Arlington Value Management, and the Wall Streeters were considering jumping on board. For nearly two hours, they peppered him with questions. Where did he get his business background? I read a lot, he replied. Did he have an MBA? No. I dropped out of college. Did he have a clever computer model or algorithm? No, he replied. I don't use spreadsheets much. Could the group look at some of his investment analyses? I don't have any of those either, he said. It's all in my head. The investors were baffled. Well, could he at least tell them where he thought the stock market was headed? "I don't know," Mecham replied. 

Read More at Smart Money.com

Inside Buffett's Office

I always wanted to see this in person.

I went to Omaha for the annual meeting in 2006. The closest I got to Buffett's office was the parking lot. I took some pictures beside Warren's car and its 'thrifty' license plate. Thankfully, I did get to meet him later in the convention hall of the Qwest centre. He randomly stepped out from the curtains and everybody stepped back in awe but I took that as my chance and stepped forward introducing myself. His reply: "Always great to meet a shareholder". 

Nothing earth shattering in the video but worth a view if you are curious to see his office.

Bill Ackman: Rim Too Risky To Invest In

I don't want to doubt Prem Watsa who recently doubled his stake in RIM, but I have to side with Ackman's thoughts on RIM for now. 

“We spent some time looking the company, but we decided against it,” Ackman said in an interview after holding a public meeting in Toronto Monday on the CP Rail proxy battle. “We’re not really technology investors.

“We like businesses like the railroad business which aren’t going to go away,” he said. “As much as I like my BlackBerry, there is some risk it’s going to go away. And that’s a risk we don’t want to take with a billion and half dollars.”

Ackman added: “I feel very comfortable (the railroad) is going to be there under my feet, and everybody is going to need it.”

That’s one of the questions an investor should consider, he said. “Is this business going to be here in the next 50 years? If not, then you probably don’t want to invest it.”

Sorry for being lazy on posting recently. I have been looking at P&C insurers and trying to figure out natural gas pricing. I'm not a huge fan of long dated US bonds so I have trouble with the asset side of the insurers but they do look interesting overall. I'm reserving my comments on natural gas for now as I continue researching. I was taking a look at Chesapeake but I have concerns about their corporate governance. 

Confessions Of An Investment Blogger

I feel obligated to write something of value. Yesterday, HCV snuck into Vuru's top 21 investment blogs. We were 21st by the way :) 

I started this blog back in March with the aim of getting more connected to the value investment community. In that sense, HCV has been a big success. I now personally know a number of very intelligent investors who share my passion for value investing. I can bounce ideas off them and we can try and destroy eachother's investment thesis. For the record, barelkarsan.com was the reason I got really back into investing after leaving the industry for a while in 2009. Saj's concise daily articles combined with value investing lessons helped me refocus on value investing and reignite my passion. Thank you Saj.

Best Buy on CNBC

There are a lot of diverging opinions on BestBuy (and Radioshack for that matter) some see it as a big box store that is from a bygone era similar to record stores, others think the death of retail fears are overdone and the stock is a screaming buy. My thoughts haven't changed much from my tweet in June:

Even with Einhorn buying bestbuy, I am still *not convinced. The retail model is changing and historical numbers may be history. $BBY