The Investor's Consigliere

Harbinger to Limit Withdrawals

Via Bloomberg.

Warren Buffett's Granddaughter

Sort of.  It's complicated--read only if you're fatally curious/nosy. 

Seth Klarman Interview in the Harvard Business School Bulletin

Right here.

Book Review: "Benjamin Graham: The Memoirs of the Dean of Wall Street"

When the modern world gets me down, I always reach for the classics.

I tend to confuse in my head Ben Graham's story with that of his most famous protege: be born, start managing money, get rich, live happily ever after.  But Graham's life was much more complicated, both personally and professionally, with as many twists and turns as his literary hero Odysseus.  His memoirs are not a how-to guide to becoming a successful investor (that 's what this and this are), but they are inspirational to me, and a timely reminder of how one great investor survived Wall Street's darkest days.

Some tidbits:

• Graham skirted financial ruin several times, beginning at age nine when his father died, and ending when the fund he managed endured seven painful years during the Depression.

• For the manager selectors like me who have struggled to construct a psychological profile of the "ideal investor," consider that Graham did not particularly care about money, studied no finance and almost no economics in college, and was alternately extravangant and miserly in his personal expenditures.   

• He says things like this:  "Several decades were to pass, and many vicissitudes to be undergone, before I could master the simplest and most important of all the rules of material welfare:  The most brilliant financial strategy consists of living well within one's means."

Sam Zell and the Tribune Company

When Sam Zell announced his deal to buy the Tribune Company, Warren Buffett described it to Charlie Rose as follows (the discussion starts at 10:25):

He's crafted a very intelligent deal from his standpoint.  How the Tribune turns out's another thing.  But you couldn't have the deal set up much better from both a tax standpoint and from a relatively small investment leveraging him into something big.  But you still have the Tribune Company to run . . . it's a tough business.

Buffett didn't address directly the ethics of shifting the economic risk of the deal working out onto Tribune employees.  Andrew Ross Sorkin is much less diplomatic.

I don't know enough yet about how the acquisition was set up to have an opinion.  Maybe the Tribune ESOP was doomed anyway and Zell gave them a cheap lottery ticket.  I've always admired Zell and thought him one of the few famous investors whose coattails are worth riding (he doesn't manage outside money as far as I know).  But I do believe that cleverness in advancing your interests can cross the line into ethics.  Generally speaking, a deal has a given level of risk and reward, and if you shift less of the former away from you and more of the latter towards you, you do it at someone else's expense. 

Those who invest in investors must take this ethical issue into account.  Not simply because it's the right thing to do, or for the selfish reason that they themselves may one day be on the receiving end of their investor's dangerous high intelligence/low ethics combination.  It's also because, as the Tribune bankruptcy may yet demonstrate, there is some karmic justice in the investing universe.  Grossly unfair risk/reward shifting, over the long term, is somehow almost always punished, making it not just bad ethics, but also bad business.

Bill Gross: "Dow 5,000 Redux"

Ignore the title--his December 2008 Outlook is about the concept of equity valuation.

Lampert and Sears

I'm a big Edward Lampert fan, but Sears is not doing well.

I'm convinced it was a big mistake for Lampert to spend $5bn of Sears' cash on stock repurchases.  Not a mistake in hindsight, but in foresight:  At the time he shouldn't have done it, and should have known not to do it.  And I don't think this simply because the stock has declined since then.

Our mutual idol Warren Buffett is famous for his advocacy of share repurchases.  He's also famous for stating that an investor should practice diversification only as a protection against ignorance--if you know what you're doing then it's better to put all your eggs in one basket and watch that basket.  By both counts, Lampert was doing as our idol advises when he bought back Sears stock--the value of which made up a large proportion of his and ESL's net worth--rather than paying out that cash as dividends, investing it elsewhere, or simply holding onto it.

But I must point out that for all his advocacy, in over 40 years Buffett has never repurchased a single share of his own company's stock, preferring instead to accumulate almost $50 billion of cash at its peak.  And I must also point out that Berskhire Hathaway is among the most diversified corporations ever assembled.  So the conventional wisdom about Buffett is wrong, or at least has its limits.  Buffett himself admitted as such in a little-known sentence from the 1980 Letter to Shareholders:

We, of course, have a corporate policy of reinvesting
earnings for growth, diversity and strength . . .

Of the three stated goals, we're all most familiar with how successful the growth part has been.  But don't forget how successful he's been on the other two as well. 

By committed so much money to repurchasing Sears shares, Lampert was going for (per share) growth, but neglecting diversity and strength.  Sears' remaining shareholders are now more invested in Sears' success than they otherwise would have been (less diversity), and more leveraged as well (less safe). 
You inflict those two strikes on yourself and your shareholders only if you get a lot back in return, and you can get a lot back in return for repurchasing shares only if you buy them at a significant discount to their intrinsic value.  Washington Post shares in the early 1970s counts.  Coca-Cola shares in the mid 1980s counts.  Sears shares in the past three years, no matter how optimistic you were, were simply not in the same category.

Lampert did an admirable job of milking Sears' assets, and his decision to cut back on capex may yet prove correct, but buying back shares was a mistake.


Disclosure:  Long Berkhire Hathway, no position in Sears.

Buffett and "Investing" vs. "Business"

Jason Zweig's "Intelligent Investor" column in last week's WSJ featured some interesting Buffett tidbits:

1)  Buffett, whose powers of mental calculation are legendary, confessed that he doesn't know how well Berkshire Hathaway's portfolio of stocks has done in recent years: 

"I've no idea what the rate of return would be.  But, knowing myself how hard it would be to do the calculations right, I'm suspicious of anybody's numbers."

The reason it's so hard to calculate is that you can't just take the ending value of the portfolio and compare it to the beginning, because he added outside money along the way (generated from operating earnings, interest and dividends) and also took out money (to buy operating business, fixed income instruments, raise cash, etc.).  Keep this in mind the next time someone pitches you a fund with a fantastic historical "IRR".

2)  Buffett talks about the advantages of being both a businessman and an investor, rather than one or the other:

"Being a businessman makes me a better investor and being an investor makes me a better businessman . . . Most businessmen limit themselves to their own field, and most investors don't really think about businesses.  And many businessmen are semi-oblivious to to the yardsticks other people use outside that field.  I'm always comparing everything to everything else."

"Most investors don't really think about businesses" is a pretty strong statement.  At the end of the day most investments--stocks and corporate bonds--are simply claims on the assets and cash flows of businesses.  It's a damning indictment to say that most investors, including professionals, don't think about what's actually behind the pieces of paper they own.  Conversely, as I've said before, to be able to approach investing from the perpective of someone who understands businesses can be of great advantage.  Most family offices are in this position, since they're started and seeded by sucessful businessmen who've sold their business. 

Disclosure:  Long Berkshire Hathaway

Another Reckless Buffett Prediction, Japan Edition

As I write the Nikkei 225 index closed down 6.4% to 7,162.90, the lowest since October 1982, a 26-year low.  The great bull market that peaked at 38,915.87 on December 29, 1989 has completely retraced itself.

Which means it's time for another reckless Warren Buffett prediction:  I wouldn't be surprised to see him do something big in Japan.  Japan is an enormous economy.  Its stock market returned 5.0% in real terms during the 20th century, a century that included not only the 1990s collapse of the Nikkei but also the utter devastation of World War II.  Japanese long bonds yield below 2%.  Earnings yields are higher than they've been in ages.  An equity holder (either of a public or private company) who can figure out a way to borrow money LT on good terms will likely do well.

Disclosure: Long Berkshire Hathaway

 

Seth Klarman Notes

My 201st post is pretty good too:  Via Whitney Tilson, here are notes taken from the Columbia Business School's 10/2 investment conference, featuring Seth Klarman.