Value Investing Word Clouds

Berkshire Hathaway Letters (1983-1987)

Berkshire Letters 83-87

Berkshire Hathaway Letters (2003-2007)
Berkshire Letters 03-07

A word cloud is a visual representation of a group of words, with the size of each word weighted to how many times it appears. The above two examples use the Berkshire Hathaway shareholder letters for the 5-year periods ending in 1987 and 2007. You can see some often-used words between the 20-year period: business, earnings, value, company, insurance. Word clouds are a good representation of what subjects the author is focusing on.
Below are a few more examples: (all created at Wordle) Continue reading “Value Investing Word Clouds”

Early Berkshire Hathaway Letters

Derek from Stableboy Selections has posted two of the "missing" Berkshire Hathaway letters (1969 – 1977). The first is written by Ken Chace, the CEO that Buffett put in charge after he ousted Seabury Stanton. These go along with the previously released 1973 and 1976 letters, which I link to below.

Berkshire Hathaway 1969 & 1971 Shareholder Letters

1973 Shareholder Letter

1976 Shareholder Letter

In the 1976 letter, equity investments are listed, and GEICO accounts for 31% of total holdings. I don’t believe these include any equities purchased through Blue Chip Stamps. That’s a fairly large position for most modern-day funds. However, it doesn’t compare to the concentration of Buffett’s portfolio before he managed other people’s money: (in the 1950’s, courtesy of Robert Miles)

Company Industry Value %
GEICO Insurance $10,150 61.6%
Greif Brothers Storage $3,650 22.1%
Timely Clothes Retail $2,600 15.8%
Thor Corp. Power tools $2,550 15.5%
Baldwin Music $2,200 13.3%
Other $330 2.0%
Total holdings $21,480
Bank loan ($5,000)
Total equity $16,480

UPDATE: I reformatted both letters into PDF’s to make them a little more readable. For the PDF formats, follow these links: 1969; 1971

On Financial Stocks and Portfolio Risk

Tom Brown recently posted a rebuttal to Jason Zweig’s Wall Street Journal column. Geoff Gannon also wrote a great follow-up article with more on Benjamin Graham. I suggest reading all three articles.

In this post, I wanted to comment on a few aspects of Tom Brown’s argument, some of which I have been thinking about lately. The following is a quote from Tom’s post:

True value investors, by contrast, tend not to worry what might happen in the interim. Instead, they come up with their best estimate of a financial company’s intrinsic value by estimating the magnitude of likely losses along with its “normalized” earnings level two or three years out. They then compare that estimate of intrinsic value with the stock’s price today. Zweig says such estimates are impossible. I disagree.

I have always enjoyed Tom’s posts, but I can see a few problems with the above statement. (As a disclaimer, I know relatively little about financial companies, as they are out of my circle of competence. I hold no interest in any financial beside Berkshire Hathaway.)

First observation:
With highly leveraged financial companies, what happens in the “interim” can not only hurt you, it can kill you. Compare a bank to a retailer. Let’s say that you find a cheap retailer, where you estimate normalized earnings a few years out to derive its value. Assuming your estimate is correct, you should be able to ride out any short-term volatility to obtain the long-term value of the company. Like Tom says, that is the foundation of value investing. Continue reading “On Financial Stocks and Portfolio Risk”

An Early Christmas for Value Investors

Christmas comes but once a year.

This year, it comes three months early for those in the world of value investing. The following two books will be released at the end of September:

September 26 — ::amazon(“0071592539″,”Security Analysis: Sixth Edition”)::

After a 20 year hiatus, McGraw-Hill is releasing the latest updated edition of Ben Graham’s original Security Analysis. The update includes: a forward by Warren Buffett; a chapter by James Grant; introductions by Howard Marks, Bruce Berkowitz, and Bruce Greenwald; and commentary from Seth Klarman, Roger Lowenstein, and Glenn Greenberg. An impressive lineup. New subjects will include international investing, hedge funds, absolute return strategies, and the efficient market hypothesis.

September 30 — ::amazon(“0553805096″,”The Snowball: Warren Buffett and the Business of Life”)::

The definitive, nearly 1,000 page biography on Warren Buffett. Written by Alice Schroeder, the insurance analyst who caught Buffett’s eye after her report on Berkshire Hathaway. Much has been written about Buffett’s life, but never from his perspective. My guess is that many details will emerge about Buffett’s personality and the mindset that makes him the greatest investor of all time.

4 Interesting 13F Buys (Q1-08)

I’ll try as much as possible to keep this tradition up every quarter. Today is the day that the 13F’s are released for funds managing over $100m. Below is a list of 4 picks that I find interesting:

WellCare1. WellCare Health Plans (WCG) — Pabrai Investments, Fairholme Fund — I don’t know much about healthcare companies, but Wellcare seems like it might be a very low risk, high uncertainty situation. Recently, a summary of Pabrai’s thesis on Wellcare was posted on the Value Investing Congress Blog. Using the last quarter with information available, WCG is trading at an EV/EBIT of about 1.8x (!).

2. EchoStar Corp. (SATS) — Greenlight Capital, Fairholme Fund (spin-out) — Spun off from Dish Network (formerly EchoStar) back in January. Has multiple holdings, including a set-top box business, SlingMedia, and 7 satellites. SATS could be extremely undervalued if you add up the valuations of its separate companies. See the VIC Writeup for more details. Charlie Ergan, Chairman and major shareholder, is extremely smart and should never be underestimated.

WellPoint3. WellPoint Inc. (::yahoo(“WLP”)::) — Springhouse Capital, Greenlight Capital, Fairholme Fund, Berkshire Hathaway, Baupost Group — Quite the lineup. Another beat-down healthcare company, but with less uncertainty. If you net out cash and unrelated investments, enterprise value is about $16B. Pre-tax income in the past year was $5.3B. So, even if WLP has lower earnings going forward, it’s trading for only 3x EBIT. It may pay to find out. (By the looks of it, healthcare companies must have a thing for logos with little swively waves in them.)

4. American Woodmark (::yahoo(“AMWD”)::) — Stadium Capital, Akre Capital, Fine Capital — A manufacturer and distributer of wood cabinets. Trading at about 8x TTM pre-tax free cash flow. It looks like they haven’t done well in the last few years, but if they can get back on track this is a very cheap stock. I don’t know a lot about wood prices, but it looks like gross margins have fluctuated widely in the past.

13F buys archive: Third Quarter 2007; Fourth Quarter 2007
Related link: Search for filings on the SEC website

Disclosure: We own a small position in SATS. This is not a recommendation to buy or sell any security.

Flight of the Black Swan

The cover story of the May edition of the Bloomberg Markets magazine discusses Nassim Nicholas Taleb’s affect on Wall Street:

On a freezing day in March 2007, Nassim Taleb walked into a conference room at Morgan Stanley’s Manhattan offices on 47th Street and Broadway to address a group of the firm’s risk managers. His message: Your models don’t work.

Using a whiteboard to scribble out his calculations, Taleb, now 48, began one of his rants, this time against stress tests–Wall Street lingo for examining how a market rout will play out. Stress tests are inherently risky because they ignore rare but potentially devastating events, Taleb said.

See the Full Article here

It’s always interesting to see what other investors or thinkers have on their bookshelf. In the introduction to the article, there’s a picture of Nassim Taleb in his library. Using the hard copy, I picked out a few books that Taleb has read (or hasn’t read, by Umberto Eco standards). These should be useful for expanding one’s network of mental models:

On another note, I have joined the team of authors at Reflections on Value Investing. If you haven’t already, head over and subscribe to the RSS feed. It’s a must for any value investor. Although this was posted at both sites, for the most part, my occasional posts at Reflections will have different content than FutureBlind.

Dr Pepper Snapple: Spin-off Bargain?

Dr Pepper Snapple

On Wednesday the 7th, Dr Pepper Snapple Group (::yahoo(“DPS”)::) officially began to trade. Its $25 price tag is lower than many expected after the soft-drink maker was spun-off of its parent company, Cadbury Schweppes.

Because spin-offs in general beat the market (and can make for excellent hunting grounds), I’m always looking for potential purchases. DPS stands out because of its well recognized brand names, competitive advantage, and unique spin-off situation.

Cadbury, its prior owner, trades on the London Stock Exchange. But when DPS was spun-off, it traded on the NYSE. This is a problem for mutual funds and institutions in the UK that owned Cadbury. They can’t or don’t want to hold a foreign-traded security. So more than likely (this may have already started), these institutions will sell their newly received DPS shares without regard to price.

Some of the brands of DPS include: Dr Pepper, Snapple, 7 UP, Motts, Sunkist, A&W, Hawaiian Punch. This post isn’t meant to be a complete analysis of the investment, just my initial thoughts on a potential opportunity.


The table below compares DPS with other soft-drink and consumer goods companies. Continue reading “Dr Pepper Snapple: Spin-off Bargain?”

5 Interesting 13F Buys (Q4-07)

Keeping up tradition from the last quarter, below is a list of 5 stocks that were added to the portfolio’s that I watch. These are either potentially interesting investments or just companies to keep an eye on.

1. Sears Holdings (::yahoo(“SHLD”)::) — Fairholme Fund, Pabrai Investments, Pershing Square — More super-investors realizing that Sears isn’t your traditional retail investment. Real estate and brand liquidation values provide downside protection (as opposed to being Lampert’s “strategy” as some claim). There are many possibilities for upside, but here are a few: (1) The sale or monetization of coveted assets; (2) A successful turnaround of the retail stores; (3) The allocation of capital from poor-performing cash generators (Kmart) to higher return divisions (Lands End) or new investments.

2. Acxiom Corp. (::yahoo(“ACXM”)::) — ESL Investments (Eddie Lampert) — An information services provider, trading at just over 4x cash flow. For the year ending March, 2007, Acxiom had before-tax free cash flow of $374 million. Currently, the entire company sells for $1.6 billion (including debt), only 4.3x that number. You can see from an amended 13F filing that Eddie Lampert’s purchase price was probably somewhere around $25 per share. So if it was cheap then, he must think it’s extremely cheap now.

3. Office Depot (ODP) — Gotham Asset Management — Joel Greenblatt, author of The Little Book That Beats the Market, took a small position in Office Depot, the second largest office products retailer. If ODP can maintain its competitive position and earnings power, it looks like a good buy. It’s run by Steve Odland, former CEO of AutoZone (another past Greenblatt holding), who’s working on improving margins. In the December 2007 issue of Value Investor Insight, Randall Abramson said he believes ODP could have earnings power of $3 per share in a few years. That would put the current price at just under 5x earnings.

4. Kraft Foods (KFT) — Berkshire Hathaway — Buffett’s widely reported 8.6% stake in Kraft makes him the single largest shareholder. Kraft was fully spun-off of Altria Group earlier last year, when shares traded over $32 per share. This is another one of Buffett’s large-cap bets that will probably outperform the market over time. A great company that trades for 13.5x last year’s operating income. This may be a good selection for the “defensive” investor. But for the “enterprising” investor, there are probably more advantageous purchases that could be made in smaller, cheaper stocks.

5. Walgreen Co. (WAG) — Longleaf Partners, Greenlight Capital — I haven’t looked at Walgreen’s, but it could be interesting. It’s a great company, but is it selling for a cheap price? Here is the link to a recent write-up at Value Investors Club.

Related post: 5 Interesting 13F Buys (Q3-07)
Related link: Search for filings on the SEC website
Related link: More super-investor portfolio’s at GuruFocus

Disclosure: We own shares in SHLD. This is not a recommendation to buy or sell any security.

Risk Arbitrage 101

Below is the second clip from my 2007 letter to partners. The first post was a case study of Tribune Co., an arbitrage situation we participated in last year.

“Give a man a fish and he eats for a day. Teach him to arbitrage, and he will eat for a lifetime.”Warren Buffett

Risk arbitrage (also called merger arbitrage) is where an investor buys stock in a company that’s expecting to be taken over. The investor’s goal is to profit from the difference in current market price and eventual buyout price. Here’s a simple example: Company A announces that it will acquire Company B for $20 per share. Immediately after the announcement, the share price moves from $15 to $19 per share. The arbitrageur then purchases the stock, hoping to make a $1 profit once the deal is complete.

Why doesn’t Company B just move straight to $20 after the announcement? Why the $1 difference? There are a number of reasons. First, since the merger usually takes some time to complete, part of the $1 represents the “time value” of not receiving the $20 right away. But most of the discrepancy usually represents the market’s uncertainty about the final outcome. The deal may fall through for multiple reasons, such as financing problems, regulatory roadblocks, or the acquirer simply changing their mind. So the risk arbitrageur has two questions to answer: will the deal go through – and if so, how long will it take?

Merger arbitrage is like a simpler, time-constrained version of value investing. When screening for candidates, there’s no need to do valuation work because the value of the company has already been announced. Both arbitrage and value investing involve handicapping the odds and buying assets for less than they are worth. With that in mind, below are some important things to consider when making any arbitrage investment.

Continue reading “Risk Arbitrage 101”

Tribune Co. Case Study

The following is a section from my 2007 letter to partners. It examines the buyout of the Tribune Company, an arbitrage situation we took part in last year. Tomorrow I will post another section that discusses risk arbitrage. (Please note that I have removed some of the non-public information that was included the actual letter). Enjoy!

Zell - TribuneOn April 2, 2007 Tribune Co. announced that Sam Zell prevailed in his bid for the struggling newspaper company. The final $34 per share offer was chosen over another eleventh-hour bid from Los Angeles billionaires Eli Broad and Ron Burkle. Sam “The Grave Dancer” Zell—contrarian real estate magnate—had just completed the sale of Equity Office Properties, his real estate holding company. With the cash he received from the sale (the largest leveraged buyout in history), Zell jumped back into business with his offer for Tribune. The company owns coveted newspapers such as the Chicago Tribune and the Los Angeles Times. Other assets include a string of TV stations and the Chicago Cubs baseball team.

Under the terms of the agreement, each share of Tribune would eventually be exchanged for $34 in cash. The deal would be subject to shareholder approval and regulatory clearance from the FCC. Sounds simple, right? The end result of the transaction was easy to understand, but the mechanics of the deal were anything but. It was especially unique because the shares would initially be owned not by Zell, but by an Employee Stock Ownership Plan (ESOP) where Tribune employees would share in the company’s upside.

Immediately after the announcement, the ESOP would purchase $250 million of newly issued stock for $28 a share. Zell’s initial investment consisted of a $200 million promissory note and $50 million in new stock. In May, Tribune would borrow $4.2 billion to finance the purchase of about half of the company from public shareholders.

Continue reading “Tribune Co. Case Study”