Go to 2:17:22 mark
Attorney General Eric Holder testimony at a Justice Department oversight hearing
Posted on 07 March 2013.
Go to 2:17:22 mark
Attorney General Eric Holder testimony at a Justice Department oversight hearing
Posted on 12 January 2013.
PART 1 OF 3:
PART 2 OF 3:
PART 3 OF 3
PART 1 OF 2:
PART 2 OF 2:
Posted on 21 November 2012.
Compilation of 34,189 Pages Of Unsealed Or Otherwise Newly Released Documents (11/19-11/20 – 11/23-11/20: MBIA v Countrywide Home Loans Motion For Summary Judgement On Breach of Insurance Agreements):
THESE ARE HUGE FILES CONVERTED INTO SEARCHABLE FORM AND COMPILED INTO A FIVE DOCUMENTS. THE FILINGS RANGE FROM NOV 19-23 AND ARE PROVIDED BELOW. HAPPY READING!
Part 1: 185 MB, 5582 PAGES
Part 2: 286 MB, 10,980 PAGES
(UPDATED NOV 21, 2012)
Part 3: 76 MB, 1993 PAGES
(UPDATED NOV 23, 2012)
Part 4: 130.9 MB, 3655 PAGES
(UPDATED NOV 25, 2012)
Part 5: ~334.5 MB, 11,979 PAGES
Brian Moynihan Deposition
Brian Moynihan Deposition
Posted on 15 October 2012.
Posted on 17 August 2012.
Posted on 02 August 2012.
Global Investment Conference – Mario Draghi, President of the European Central Bank
Mario Draghi, President of the European Central Bank, speaking at the Global Investment Conference at the British Business Embassy on 26th July 2012.
Posted on 01 August 2012.
Posted on 28 July 2012.
Posted on 25 July 2012.
Posted on 15 July 2012.
Posted on 06 July 2012.
Posted on 12 June 2012.
-Cases Provided in Court on June 7, 2012 (ABN AMRO V DINALLO/MBIA)
CASES PROVIDED IN COURT ON JUNE 7, 2012
MBIA Trial Docs1
MBIA Trial Docs2
Posted on 12 June 2012.
MBIA Article 78 Transcripts (Full LIST in order)
Thank Alison Frankel (Thomson Reuters News and Insight)
Posted on 08 June 2012.
This year’s guest speaker will be Salman Khan ’98, founder of the Khan Academy
Posted on 02 September 2011.
Posted on 03 April 2011.
(Kudlow is an idiot and would edit him out if I had time) James Grant
Posted on 31 March 2011.
Posted on 27 January 2011.
Posted on 10 November 2010.
Monday, November 8, 2010
There’s a small airline in Florida planning a $300 million initial public offering.
In Luxembourg, a beverage company is eyeing its own IPO, worth perhaps 1 billion euros.
A German packaging firm already has issued $341 million in bonds to repay debt owed to its owner.
The firm behind each of these maneuverings? L.A.’s own Oaktree Capital Management.
While most local investment firms have at best held steady in recent years, Oaktree has tripled its size because of an aggressive strategy of buying distressed debt. Now it’s reaping the rewards.
With the markets stronger and IPOs coming back, the firm is cashing out of its most successful investments and, in the process, becoming one of the country’s most prominent private equity firms.
“They had the guts and the foresight to be opportunistic in this once-in-several-decades opportunity to acquire these assets at these incredibly low prices,” said Jim Freedman, a veteran L.A. investment banker. “It’s a brilliant strategy.”
In the tight lending environment after the financial crisis two years ago, corporate defaults skyrocketed. That meant distressed debt investors had a wealth of opportunities – if they had the money and the nerve to buy.
Oaktree’s strategy has involved targeting companies in or on the verge of bankruptcy and buying distressed debt on the secondary market, then taking control of a company by converting its stakes into equity – a so-called “loan-to-own” strategy.
Oaktree was one of the first and most prominent firms to take advantage of the opportunities, raising nearly $11 billion in the midst of the financial crisis for what was by far the largest distressed investment fund in the firm’s history.
“We did a lot of investing in ’08 and early ’09,” said Oaktree co-founder and chairman Howard Marks, who the Business Journal ranked in May as the 34th Wealthiest Angeleno with an estimated net worth of $920 million.
“We’re at a new level. We’ve made an order of magnitude change that we’re unlikely to give up fully,” he added.
Oaktree was quick to recognize the historic – but fleeting – opportunity when the markets soured.
Consider its acquisition of Pierre Foods, viewed by some as one of the more opportunistic investments in recent history.
The Cincinnati-based meat producer had been acquired in 2004 by Madison Dearborn Partners, a Chicago private equity firm, in a $420 million buyout. But the heavy debt load left Pierre unable to cope when the prices of raw materials rose, and the company filed for Chapter 11 protection in 2008.
Oaktree swooped in to provide $35 million of debtor-in-possession financing while acquiring most of Pierre’s debt in the secondary market for less than $200 million. It swapped all the debt for an equity stake, leaving Oaktree as the owner when Pierre emerged from bankruptcy later that year.
Marks declined to discuss specific deals, citing firm policy, but industry trade publication Mergers & Acquisitions named that deal its 2008 Acquisition of the Year.
“The transaction underscores the excesses of the (leveraged buyout) market of a few years ago, and showcases how investors will be able to profit by picking up the pieces,” the publication said.
Oaktree recently merged Pierre with Advance Food Co. and Advance Brands to create a food distribution giant called AdvancePierre Foods, with annual net sales of $1.3 billion. Oaktree remains the owner, but Pierre executives have said the firm may exit through an IPO in the near future.
Oaktree is willing to shake up management when it takes control of a company, but Marks said the firm prefers to acquire companies that already have strong management but are in difficulty because of market and industry conditions.
Other opportunistic deals in recent years have involved acquiring major stakes in companies in or nearing bankruptcy, including casino operator MGM Mirage, aluminum producer Aleris International Inc., packaging company Chesapeake Corp., cable operator Charter Communications Inc., German boat builder Bavaria Yachtbau, lender CIT Group Inc. and media company Tribune Co.
Bill Doyle, managing partner of investment banking firm Kerlin Capital Group in downtown Los Angeles, said Oaktree has had a shrewd investment strategy.
“Given the firm’s heritage in the distressed debt markets, they … make sizable structured debt and equity principal investments that are designed to generate outsize returns with less risk,” he said.
In 2008, the firm raised $10.9 billion for its OCM Opportunities Fund VIIb, its largest distressed fund ever and three times the size of its previous one. Oaktree also raised 1.8 billion euros for its OCM European Principal Opportunities Fund II, a distressed investment fund that was originally supposed to be just 1.25 billion euros.
In the process, the firm, which Marks co-founded in 1995 with colleagues who split from bond giant TCW Group Inc., has seen it assets under management balloon from less than $30 billion to more than $75 billion. During that time, the firm has stretched around the globe, adding offices in Stamford, Conn.; Hong Kong; Beijing; Seoul, South Korea; Tokyo; Luxembourg; Paris; and Amsterdam, the Netherlands.
Sometimes, Oaktree’s gain has come as some other major firms have seen the strategy backfire.
In the case of Bavaria Yachtbau, Oaktree acquired the debt last year for $440 million while taking control of the company from Bain Capital. The deal represented a loss of about $600 million for the Boston private equity firm, which had previously acquired the boat company for $1.7 billion.
Perhaps the best example of how distressed deals can go wrong when the timing is off: Cerberus Capital Management took huge losses after spending $7.4 billion to take an 80 percent stake in struggling auto giant Chrysler in 2007.
“There have been many prominent private equity firms (that) have had their shares of black eyes in the last few years,” Freedman said.
That’s not to say Oaktree’s record has been spotless.
In an interview with the Business Journal early last year, Marks admitted that investors had lost money with Oaktree during the worst of the financial crisis, though he declined to specify the investments. But he said the losses were relatively small and temporary, with the value of the investments projected to rebound.
Marks also acknowledged that the recent growth is not sustainable. As the market has stabilized and the level of potential returns has dropped, fundraising is down. Oaktree this year raised less than $5 billion for the successor to its 2008 distressed fund.
So, for now, Marks said the firm has turned its attention to getting out of its mature investments. In particular, the IPO market has become a viable exit strategy again.
In September, Spirit Airlines, which Oaktree owns along with private equity firm Indigo Partners, filed a prospectus with the Securities and Exchange Commission for a $300 million IPO. The Miramar, Fla.-based budget carrier would be the first airline to go public in three years.
Oaktree took control of the company prior to the market downturn through strategic investments and brought in Indigo as a partner in 2006. In its prospectus, Spirit said it would use some of the proceeds of the IPO to repay debt owed to Oaktree and Indigo.
Stock Spirits Group, a European liquor company owned by Oaktree, is reportedly planning a 1 billion euro IPO in London. The company, which produces a number of vodkas and other alcoholic beverages, was established in 2007 after Oaktree acquired the spirits business of Eckes Stock.
A report last month in British newspaper the Sunday Telegraph said Stock Spirits is looking to go public next year.
Marks would not address the exit deals or the expected profits, but said the firm is looking to cash out of mature investments.
IPOs are not the only doors out, though. Nordenia International AG, a German packaging company acquired by Oaktree in 2006, recently announced plans to issue $341 million in high-yield bonds to repay all outstanding debt and an additional $238 million equity payment to Oaktree.
And Oaktree continues to invest, albeit with more modest expectations. Last week, for instance, the firm took a majority stake in two overseas shipping companies. But Marks noted that the window of opportunity for high returns and fast growth has closed as fewer companies today are being motivated by fear and uncertainty.
“Two years ago we could invest for very high returns and today those aren’t available,” he said. “This is not a period for massive bargain hunting. This is a time for conservative investing with moderate aspirations, for tending the investments that we’ve made and for exiting the ones that were successful.”
Posted on 24 September 2010.
Posted on 24 September 2010.
Posted on 13 September 2010.
Posted on 14 August 2010.
Benjamin Graham‘s The Intelligent Investor
Martin Whitman’s The Aggressive Conservative Investor
Books by James Grant:
Book by Roger Lowenstein:
Books by Michael Lewis:
Posted on 14 August 2010.
June 11, 2010, 12:20 AM EDT
By Charles Stein
June 11 (Bloomberg) — Seth Klarman almost doubled his hedge fund’s assets to $22 billion in the past two years as the industry shrank by sticking with the off-the-beaten-path investments he’s pursued since starting out in 1983.
Unlike John Paulson, who made $15 billion by betting against home mortgages, Klarman didn’t see one big trade that would profit as markets began to collapse. The founder of Baupost Group LLC focused on corporate bonds he calculated would yield solid returns even if the economy got worse.
“We didn’t have the degree of conviction Paulson had,” said Klarman, whose views are so closely watched by investors that his out-of-print book, “The Margin of Safety,” is offered on Amazon.com for more than $1,700. “We don’t deal in absolutes. We deal in probabilities,” he said in an interview at his Boston office.
While Klarman didn’t post the gains that made Paulson famous, he was able to raise almost $4 billion in 2008 when firms including D.B. Zwirn & Co. and Peloton Partners LLP liquidated funds. Baupost was the ninth-largest hedge-fund firm as of Jan. 1, according to AR magazine, Pensions & Investments magazine and data compiled by Bloomberg. He oversees more money than better-known managers such as Ken Griffin and Steven Cohen.
A value investor who looks for securities he considers underpriced, Klarman, 53, said he’s best at “complicated” situations where fewer investors compete for assets. Over the years, Baupost has invested in Parisian office buildings, Russian oil companies and real estate that the U.S. government disposed of following the savings and loan crisis of the early 1990s, said Thomas Russo, a partner in the Lancaster, Pennsylvania-based investment firm of Gardner Russo and Gardner.
“He specializes in illiquid, complex assets,” said Russo, who has known Klarman since 1984.
Baupost gained an average of 17 percent annually in the 10 years ended in December, a period in which the Standard & Poor’s 500 Index fell 1 percent a year. The hedge fund has returned 19 percent a year since it was started, even as it held more than 40 percent of its assets in cash at times.
In February 2008, when Baupost accepted new investors after being closed for eight years, Klarman bought distressed corporate and mortgage debt. The fund lost 12 percent that year, its second annual decline since inception, because it bought some of the debt too early, Klarman said. It returned 23 percent in 2009 and was up 4.4 percent through April.
“It was a wonderful time to put money to work,” said Klarman.
Hedge funds on average lost 19 percent in 2008, gained 20 percent in 2009 and were up 3.6 percent through April, according to data from Chicago-based Hedge Fund Research Inc.
Among the money-making bonds Baupost purchased, according to an October 2008 shareholder letter, was debt issued by Washington Mutual Inc., whose bank unit failed in 2008 and was bought by New York-based JPMorgan Chase & Co. Baupost also acquired bonds of CIT Group Inc., a New York-based lender that emerged from bankruptcy in 2009. The fund was part of a group of creditors that made a $3 billion loan to CIT in July 2009.
Klarman, in a May 18 talk to financial advisers in Boston, cited another Baupost purchase during the crisis to illustrate the way he thinks about investing. In a series of “what if” exercises, the firm calculated how much bonds of Ford Motor Credit Co. would be worth under different scenarios, including an economic depression in which loan defaults rose eightfold. The conclusion: the bonds, then selling for about 40 cents on a dollar, would still be worth 60 cents.
Ford Credit had net income of $1.3 billion in 2009, compared with a $1.5 billion loss in 2008. Some of its bonds have more than doubled in price since reaching lows in March 2009, Bloomberg data show.
More recently, the fund has been looking to buy privately held commercial real estate. While the fundamentals for much of that property are “terrible,” Klarman said, such investments may pay off for those willing to wait long enough.
Prices of publicly traded real estate securities have run up too far, he said in the interview. If the firm can’t come up with enough opportunities, it may return cash to investors, Klarman said.
“At this point, the clients don’t seem to want their money back,” he added. Baupost, whose investors are wealthy individuals and institutions such as Harvard University’s endowment, currently has about 30 percent of its assets in cash.
Graham and Dodd
Klarman is a disciple of Benjamin Graham and David Dodd, whose 1934 book, “Security Analysis,” is considered the bible for value investors. Graham taught finance at New York’s Columbia University where Berkshire Hathaway Inc. Chairman Warren Buffett was his student.
Klarman wrote the preface to the sixth edition of “Security Analysis,” which was published in 2008. His own book, subtitled ‘Risk-Averse Value Investing Strategies for the Thoughtful Investor,” has become a collector’s item.
Chris Ely, portfolio manager at Nichols Asset Management LLC in Boston, tried to get the book through his suburban library system. He was the 18th person on the waiting list and after six months still hadn’t gotten a copy, he said in a telephone interview.
“Seth writes about investing better than anyone ever has, bar none,” Michael Price, the longtime value investor, said in a telephone interview. Price, who sold his former firm, Heine Securities Corp., to Franklin Resources Inc. of San Mateo, California, in 1996 for more than $600 million, is now managing partner of New York-based MFP Investors LLC.
Red Sox Partner
Klarman, who was born in New York and grew up in Baltimore, worked for Price before and after graduating in 1979 from Cornell University in Ithaca, New York. He later earned a master of business administration at Harvard Business School in Boston.
Klarman is a limited partner of Major League Baseball’s Boston Red Sox, whose principal owner is commodities fund trader John Henry. He is chairman of the board of Facing History and Ourselves, a nonprofit that encourages the study of racism and anti-Semitism in schools.
As early as January 2006, Klarman warned in a letter to shareholders about “tremendous leverage,” “untested” products such as credit derivatives, low interest rates and “a housing bubble that is starting to burst.”
Today, Klarman says he worries that the dollar could lose value and interest rates and inflation may rise. Stocks will probably provide poor returns for the next 10 years, he said.
“We are perennially on the bearish side of things,” he said in the interview.
Baupost held $1.7 billion of U.S. listed stocks at the end of March, according to its latest filing with the Securities and Exchange Commission.
“We are not against owning stocks,” Klarman said in the interview. The problem, he said, is that except for a brief time in March 2009, “stocks haven’t been at bargain prices for most of the last two decades.” U.S. stocks reached a 12-year low in March 2009.
Klarman’s views on the U.S. stock market echo those of Jeremy Grantham, chief investment strategist at Boston-based Grantham Mayo Van Otterloo & Co., who recommended investors buy stocks in March 2009 after more than a decade of saying they were overvalued. Grantham’s latest forecast, posted on the firm’s website, predicted U.S. large cap stocks would return 0.3 percent a year, adjusted for inflation, over the next seven years.
Klarman called Grantham “a very smart person” whose forecasts he watches carefully. In an e-mail, Grantham called Klarman “just about the smartest guy around.”
Klarman buys put options and credit-default swaps, which he calls “cheap insurance,” to protect Baupost against risks such as a steep fall in the stock market or a surge in inflation. He currently has a put, or an option to sell a set amount of a security by a specific date, that will pay off only if interest rates go dramatically higher, he said in his Boston speech. In an October 2008 letter to shareholders the firm said it benefited from credit-default swaps, without saying what the swaps were meant to protect against.
When Klarman can’t find investments he likes, he holds cash. “We prefer the risk of lost opportunity to that of lost capital,” he wrote in his 2004 yearend letter to shareholders. In 2007, Baupost gained more than 50 percent, even as it held more than 40 percent of its assets in cash.
Bruce Berkowitz, named Morningstar Inc.’s domestic stock manager of the decade and a contributor to the latest edition of the Graham and Dodd book, said Klarman stands out among fund managers because he’s able to make money while holding cash and avoiding leverage.
“If he isn’t Elvis, he’s pretty close,” Berkowitz said.
–Editors: Christian Baumgaertel, Larry Edelman.
To contact the reporter on this story: Charles Stein in Boston at firstname.lastname@example.org
To contact the editor responsible for this story: Christian Baumgaertel at email@example.com
Posted on 02 August 2010.
Posted on 30 July 2010.
I win. Li Lu is indeed one of the three Buffett successor candidates, as suggested earlier.
Posted on 18 June 2010.
June 16, 2010
Posted on 07 June 2010.
There appears to be a negative reaction to Buffett’s recent support of Moody’s during his testimony to the FCIC.
In response to a question about what remedies might prevent future conflicts of interest, given the quality of the information provided by Credit rating agencies (CRAs) and the means by which they are compensated, it would appear to me as though there is only one true remedy. Investors must determine for themselves whether an investment makes financial sense. Insofar as professional investors should be concerned, the usefulness of these agencies should not extend beyond a secondary or tertiary assessment of investment risk with which to compare against one’s own assessment of risk. If I as an investor need to rely on a third party’s assessment of investment risk, I should not be in a position to allocate money on behalf of other individuals or institutions. (I fully recognize the role of these agencies in relation to, for example, the investable securities of insurance companies. Statistically, such requirements provide more benefit than they do harm.)
Ultimately, decisions based upon someone else’s set of facts (without independent verification) in my opinion, deserve to fail and should fail on the basis of meritocracy.
Posted on 04 June 2010.
Warren Buffett & Raymond McDaniel
Posted on 04 June 2010.
By Andrew Frye and William Selway
June 2 (Bloomberg) — Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years.
“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”
Berkshire’s investment portfolio included municipal bonds valued at less than $3.9 billion as of March 31, down from more than $4.7 billion at the end of 2008. The company had a maximum of $16 billion at risk in derivatives tied to such debt, according to the company’s annual report for 2009.
Buffett, Berkshire’s chairman and chief executive, has previously warned about the risks of insuring municipal bonds. In his annual letter to shareholders in 2009, he said public officials may be tempted to default on bonds whose payments are guaranteed by insurance companies rather than push through needed tax increases. He said guaranteeing municipal bonds against default “has the look today of a dangerous business.”
Local governments rely on the $2.8 trillion municipal bond market to raise money for construction projects and fund other budget items. The financial crisis and recession battered governments across the U.S. by cutting into tax collections and causing pension-fund losses. Some governments failed to set aside enough money to cover retirement benefits promised to employees, which may place increasing strain on public finance.
Rescue for Governments?
Buffett said last month that the U.S. may feel compelled to rescue a state facing default after the government committed $700 billion to bail out financial firms and automakers.
“It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,” Buffett told shareholders in Omaha, Nebraska, at Berkshire’s May 1 annual meeting. “I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations.”
A report by the Pew Center on the States in February estimated that by the end of the 2008 budget years, states had $1 trillion less than needed to pay for future pensions and medical benefits, a gap the center said was likely compounded by losses suffered in the second half of 2008.
About $14.5 billion of municipal bonds defaulted in 2008 and 2009, according to Income Securities Advisor Inc., a Miami Lakes, Florida-based company that publishes a newsletter tracking distressed debt. Many those were securities backed by revenue from nursing homes, property developments and other projects without claim to government tax revenue.
Defaults by local governments with the power to raise taxes are less common. Jefferson County, Alabama, defaulted on more than $3 billion of bonds backed by sewer fees after the deals grew more costly in the wake of the credit crisis in 2008. Vallejo, California, filed for bankruptcy in 2008 after its tax revenue tumbled.
Buffett set up a municipal bond insurance company in December 2007 as competitors, including Ambac Financial Group Inc. and MBIA Inc., struggled to maintain top ratings. Berkshire has scaled back sales as Buffett said the rates that bondholders are willing to pay don’t match the risk.
To contact the reporters on this story: Andrew Frye in New York at firstname.lastname@example.org; William Selway in San Francisco at email@example.com.
Posted on 02 June 2010.
A videotaped interview with Former Federal Reserve Chairman Paul Volcker on the state of the economy and government responses to the economic crisis.
Posted on 01 June 2010.
Original Source gurufocus
Li Lu, a student leader in the Tiananmen Square uprising, has jumped headlong into the bull market. In January, he rented two rooms of office space on the 15th floor of 660 Madison Avenue, and, equipped with a phone, a computer and a Bloomberg machine, he got to work investing other people’s money, running a high-risk hedge fund called Himalaya Capital Partners L.P. The minimum investment is $1 million.
In setting up the fund, Mr. Li said he’s experiencing firsthand the capitalism and democracy he was fighting for in his homeland. “Free man, free market,” is a phrase he invokes often.
Mr. Li is 32 years old. He wears Armani suits that he buys at a factory outlet; he lives in one of those bland modern towers on the East Side. While other Wall Street hotshots his age may have endured the trauma of not getting into the business schools or investment banks of their choice, Mr. Li has survived poverty, separation from his family (his parents were forced into labor camps) and a devastating earthquake. When he escaped to America after hundreds of his fellow protestors were killed in Beijing, he was one of the most wanted dissidents in China.
His clients hope they’ll see big profits, but they also seem to be investing in the future of Mr. Li himself. Jerome Kohlberg Jr., a founder of the leverage buyout monolith Kohlberg, Kravis, Roberts & Company, said his decision to invest with Mr. Li “wasn’t my usual cautionary thing, but my admiration prevailed … I don’t know about others, but I would like to see him succeed and eventually help bring China into the 21st century and be a democracy, and I think he, by then, will be uniquely qualified.”
Others who have invested in Mr. Li’s new hedge fund include: Stanley Shuman, executive vice president at Rupert Murdoch’s deal maker, Allen & Company; Jack Nash, co-founder of Odyssey Partners L.P.; Robert Shaye, chief executive of New Line Cinema Corporation; Robert Bernstein, former chief executive of Random House Inc. and a founding chairman of Human Rights Watch; and his son, Tom Bernstein, president of Chelsea Piers Management Inc. And proving that it’s a chic investment, there is also Sting, the sensitive rock star and rain forest activist, who has kicked in with at least a million of his own.
The glittering client roster seems not to intimidate Mr. Li. “You prove to them you’re good, people trust you,” he said over iced tea at Sofia’s Fabulous Grill on the Upper East Side. “They don’t ask how many years I’ve managed a fund. The question is, Can you make me money? Show me the money! This is one area where, if you really believe you’re smart and you’re unique and you’re different, this can be challenging-this is it. Because if you’re right, you make a lot. If you’re wrong, you lose a bundle.”
With the Dow Jones average rising above 9,000, the latest financial district jokes and clichés liken good investing to good sex. Mr. Li considered the comparison. “This market is not a man’s sex drive,” he said. “If you had to compare it, this market is a woman’s sex drive. It is really experiencing a multiple climax, but even the woman has downtime. The traditional Chinese sentiment is that the woman has the capacity to climax 15 times. The market is turning into the traditional description of the woman’s sex drive. My girlfriend is around that number.”
So how long can it last? “Nothing goes forever,” Mr. Li said. “As I say, even if you compare it with the woman’s sexual capability, it has an end. This market is capable of multiple climaxes, but there is a recession.”
Born in 1966, the year Mao Zedong initiated the Cultural Revolution, Mr. Li was separated from his parents when he was less than a year old. He passed through half a dozen adoptive families during the first decade of his life. Mao’s regime condemned his mother, a botanist and the daughter of a wealthy landowner, and his father, an engineer, as bourgeois intellectuals-and therefore enemies of the state. They were sent to separate labor re-engineering camps. Facing a life of hard labor, Mr. Li’s mother was forced into having to choose one of her children to keep with her. She kept Mr. Li’s older brother.
“Mao Zedong’s way was to make people crazy,” Mr. Li said. “It was like a religious cult. You cut all the culture, you kill or jail all the people with learned minds who think independently. Anything that remotely reminded you of humanity was destroyed.”
On the eve of Mao Zedong’s death in 1976, Mr. Li survived an earthquake in Tangshan, China, that killed the adoptive family whom he had grown to love. In the earthquake’s rubble, the 10-year-old boy ran through the city; the dead bodies overwhelmed him and he blacked out. When he came to, he saw a woman giving birth and heard her cries.
Days after the earthquake, radio propaganda claimed that Mao Zedong’s administration was helping his ravaged town-something that ran counter to what he saw. “The soldiers and party officials are grabbing all the things available for relief for themselves or their family,” he recalled. “Older people just don’t get anything. So I developed a tremendous aversion, you know, hatred toward those people.”
He was living with his blood family again and came under the guidance of his grandmother, a founder of elementary schools in the 1930′s. She told him the only way he could beat the government and help people was, first of all, to educate himself. Mr. Li immersed himself in books, which gave him the idea that “other people have lived a different life, a better life, so should I-so should everybody.”
His convictions led him to Nanjing University and Tiananmen Square. He was deputy commander of the student movement, second to Chai Ling, who is now at Harvard Business School. He saw many of his fellow student protesters shattered by the massacres. “They couldn’t get over this sense of loss and failure and guilt,” he said. “It was terrible and I had some of it.”
He arrived in Manhattan in December 1989. By 1996, he had earned a B.A., M.B.A. and J.D. from Columbia University, and written a memoir of his experiences in China ( Moving the Mountain , Macmillan London). With royalties from the book, as well as fees earned from giving lectures, he made investments and rode the bull market to the $125,000 he needed to pay his living costs and the tuition not covered by his scholarship.
“Early on,” he said, “I know I gotta make money work. The whole thing is, really, money makes money. That’s the whole thing about capitalism. Without the capital, there is no -ism.”
His early success in investing, linked with his abysmal experience with communism, made him a true believer in the free market. “But the precondition of capitalism is a free man,” he said. “With free market and free man, if you remove one of them, it is not called capitalism in my dictionary. Without a free man, there is no free market. That’s called exploitation. In China, there’s not capitalism. It’s official corruption, that’s what it is.”
Before striking out on his own, Mr. Li worked for a summer at the white-shoe law firm Simpson, Thacher & Bartlett, put in four months at the media investment-banking firm Allen & Company and spent two years as a corporate finance associate at another investment banking firm, Donaldson, Lufkin & Jenrette. The chores that go with pleasing clients didn’t sit well with him. “It’s very hard for me in the service business,” he said. “I want to make up a decision and do it. I’m a doer rather than just giving ideas.”
Mr. Li’s liberation from corporate hell came on the red-eye from San Francisco to New York last year. On the flight, he saw Rena Shulsky, a Manhattan real estate magnate whom he had met while giving a lecture. She encouraged him to start a fund. “I thought he could do better than working at D.L.J.,” she said. She also, according to Mr. Li, gave him something better than advice-namely, $2 million in seed money. (Ms. Shulsky would not comment on how much she invested with him.)
Tom Bernstein, who helped Mr. Li gain asylum in the United States in his role as board president of the Lawyers Committee for Human Rights, was another early investor. “We kid about Li Lu,” Mr. Bernstein said. “If you said that someone was going to make a billion dollars and be the head of the largest country in the world, all in one lifetime, he could be the guy.”
Two investors said John Kluge, chairman of Metromedia Company, had invested in Mr. Li’s fund this past January. Which seemed odd, given Mr. Kluge’s recent meeting with Chinese President Jiang Zemin concerning the possibility of expanding his company into China. (Mr. Li at first would not comment on Mr. Kluge; in a later interview, he said Mr. Kluge was not one of his clients. Mr. Kluge did not return calls seeking comment on the matter.)
Mr. Li said he likes to buy stocks that are undervalued, in his estimation. That goes against the currently fashionable “momentum” theory used by investors who believe they can ride an overvalued stock that is still soaring in price, and then jump out before the stock comes crashing back down.
“If you’re right, ultimately it will prove you’re right, but you look stupid for a long time,” he said of his own gambits. “It is what I’m all about. It’s revolutionary. It is about trusting yourself. It’s about challenging the conventional wisdom. That’s what we did in Tiananmen.”
Posted on 01 June 2010.
Posted on 28 May 2010.
FORBES ON BUFFETT
HOW OMAHA BEATS WALL STREET
Forbes discovered Warren Buffett in 1969, and this early interview
introduced the iconic investor to a wide audience for the first time.
THE MONEY MEN
Look At All Those Beautiful, Scantily Clad Women Out There!
“YOU PAY A VERY HIGH PRICE IN THE STOCK MARKET FOR A CHEERY CONSENSUS”
What does Buffett think now? In this article written for
FORBES he puts it bluntly: Now is the time to buy.
WILL THE REAL WARREN BUFFETT PLEASE STAND UP?
Warren Buffett talks like a cracker- barrel Ben Graham,
but he invents sophisticated arbitrage strategies that keep
him way ahead of the smartest folks on Wall Street.
WARREN BUFFETT’S IDEA OF HEAVEN: “I DON’T HAVE TO WORK WITH PEOPLE I DON’T LIKE”
Warren Buffett this year moves to the top of The Forbes Four Hund red.
Herein he ex plains how he picks his uncannily successful investments and
reveals what he plans on doing with all that loot he has accumulated.
NOT-SO-SILENT PARTNER: MEET CHARLIE MUNGER,
Here’s the lawyer who converted Warren Buffett from an old – fashioned
Graham value investor to the ultimate buy-and-hold value strategist.
BUFFETT ON BRIDGE
As the Duke of Wellington trained on the playing fields of Eton,
Warren Buffett trains at the bridge table.
THREE LITTLE WORDS
Warren Buffett says he doesn’t think the market is overvalued,
yet he buys few stocks. Why ?
Leading a revolt of the airline business traveler.
THE BERKSHIRE BUNCH
Chance meetings with an obscure young investment counselor
made a lot of people wildly rich. Without knowing it, they were
buying into the greatest compound-interest machine ever built.
A SON’S ADVICE TO HIS FATHER
Howard Buffett does not expect to inherit his dad’s place on
The Forbes 400, but he hardly seems bitter.
36 A WORD FROM A DOLLAR BEAR
Warren Buffett’s vote of no confidence in U.S. fiscal policies
is up to $20 billion .
Posted on 28 May 2010.
Appraisal of General Motors Common Stock
by Nicholas Molodovsky
The Analysts Journal 1959
THE THEORETICAL INTRINSIC VALUE OF GM for 1959 is estimated in this report at 52. With the stock currently selling around 50, its price is almost in line with value. However, GM is not the only stock in the market. The advantage of the method used in this study is that it allows setting up comparative tables for an unlimited number of equities, in terms of today’s values as well as of values projected into future years. An investor can select the most undervalued stocks for the time range of his planning. And these appraisals are entirely independent from the past or present prices of the stocks in question.
As The Analysts Journal is the professional forum for the National Federation of Financial Analysts Societies, it would be improper to use its pages for selling specific stocks. However, we can justify the selection of an equity which is fairly valued by the market for illustrating the practical application of proposed principles of appraisal.
In an address reprinted in The Commercial ~ Financial Chronicle of October 30, 1958, an appraisal of the Dow Jones Industrial Average was based on a technique of valuation gradually developed through years of work. This DJIA study was begun at the end of July, when the Average had crossed 500. The address was delivered when it stood at 535. It was then a representative opinion that the market had broken loose from traditional moorings of price-to-earnings and yield ratios and was dangerously high. The conclusion that the DJIA was still reasonably priced at that level seemed more daring last October than it does in retrospect now in May. The methods and techniques used in the DJIA appraisal were described in a 20,000-word article published in the February issue of this Journal. Written primarily for professional analysts, it found good response outside their specialized ranks. Fortune magazine mentioned the methods and techniques last month in an article on growth stocks. In April, 1958, a comprehensive valuation report on GM was sent to many analysts with request for comments on the method of appraisal. The stock was then selling at 35.
The report estimated GM’s 1958 theoretical intrinsic value at 45 and recommended purchase. The present study offers a revised version of the original report embodying the criticisms offered. And since, in the meantime, the underlying principles and techniques have been discussed in a separate theoretical study, they can be omitted. By referring to the basic study, “Valuation of Common Stocks,” published in The Analysts Journal of February, 1959, the reader will find a detailed account of the general economic reasoning and of the valuation techniques used here for appraising GM. The present study itself should, in turn, serve as a prototype for future appraisals of other stocks. This should make it possible, at the risk of hurting the paper industry, most of whose products seem to get engulfed in the mounting tonnage of financial literature, to give subsequent reports a condensed presentation.
A New Profession
The growing specialization so evident in medicine, law, engineering, and other professions, is also apparent in financial analysis. No single individual can absorb an adequate store of information about the technologies of all the different industries, the markets for their products, and the characteristics of their respective managements to pass competent judgment on the prospects of all and any individual corporations. Their diversities are so great that sometimes no true knowledge can be acquired beyond a handful of companies.
Considerable professional experience is needed to assemble significant facts from the welter of activities engaged in by a business enterprise, accurately interpreting and adjusting the reported figures of past and current profits, as well as expertly projecting them into the reasonably visible future. A different kind of skill is required for effectively using such facts, interpretations and projections as bases for an appraisal of value. Most of so-called valuations represent mere comparative pricing drawn from prevailing bid-and-asked ranges for similar properties-a borrowing of price tags worn in their lapels by other corporate Joneses. No objective measure of value, independent of going quotations, underlies this approach. Yet independence from the object to be measured is the main requirement of a good standard.
It seems likely that, a£ time goes on, the delineation between the two professions of corporate analysts and appraisers of stock values will become more sharply defined. Corporation finance and the economic theory of stock values have little in common. Even the practical experience and the educational backgrounds most desirable for efficient functioning in either field are different.
-END Page 1 of 7-
Full Document below:
Posted on 26 May 2010.
Download original Letter
March 5, 1982
The Honorable John Dingell
U.S. House Building,
Rayburn House Building
Washington, D.C. 20515
Dear Mr. Dingell:
This letter is to comment upon the likely source for trading activity that will develop in any futures market involving stock indices. My background for this commentary is some thirty years of practice in various aspects of the investment business, including several years as a securities salesman. The last twenty-five years have been spent as a financial analyst, and I currently have the sole responsibility for an
equity portfolio that totals over $600 million. I am enclosing copies of several articles that relate to my experience in the investment field.
It is impossible to predict precisely what will develop in investment for speculative markets, and you should be wary of any who claim precision. I think the following represents a reasonable expectancy:
1. A role can be performed by the stock index future contract in aiding the risk-reducing efforts of the true investor. An investor may quite logically conclude that he can identify undervalued securities, but also conclude that he has no ability whatsoever to predict the short-term movements of the stock market:. This is the view I maintain in my own efforts in investment management. Such an investor may wish to “zero-out” market fluctuations and the continual shorting of a representative index offers him the chance to do just that. Presumably an investor with $10 million of undervalued equities and a constant short position of $10 million in the index will achieve the net rewards or penalties attributable solely to his skill in selection of specific securities, and have no worries that these results will be swamped – or even influenced by the fluctuations of the general market. Because there are costs involved-and because most investors believe that, over time long term, stock prices in general will advance – I think there are relatively few investment professionals who will operate in such a constantly hedged manner. But I also believe that it is a rational way to behave and that a few professionals who wish always to be “market neutral” in their attitude and behavior will do so.
2. As previously stated, I see a logical risk-reducing strategy that involves shorting the futures contract. I see no corresponding investment for hedging strategy whatsoever on the long side. By definition, therefore, a very maximum of 50% of the futures transactions can be entered into with the expectancy of risk reduction and not less than 50% (the long side) must act in a risk-accentuating or gambling manner.
3. The actual balance would be enormously different than this maximum 50/50 division between risk reducers and risk accentuates. The propensity to gamble is always increased by a large prize versus a small entry fee, no matter’ how poor the true odds may be. That’ s why Las Vegas casinos advertise big jackpots and why state lotteries headline big prizes. In securities, the unintelligent are seduced by the same approach in various ways, including: (a) “penny stocks”, which are “manufactured” by promoters precisely because they snare the gullible-creating dreams of enormous payoffs but with an actual group result of disaster, and (b) low margin requirements through which financial experience attributable to a large investment is achieved by committing a relatively small stake.
4. We have had many earlier experiences in our history in which the high total commitment/low down payment phenomenon has led to trouble. The most familiar, of course, is the stock market boom in the late 20′s that was accompanied and accentuated by 10% margins. Saner heads subsequently decided that there was nothing pro-social about such thin-margined speculation and that. rather than aiding capital markets, in the long run it hurt them. Accordingly, margin regulations were introduced and made a permanent part of the investing scene. The ability to speculate in stock indices with 10% down payments, of course, is simply a way around the margin requirements and will be immediately perceived as such by gamblers throughout the country.
Brokers, of course, favor new trading vehicles. Their enthusiasm tends to be in direct proportion to the amount of activity they expect. And the more the activity. the greater the cost to the public and the greater the amount of money that will be left behind by them to be spread among the brokerage industry. As each contract dies, the only business involved is that the loser pays the winner. Since the casino (the futures market and its supporting cast of brokers) gets paid a toll each time one of these transactions takes place. you can be sure that it will have a great interest in providing very large numbers of losers and winners. But it must be remembered that. for the players, it is the most clear sort of a “negative sum game”. Losses and gains cancel out before expenses; after expenses the net loss is substantial. In fact, unless such losses are quite substantial, the casino will terminate operations since the players’ net losses comprise the casino sole source of revenue. This “negative sum” aspect is in direct contrast to common stock investment generally, which has been a very substantial “positive sum game” over the years simply because the underlying companies, on balance, have earned substantial sums of’ money that eventually benefits their owners, the stockholders.
5. In my judgment. a very high percentage – probably at least 95% and more likely much higher – of the activity generated by these contracts will be strictly gambling in nature. You will have people wagering as to the short-term movements of the stock market and able to make fairly large wagers with fairly small sums. They will be encouraged to do so by brokers who will see rapid turnover of customers t capital – the best thing that can happen to a broker in terms of his immediate income. A great deal of money will be left behind by these 95% as the casino takes its bite from each transaction.
6. In the long run, gambling-dominated activities that are identified with traditional capital markets, and that leaves a very high percentage of those exposed to the activity burned, are not going to be good for capital markets. Even though people participating in such gambling activity are not investors and what they are buying really are not stocks, they still will feel that they have had a bad experience with the stock market. And after having been exposed to the worst face of capital markets, they understandably may, in the future, take a dim view of capital
markets generally. Certainly that has been the experience after previous waves of speculation. You might ask if the brokerage industry is not wise enough to look after its own long-term interests. History shows them to be myopic (witness the late 1960s); they often have been happiest when behavior was at its silliest. And many brokers are far more concerned with how much they gross this month than whether their clients – or, for that matter, the securities industry – prosper in
the long run.
We do not need more people gambling in non-essential instruments identified with the stock market in this country, nor brokers who encourage them to do so. What we need are investors and advisors who look at the long-term prospects for an enterprise and invest accordingly. We need the intelligent commitment of investment capital, not leveraged market wagers. The propensity to operate in the intelligent, pro-social sector of capital markets is deterred, not enhanced, by an active and exciting casino operating in somewhat the same arena, utilizing somewhat similar language and serviced by the same work force.
In addition, low-margined activity in stock-equivalents is inconsistent with expressed public policy as embodied in margin requirements. Although index futures have slight benefits to the investment professional wishing to “hedge out” the market. the net effect of high-volume futures markets in stock indices is likely to be overwhelmingly detrimental to the security-buying public and, therefore, in the long run to capital markets generally.
Warren E. Buffett
b cc enclosures-
Mr. Irwin Borowski
House Oversight Investigation Sub-Committee
233 Rayburn Office Building
Washington, D.C. 20515
Posted on 24 May 2010.
Posted on 23 May 2010.
Fairholme Capital Management, L.L.C.
1001 Brickell Bay Drive, Suite 3112
Miami, FL 33131
Naturally, I applaud your temperament over the last two years.
The below discussion will not at all be new and you will certainly recognize the issues of my concerns and I hope you choose to act on them in short duration.
From my perspective, $10 billion is the point at which size really begins to constrain performance, the consequence of a rapidly decreasing universe of investments. With respect to Fairholme, you must be thinking whether it makes sense to keep the fund open or otherwise to close it to new investors.
If to keep it open there must be clear evidence that in doing so, current investors will not suffer as a consequence. That is, the rate and duration of compounding returns that you can reasonably expect to earn while open to new investors must either be equal to or exceed the reasonably expected returns of Fairholme as a fund closed to new investors. Prior to the asininities of the last two years, size was an increasing concern, however the ensuing fiasco provided conditions which made incremental (external) capital attractive to all Fairholme investors. You addressed the question of size during a conference call last year, and I believe you were completely correct in your response, brief as it was. However, these conditions are not what they were a few months ago and I don’t know that a compelling argument can currently be made in favor of keeping the fund open-unless you are expanding your operations to international markets, you intend to employ future capital in the purchase of private businesses, or contributions are offset by distributions/redemption’s, but even under these circumstances it would be a difficult argument.
Posted on 23 May 2010.
(courtesy of dcollon)
Memo to: Oaktree Clients
From: Re: Howard Marks
For about a year, I’ve been sharing my realization that there are two main risks in the investment world: the risk of losing money and the risk of missing opportunity. You can completely avoid one or the other, or you can compromise between the two, but you can’t eliminate both. One of the prominent features of investor psychology is that few people are able to (a) always balance the two risks or (b) emphasize the right one at the right time. Rather, at the extremes they usually obsess about the wrong one . . . and in so doing make the other the one deserving attention.
During bull markets, when asset prices are elevated, there’s great risk of losing money. And in bear markets, when everything’s at rock bottom, the real risk consists of missing opportunity. Everyone knows these things. But bull markets develop for the simple reason that most people are buying – ignoring the risk of loss in order to keep from missing opportunity – just when elevated prices imply losses later. Likewise, markets reach their lows because most people are selling, trying to avoid further losses and ignoring the bargains that are everywhere.
The Never-Ending Cycle
Why do people buy when they should sell, and sell when they should buy? The answer’s simple: emotion takes over. Price increases excite investors and encourage them to buy, and price declines scare them into selling.
When the economy and markets boom, people tend to assume more of the same is in the offing. They find little to worry about, other than the possibility that others will make more money than they will. Fear of loss recedes, and fear of opportunity costs takes over. Thus risk aversion evaporates and risk tolerance rises.
Risk aversion is absolutely essential in order for markets to function properly. When sufficient risk aversion is present, people shrink from riskier investments and prefer safer ones. Thus riskier investments have to appear to offer higher returns in order to attract capital. That’s as it should be.
But when people get excited about the prospect of easy money – even if from assets or investment strategies that have become far too popular, turning into overpriced manias – they frequently drop their risk aversion and adopt risk tolerance instead. Thus they swarm into the investment du jour without concern for its elevated price and risk. This behavior should constitute an important warning flag for prudent investors.
In the same way that expanded risk tolerance accompanies appreciated asset prices and contributes to the risk of loss, so does risk aversion tend to rise in times of depressed prices, increasing the risk of missed opportunity. When people refuse to buy assets regardless of their low prices, they miss out on the best, lowest-risk returns of the cycle.
Recent History – on the Upside
Just as the recent market cycle was extreme, so was the swing in attitudes regarding the “twin risks.” And thus so are the resultant learning opportunities.
Risk aversion was clearly inadequate in the years just before the onset of the crisis in mid-2007. In fact, I consider this the main cause of the crisis. (Last year, DealBook, the online business publication of The New York Times, asked me to write about what I thought had been behind the crisis. My article, entitled “Too Much Trust, Too Little Worry,” was published on October 5, 2009. It offers more on this subject should you want it.) Here’s the background regarding the early part of this decade:
Interest rates kept low by the Fed combined with the first three-year decline of stocks since the Depressionto reduce interest in traditional investments. As a result, investors shifted their focus to alternative and innovative investments such as buyouts, infrastructure, real estate, hedge funds and structured mortgage vehicles. In the low- return climate of the time, much of the appeal of these asset classes came from the fact that they promised higher returns thanks to their use of leverage, whether through borrowing, tranching or derivatives.
Given the high promised returns, investors forgot about (or chose to ignore) the ability of leverage to magnify losses as well as gains. Contributing to investors’ rosy view of leverage’s likely impact was their belief that risk had been banished by (a) the efficacy of the Fed and its “Greenspan put,” (b) the combination of securitization, disintermediation, tranching, decoupling and financial engineering, and (c) the “wall of liquidity” coming toward us from China and the oil producing nations.
For these reasons, few market participants were afraid of losing money. Most just worried about missing opportunity. The unattractive outlook for stocks and bonds meant investors would have to be aggressive and innovative if they were going to earn significant returns in the low-return environment. Thus risk aversion (a) was unnecessary and (b) would be counter-productive. “You’d better invest in this new financial product,” people were told. “If you don’t, you’ll miss out. And if you don’t and your competitor does – and it works – you’ll look out-of-step and fall behind.” When contemplating a virtuous circle without end, investors usually think of only one word: “buy.”
This describes the process through which fear of missed opportunity can overcome skepticism and prudence. And in this period, that’s what happened. No one worried about losing money. Fear of missed opportunity drove most investors, and Citibank’s Chuck Prince famously said, “. . . as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” Although he worried about a possible decline in liquidity, he worried more about falling behind in the manic race to provide capital.
Recent History – on the Downside
The events from mid-2007 through late 2008 or early 2009 demonstrate the reverse in operation. The upward trend in home prices ground to a halt and subprime mortgages began to default in large numbers. Leveraged vehicles melted down. Credit became unavailable, and financial institutions needed rescuing. Recession caused spending to contract, and corporate profits declined. Bear Stearns, Merrill Lynch, AIG, Fannie Mae, Freddie Mac, Wachovia and Washington Mutual all required rescues. Bank capital, commercial paper and money market funds needed federal guarantees. After the bankruptcy of Lehman Brothers, people began to ponder the collapse of the financial system. As often happens in scary times, “possible” morphed into “probable,” or at least something very much worth worrying about.
Now a vicious circle replaced the virtuous one of just a few months earlier. And with its arrival, the fear of losing money replaced the fear of missing opportunity. As I’ve said before, I imagine most investors’ cry was, “I don’t care if I ever make a penny in the market again; I just don’t want to lose any more. Get me out!”
For most investors, no assumption was too negative to be true, and no potential return made the risk of loss worth bearing. High yield bonds at 19% yields. First lien leveraged loans at 18%. Investment grade bonds at 11%. None of these was sufficient to induce risk-taking.
In the middle of this decade we saw a manic period in which losses were unimaginable. The resultant shortages of risk aversion and skepticism caused investors to buy at highs and assume unprecedented risks in order to avoid missing opportunity. This was followed – as usual – by a collapse in which no negative event could be ruled out and no return was high enough to induce buying, all because investors wanted nothing other than to avoid losing money.
This cycle produced a treacherous, low-return period in which it was very hard to find investments promising good returns earned with safety, and then a period of collapse in which there were bargains everywhere but few investors possessed the requisite “dry powder” and intestinal fortitude with which to buy. That’s the background. Where do we stand today?
Signs of the Times
Optimism, adventurousness and unworried behavior characterized the pre-crisis period, and investor behavior reflected those attitudes. In my memo “It’s All Good” (July 16, 2007), just before the onset of the crisis, I mentioned some of the warning signs in the credit markets:
Unlike the historic norm, it’s routine today to issue CCC-rated bonds. It’s easy to borrow money for the express purpose of distributing cash to equity holders, magnifying the company’s leverage. It’s so easy to issue bonds with little or no creditor protection in the indenture that a label has been coined for them: “covenant-lite.” And it’s possible to issue bonds whose interest payments can be paid in more bonds at the option of the borrower.
The first requirement for an elevated opportunity in distressed debt is the unwise extension of credit, which I define as the making of loans which borrowers will be unable to service if things get a little worse. This happens when lenders fail to require a sufficient margin of safety. . . .
The default rate in the high yield bond universe is at a 25-year low on a rolling-twelve-month basis. Under such circumstances, how could the average supplier of capital be expected to maintain a high level of risk aversion and prudence, especially when doing so means ceding all the loan making to others? It’s not for nothing that they say “The worst of loans are made in the best of times.”
The inspiration for today’s memo came as my pile of clippings began to swell with indications that pre-crisis behavior is coming back. Here are excerpts from a few, with emphasis added in each case:
On covenant-lite loans –
Are debt investors just stupid? That might help explain why they’re buying covenant-lite loans again. These deals, which carry few restrictions on borrowers, became a standard bearer for easy money. They may have helped some companies limp through the downturn – but they’ve left lenders saddled with lots of risk and little return.
It’s easy to see why companies like covenant-lite loans. . . . But for owners of the debt, the attraction is far less clear beyond the familiar short-term reach for yield. . . .
Posted on 20 May 2010.
Jason Zweig interviewed Seth Klarman and these are my [iluvbabyb] incomplete notes scribbled in haste and not direct quotes.
In value investing, you should think about investing Graham & Dodd style. Volatility works in your favor in terms of providing mispriced assets. Volatility shouldn’t be viewed as a problem. You should be seeking to buy bargains, and the best bargains often are found in the “hairiest” situations, such as in distressed securities or securities in litigation.
The business climate is more volatile today than during Graham’s time. What’s on the books today may not be as reliable as during Graham’s days. You need to look behind the numbers. There are more fads today in consumer goods i.e. Lady Gaga sneakers.
Seth Klarman previously worked for Michael Price and Max Heine of Mutual shares. The lesson he learned from Michael Price was the endless drive to get information by pulling all threads on a business in the efforts to seek value. Seth described Max Heine as a very kind person…he always had a smile and kind word for everyone in the shop from a junior analyst to the receptionist.
Seth was asked why so many value managers underperformed the market in 2008. He said over time value investing works and provides outperformance of 1-2% over the S&P 500. While this may seem like slender outperformance, it really adds up over time. There will be periods, however, when value investing underperforms. Many value investors were looking at the book value of banks and thinking they knew what was in it. However, instruments rated AAA weren’t all the same. During 2007/2008, investors needed to be more nimble and pull all the threads together on a business. Banks got cheap…and then cheaper. Many equity investors weren’t looking at the whole picture…they should have been looking at the credit bubble. Many investors also are pressured to be fully invested all the time. However, once the plug was pulled out of the tub in 2008, it was a long way down. Even for investors that were right, it wasn’t easy. Seth went on to discuss Michael Burry’s position as described in “The Big Short.” Burry had to defend his short position against his own investors.
Seth Klarman’s organization, Baupost, is organized to attract great clients, which is the key to maintaining investment success. His clients have a long-term perspective. They consist of highly knowledgeable families and sophisticated institutions. He described the ideal client as the one who agrees with them when they think they have had a good year and adds capital at times when Seth calls saying he is seeing good buying opportunities…which are usually the times other firms are facing redemptions. Seth was thus able to actively buy investments in 2008 when others had to sell. Many money managers had to liquidate positions just based on the fear or redemptions.
During 2008, Baupost went from zero exposure in distressed debt and mortgage securities to having 1/3 of their assets in distressed debt and mortgages, which subsequently grew to half of their total assets by 2009. They always look for mispriced securities and evaluate the opportunity costs and are prepared to act when opportunities become available.
Klarman quoted Ben Graham:
Those with the enterprise lack the money and those with the money lack the enterprises to buy stocks when they are cheap.
During the fourth quarter of 2008, it was easy for Klarman to buy securities. He doesn’t look at investments as pieces of paper like Cramer or Kudlow. He knows he is buying a fractional interest in a business. When you buy distressed bonds and you expect them to return to close to par, they become more compelling investments as the price goes down. If you have staying power and the conviction of your analysis, you won’t panic when prices drop.
Baupost always looks for compelling bargains and then stress tests all their assumptions, asking things like what happens to the investment if interest rates rise from 8% to 9%? They always buy with a margin of safety. One needs to have humility when investing–always worry about that which could go wrong with the investment.
An investor’s own confidence and temperament will impact their performances. One needs to be a highly disciplined buyer and seller and avoid the round trips. Temperament and a disciplined process will lead to successful investing.
Ben Graham said you need both cash and courage when investing. Having only one is not enough.
Klarman thinks indexing is a “horrible idea.” Most stocks run up prior to being put into the index, so the index is buying high. Klarman would rather buy stocks that are kicked out of the index, since they are likely to be a better value. For the average person, indexing may work but the entry point is critical.
Given the stock market rally since last year, Klarman is now worried of zero to low returns from the stock market for the next decade.
He compared the stock market to a Hostess Twinkie, which has totally artificial ingredients. Given the financial crisis, the market has been manipulated by the government with interest rates kept close to zero, TARP, Cash for Clunkers and Caulkers, the government buying dubious assets, etc. The government wants people to buy stocks to restore confidence. However, Klarman is worried about what the markets and the economy would look like if they hadn’t been manipulated…if the market wasn’t a Twinkie. The bailouts continue with the latest being put into place by the European governments. These bailouts probably won’t work.
Klarman said he is more worried about the world broadly than at any time in his career. There is now a new element to the investing game…will the dollar be worth anything if the government intervenes each time to prop things up? There are not enough dollars in the world to solve all the problems. He worries about all paper money. It is easy to imagine that politicians will find it easier to debase the currency with inflation than solve the hard problems. However, they can’t just keep kicking the can down the road. There is no free lunch and inflation is not zero.
The trouble is that we didn’t get “value” out of this crisis. There has been no Depression mentality. We’ve had “Just a Bad Week” mentality and there is still speculation going on.
We’re at a tipping point with sovereign debt. If investors think the U.S. will pay back debt, they won’t be worried. However, if they become worried, we could have failed Treasury auctions. The tipping point is invisible. Our Treasury Secretary is lulled into thinking we are AAA, but we have an eroding infrastructure and no fiscal responsibility.
How do you go bankrupt? Gradually and then suddenly…like Greece.
Commodities are not investments as they don’t produce cash flow. They only have value if you can sell them to a “greater fool.” They are only worth what some future buyer will pay for them. They are a speculation. Gold is somewhat different in that it is seen as a store of value. Investors might consider having some exposure to gold due to the worry of debasement of currency.
The investing game was checkers, now it is more like three-dimensional chess due to the potential destruction of dollars. Klarman is seeking an inexpensive hedge against dollar destruction as he is trying to protect against catastrophic tail risk. His way to hedge against inflation is through way out of the money puts on bonds. If interest rates go to double-digit ranges, he will make a lot of money. As long as the insurance is cheap enough, he will do it.
Baupost is managing $22 billion and said size is an anchor when it comes to investing. However, when he anticipated buying opportunities in early 2008, he called folks on his waiting list and allowed them to take advantage of the buying opportunities he was seeing so he could put greater capital to work.
He is worried a great deal about a double-dip recession due to debt morphing to sovereign risk. He now has about 30% in cash in his partnership. He will return the cash to clients if the cash increases much more and he doesn’t find any buying opportunities. He has no real lock ups in his hedge fund and calibrates his firm size to manage the right amount of the money dependent on market opportunities. His goal is excellence. He doesn’t want to take his company public as it would ruin the firm. He wants to retire at the end of his career knowing that he put his clients first, and he doesn’t care if he doesn’t charge as much as others.
Klarman had a bad visceral reaction to the Goldman hearings. Goldman’s hedging should have been celebrated as they were the Wall Street firm least likely to blow up thanks to the hedging. The world is a wild and woolly place. Brokers may have more conflicts of interest, but he knows Wall Street will always try to “rip out our eyeballs” on a trade. He said they go to Wall Street with their eyes wide open. He doesn’t know how to police Wall Street better. As market-makers, Wall Street doesn’t owe them any fiduciary duty.
Klarman would welcome more regulation if it helps the country. Limits on leverage and more disclosure would be fine. He wishes proprietary trading would go away. He knows firms front run Baupost trades. Bank capital requirements need to be higher. The bank rescue fund, however, has problems. It will penalize successful firms like J.P. Morgan due to their dumber competitors. He agreed with Bill Ackman who thinks if the bank’s equity gets wiped out, the subordinated debentures should be converted to equity.
At Baupost, they try to avoid groupthink. They recently had a conference in which they invited a variety of speakers. Most of them described the terrible problems we face; think the ECU will likely break up and that gold should be held. Following the meeting, members of Baupost questioned whether this was groupthink? They are very good at intellectual honesty and learn from their mistakes. There is no yelling at the firm over mistakes. They are aware of their biases in either direction.
Investors need to pick their poison. You either need to protect on the downside, which means you may not be at the party as long. Or you stay at the party and make money, but realize you will have a bad year or so. At Baupost, they prefer to be conservative. Klarman would rather underperform in a big bull market than get clobbered in a bear market.
In hiring folks, they try to find intellectually honest folks by asking them “What is the biggest mistake you ever made.” They also ask lots of ethical questions. Everyone they interview is smart, but they are seeking folks with idea fluency and high integrity.
Klarman believes short-sellers do better analysis than long-only investors since they have to due to the upward bias of the stock market over time. The Street is biased on the bullish side. Short sellers are the policeman of the market. It is not in the country’s interest to limit short-sellers. The one exception is on CDS buyers, who want a company to fail rather than recover and shout “Fire in the theatre” to make it happen. However, the burden should be on companies to not get into a position where their access to capital can be roiled by the short-sellers. GE was irresponsible in thinking they could always roll over their debt. However, if short sellers short on fundamentals and are wrong then Klarman welcomes them being stupid. He also said that if a computer wants to sell him a stock for a penny, he also would like that. When asked about how the flash crash hurt people who had in market orders, he thundered back that no one should ever put in a market order.
When asked about his asset allocation strategy, he just smiled since he doesn’t have one. He is highly opportunistic and buys what is out of favor. He goes where the trouble is…and can’t predict where that will be in the future.
He said “we make money when we buy bargains and count the profits later.” He currently is buying commercial real estate as the fundamentals are terrible. The government is winking at banks and telling them not to sell the real estate. While he isn’t currently making money in real estate, he is putting money to work in real estate. He is making money currently on the distressed debt he purchased two years ago which has nearly doubled in value.
His holding period is maturity for bonds and “forever” for stocks. This doesn’t mean that his turnover might be quicker if a bond rises rapidly from depressed prices to close to par.
When asked to describe a value company, he said there is no such thing. Price is the determinant for every investment.
When asked if he was worried about the counterparty risk for his out of the money puts, he said they worry about everything as there is risk in everything they do. However, they try to choose the best counterparties they can and require collateral posting.
When asked how he was confident enough to be fully invested in 2008, he said they over worry. They considered that the market could drop 40% and the economy could fall off the cliff. Even after considering a Depression scenario, they were still able to find things to buy like the bonds of captive auto finance companies, especially when they could pick up Ford bonds at depressed levels. They stress tested the loan portfolio and thought the bonds were worth significantly more than they were trading for as there wasn’t the same overbuilding in the auto industry as in the subprime housing market. As a result, there wasn’t the same deterioration in the loan portfolio. Klarman saw amazing upside in buying the bonds with Depression-proof downside, so he invested.
Credit risks remain real, however. The credit market rallies are now overblown especially in the junk market. Lessons were not learned even as investors stared into the abyss. Investors are back to drinking the Kool-Aid. There could be another collapse and people are not prepared for it.
Investors should think about disaster scenarios and prepare for them, although the preparation is more art than science. Klarman is trying to protect his client’s assets in the even the world gets really bad.
When asked if he plans to re-release his book, “Margin of Safety,” he said he has no immediate plans to do so although he has thought about doing it with a new introduction and perhaps a companion volume to raise money for charity. He just hasn’t had time.
When asked about other book recommendations, he gave the following:
The Intelligent Investor-Ben Graham
You Can Be a Stock Market Genius-Joel Greenblatt
The Conservative Investor-Marty Whitman
Too Big to Fail-Andrew Sorkin
Anything written by Jim Grant, Roger Lowenstein and Michael Lewis
He said folks should never stop reading as history doesn’t repeat but it rhymes, and in finance, progress is cyclical.
Posted on 08 May 2010.
What Buffett really said about the SEC Goldman Sachs Investigation
(From the Berkshire Hathaway Shareholder’s Meeting 2010)
Abacus was made the subject of an SEC investigation. There’s been misreporting, non-intentional obviously, but there has been a misreporting of the nature of the transaction, in the majority of the reports that I’ve read. This will take a little time, but I think it’s an important subject. I would like to go through that transaction first and then we’ll get to have further questions.
There were four losers, I will focus on two of them. Goldman Sachs itself was a loser, but they didn’t intend on being a loser. They intended to sell a portion of the transaction, but were unable to sell. The main loser in terms of actual cash value was a very large bank in Europe by the name of ABN AMRO. They subsequently became part of the Royal Bank of Scotland.
Why did they lose money? They lost money because they, in effect, guaranteed the credit of another company ACA. ABN was in the business of judging credits, deciding which credits they would accept themselves and which credits they would guarantee. In effect, they did something in the insurance world called fronting, which really means guaranteeing the transaction of another party. We have done that many times at Berkshire, we get paid for it. People may not want the credit of XYZ insurance company, but they say they’ll take a policy of XYZ company, if we (Berkshire) guarantee it. Berkshire has been paid a lot of money over the years and Charlie you can remember years back in the 1970′s when we lost a lot of money because we guaranteed some not so honest people and we lost a lot of money, Lloyd’s of all things, but they found ways not to pay it.
So ABN agreed to guarantee about $900 million worth of credit for ACA. That is in the SEC complaint that they received about 17 basis points, that is 17 hundredths of one percent. They got it about $1,600,000 and the company they guaranteed went broke, so they had to pay the $900 million. It is a little hard for me to get terribly sympathetic.
ACA was a bond insurer and they started out as a municipal bond insurer. ACA, MBIA…all those companies started out insuring municipal bonds. It was a big business insuring municipal bonds and then all of a sudden their margins started to get squeezed so instead of accepting lower profits they got into the business of insuring structured credits and other kinds of activities. I described their activities a couple years ago as being a little bit like Mae West who said, “I was like snow white, but I drifted.” Almost all of these bond insurers drifted to make a little bit more money.
ACA did it, they all did it, and they got into trouble, every one of them.
Is there anything wrong with bond insurance? No, but you better know what you’re doing. Interestingly enough, when these other guys got in trouble we (Berkshire Hathaway) got into the municipal bond insurance business and reassured things that were almost identical to what ACA and others had insured, the difference being we thought we knew a little bit more about what we were doing and we got paid better for what we were doing and we stayed away from things we didn’t understand.
Here’s something we did ensure to give you a better idea. Let me describe a deal to you.
A large investment bank came to us a couple of years ago (Lehman Brothers). At the time we were not insuring bonds regularly, but we were insuring the bonds of a local utility in Nebraska and insuring the bonds of the Methodist Hospital about six miles from here. We made the agreement that if the Methodist Hospital could not pay the liabilities of its bonds that we would pay. The total issue was between $100 million $200 million. Now a couple of years ago, Lehman came to us and asked us to take a look at this portfolio.
(Projection of a slide displayed of several states and related amounts to be insured.)
As you can see there’s $1.1 billion for Florida and only $200 million for the state of California…
Lehman asked us to insure the bonds of these states for the next 10 years and if any of these states don’t pay then we’d have to pay. I looked at the list and we had to decide (a) whether we knew enough to insure them and (b) what premium to charge. It was that simple. We didn’t have to insure them, we could just say forget it, we don’t know enough to make the decision. But we knew enough to make the decision and collected about $160 million to insure those bonds.
This gets to the crux of the SEC’s case against Golden.
Lehman came to us with this list, we didn’t create them, another party came to us. From a buyers perspective there are about 4 possibilities to consider.
Lehman Brothers might:
(1) own these bonds and want protection against the credit
(2) they might be negative on the bond market and effectively be shorting these bonds.
(3) a customer of Lehman that owns these bonds may have wanted to buy protection against the credit.
(4) or a customer of Lehman might be negative on these bonds and wants to short them.
We don’t care what scenario exists. It is our job to value the risk of these bonds
and to arrive at a proper premium. If Ben Bernanke were on the other side of the trade it wouldn’t make any difference to me. If I have to care about who’s on the other side of the trade I should not be in this business.
So, in effect, we did with these bonds exactly what ACA did with the bonds that were presented to them, but ACA was presented with a list of about 120 and they decided they’d insure about 50 of them, then went back and negotiated to insure 30 more. So they insured only a handful of the total list, whereas we looked at the list and took the list and was totally the other guys list.
In the case of the Abacus transaction it was a negotiation. In the end the bonds that were included in the Abacus transaction all went south very quickly. That wasn’t so obvious that they would go south in 2007 as you can see by studying something like the ABX index, but the housing bubble started blowing up in 2007. Now there could be problems in states we insured, there could be pension obligations or other problems and maybe the guy going short knows more about that than we do, but that’s our problem. In the case of ACA they had teams of people looking at these bonds and at Berkshire we only had a couple people. if I lose a lot of money on our transactions I’m not going to go to the other guy and say you took advantage of me. If it’s John Paulson, I’m not going to complain. No one forced me to enter into these contracts, we made the decision to do so.
I think the central part of the argument is that Paulson knew more about the bonds than the bond insurer did and my guess is that ACA employ more people than John Paulson. In retrospect it just turned out to be dumb bond insurance. I don’t see what difference it makes whether it was John Paulson on the other side of the deal or someone else.
I’d like to get Charlie’s comments from a legal perspective and I haven’t really spoken to him too much about this, charlie.
My attitude is pretty simple. This was a 3-2 decision by the SEC, under circumstances where they normally require unanimous consent. if I would have voted, I would’ve been one of the two not the three who voted to move forward against Paulson.
I’ve heard something about the ACA deal claiming that investors were taken advantage of, but ACA was the parent company of the bond insurer that entered into the deal with Paulson. ACA lost money because they were bond insurer.
Responding to a question about Berkshire’s Investment in Goldman Sachs Preferreds.
Ironically the negative publicity to Goldman is probably in our best interest in certain ways, because we have $5 billion in preferred stock that pays us $500 million year. Golden has the legal right to call these preferreds at 110% of par. Anytime they want to send Berkshire 5.5 billion, they can, and we would turn around and put that money in some very short-term security, which would probably under today’s conditions yield something very small, so every day that Goldman does not call their preferred’s is beneficial to us. Goldman pays us $15 every second, so as we sit here tick, tick, tick, tick… $50,000 We don’t want that to go away. These ticks occur at night, on weekends…
We love the Goldman investment.
Advice to Goldman:
When some kind of transgression is found or alleged we go by the motto
(1) get it right
(2) get it fast
(3) get out
(4) get it over
But, get it right is number one. If you don’t have your facts right you’re going to get killed. I do not hold the allegations against Goldman as significant, but if it leads to something more serious, I’ll look at the situation at that time.
With respect to the Abacus situation I don’t see much of an argument. We trade with Goldman but we don’t hire them as investment advisors. We make our own decisions. They could very well be selling short securities they sell us. They don’t need to explain to us what their doing. Their operating in a non-fiduciary capacity and we know that.