Saturday, January 23, 2010

Reminiscences of a Stock Operator: Jon Markman's Annotated Edition (Book Review)

Financial authors have been cranking out some good books as of late on topics relating to the crisis and current investment landscape. Award winning journalist and veteran hedge fund manager Jon D. Markman, however, has added a twist to an investing classic. Recently, he published an Annotated Edition of Edwin Lefevre's Reminiscences of a Stock Operator. Markman has put out a historical and insightful version of the life and times of Jesse Livermore that includes a foreword and appendix by legendary hedge fund manager Paul Tudor Jones.

The original story, Lefevre's Reminiscences of a Stock Operator, is by far one of the most well known and acclaimed books on financial markets. It was one of the first books listed in our recommended reading list because it teaches many valuable lessons about financial markets via a fictionalized account of Jesse Livermore's rollercoaster trading ride. This book is well known for its timeless advice such as, "the trend is your friend" and "let your winners run and cut your losses quickly." We could go on, but Lefevre's tale is literally laced with hundreds of insightful anecdotes. Hedge fund manager Paul Tudor Jones received a copy from his first boss and now gives a copy to every new trader at hedge fund Tudor Investment Corp, regardless of their experience level. The book is that useful.

Now, what Markman has done with his Annotated Edition of Reminiscences of a Stock Operator is added a sense of history and context. He has helped modern day readers connect with what now seem like ancient times. To today's reader, the people, places and events of the 1920's are distant and disconnected. Markman connects the dots by incorporating newspaper clippings, biographies, pictures, descriptions and more in his annotations. Almost every single page is chalk full of information and we can only imagine how long it took him to compile such historical resources.

This annotated edition is both a story and a history book. It adds a layer of vintage facts and really draws you in to what trading and financial markets were like back in the 1920's. When we first read Lefevre's Reminiscences many years ago, we'll be the first to admit that some of the people, places and events had little to no meaning or relevance for us; they were just 'part of the story.' Markman's work truly rectifies this as he bridges the gap and provides you with many "ah-ha!" moments. Needless to say, many elements of the book now have much more meaning and relevance.

While these annotations are highly useful, they definitely slow the flow of the story. You'll undoubtedly find yourself reading every single notation and it will take you almost twice as long as the original to read. That being said, it is definitely worth the time as it made us discover so many elements we missed in prior reads. Not to mention, Paul Tudor Jones' interview at the end of the book offers you a glimpse through his legendary hedge fund trading eyes. Simply put, Jon D. Markman's Annotated Edition of Reminiscences of a Stock Operator enhances an already must-read investing classic.

We'll leave you with one timeless bit of wisdom from the book: never argue with the tape.

For other insightful investing books, be sure to check out our recommended reading lists as well as our other book reviews.

Friday, January 22, 2010

AlphaClone: Over 70% Of Portfolios Outperformed the S&P 500 in 2009

We came across a recent press release and were quite impressed with Alphaclone's performance results from their 3,100 possible clones. In 2009, over 70% of their portfolios outperformed the S&P 500 and over half of the clones outperformed the S&P by 10% or more. Needless to say, this is some impressive stuff and we wanted to highlight it given our fascination with hedge fund replication.

Here is a table with the top performing single fund clones for 2009. These portfolios take the top 20 holdings of single hedge funds and combine them into a portfolio:

Rank Fund Return
1 Eagle Value Partners (Witmer) 220.8%
2 Mohnish Pabrai 171.0%
3 Silver Point Capital 167.3%
4 Tracer Capital Management 125.9%
5 Pershing Square Capital Management 123.7%
6 Elliott Management 122.9%
7 Pamet Capital Management 121.7%
8 Greywolf Capital Management 120.9%
9 Artis Capital Management 118.2%
10 Kayne Anderson Capital Advisors 116.7%

As you can see, there are some well known hedge funds on this list and Alphaclone easily replicated them for solid results.

We also want to point out that the Tiger Cubs top 10 most popular holdings clone returned over 59% in 2009. We cover a ton of the Tiger Cub hedge funds here on the site and this outperformance is why. This portfolio takes the most popular holdings amongst these various funds and assembles them into a single cohesive portfolio.

Really impressive stuff and this just goes to show that if done right, hedge fund replication not only works, but it outperforms. Alphaclone currently has a free 14-day trial so definitely check it out as we use it for all our hedge fund replication needs.

David Einhorn's Greenlight Capital Returning 22% Annualized (Investor Letter)

David Einhorn has sent out his hedge fund's investor letter for the fourth quarter of 2009 and we get a peek as to what Greenlight Capital has been up to lately. Their six largest disclosed long positions are now Arkema, Boston Scientific, CIT Group, Ford Motor Company debt, gold, and Vodafone Group. Over the course of the quarter, they added 'significant' new long exposure via Boston Scientific (BSX), Delta Lloyd (Netherlands: DL), and Vodafone Group (UK: VOD). Greenlight's exposure levels were 95% long and 63% short (excluding credit derivatives, gold and foreign currencies).

For 2009, Greenlight's various hedge funds were up 36.9%, 33.7%, and 30.6%. See how Greenlight stacks up to other major funds in our 2009 hedge fund performance numbers post. We also want to point out an intriguing fact from the letter: "Since inception in May 1996, Greenlight Capital, L.P. has returned 1,397% cumulatively or 22% annualized, both net of fees and expenses." Amazing stuff.

Over the course of the quarter, Greenlight sold out of "some real dogs" (their words, not ours). They sold their longs in Criteria Caixa, Echostar Holding Corp.-A, Nokia OYJ, Nyrstar, and IHOP Franchising 7.0588%. They also covered their short in International Bancshares Corp as losses in construction loans were not quite what Greenlight expected.

Heading into 2010, their portfolio is conservative and their long portfolio is invested in mainly stable, less cyclical businesses. They are short businesses that are fundamentally challenged in a difficult economic environment. Also, they have been moving out of successful debt investments that only have limited upside potential left. Where have they deployed that capital now? Well, into long equity positions, of course. Yet again, we see that hedge funds have been very net long equities. This also ties in with Bank of America's recommendation of overweighting equities and underweighting bonds.

Einhorn's letter also highlights that they are still short Moody's (MCO) and have been on the losing side of this play. However, it sounds like this is a position they will be in for a while as Einhorn writes, "We agree that the litigation will take time to play out, but doubt that the situation will prove 'manageable' for MCO." You can see his original short thesis here.

Also, we make note that Einhorn has been long gold (via storing physical gold) for a while, and he continues to maintain this large position.

Embedded below is David Einhorn's Greenlight Capital Q4 2009 investor letter:

You can download the .pdf here.

For other notable portfolio activity out of David Einhorn's Greenlight Capital, we've covered their recent new position. To get a better idea as to how Greenlight constructs and researches their investment themes, we highly recommend checking out Einhorn's book Fooling Some of the People All of the Time: A Long Short Story. Typically, Greenlight approaches things by identifying mispricings in the markets and then proceeding from there. We've covered Greenlight in-depth for quite some time now and will continue to bring you future updates.

Hedge Fund QVT Financial: UK Activist Portfolio

QVT was founded in 2004 by former Deutsche Bank proprietary trader, Dan Gold. QVT's approach in the UK market is to seek out activist positions in small-cap companies, particularly in the investment management sector. They appear to look for out of favor and often illiquid stocks, many of whom trade on London's less regulated AIM market. Several of their positions are in investment trust companies. See our earlier article on UK investment trusts and the potential for hedge fund activism as well as our primer on tracking a hedge fund's UK positions.

QVT have 26 holdings in UK listed companies worth approx £190,300,000. Over 90% of their holdings by market value are in investment managers of one type or another. Real estate investment managers and equity investment managers account for 40% each with non-equity investments like funds of hedge funds and alternative energy accounting for 10%.

We were surprised to discover that QVT had such high exposure to property companies (40% of their current UK portfolio). London's AIM market was the favored place to raise money for property companies from all around the world during the property boom. In this period, one hundred and sixty property companies were listed on AIM to invest in real estate in over forty different countries. Of course today the market valuations of these companies are generally only a fraction of what they were at flotation, let alone at the top of the market in 2008. All the property companies in QVT's portfolio invest outside of the UK. At first sight, this may appear to indicate that QVT are nervous about the UK property market or at least that they perceive better value elsewhere, however, it may just reflect the fact that most of the property companies that listed on AIM are focused on overseas property.

It's probably safe to assume that most of QVT's UK positions are activist to one degree or another. Information about QVT's motives and strategy towards companies is patchy but some is available via the London Stock Exchange Regulatory News Service and the financial press. Trikona Trinity Capital, an Indian property company, is one of QVT's largest positions. QVT wants Trikona to sell all its investments and return the money to shareholders. A fairly straight-forward request, but one that is potentially the kiss of death for Trikona. Trikona have responded by arguing that they would likely face legal action from their partners and the Indian government if they were to sell assets on a large scale. However, they have indicated that they will return some assets to shareholders over the next two years.

Treveria, the German real estate company, is one of QVT's newest holdings. In November, QVT called an Extraordinary General Meeting (EGM) of shareholders in an attempt to remove four directors, including the Chairman and appoint one of its own representatives. Treveria responded by pre-empting the EGM by naming Yossi Raucher as non-executive chairman replacing Christopher Lovell, the interim chairman, who remains a director. Treveria has also appointed Jeffrey Strong, a senior investment professional at QVT Financial, as a non-executive director. Following the appointments, QVT and Treveria have agreed to cancel the EGM.

QVT own 20% of South African Property Opportunities (AIM: SAPO), an AIM listed property investment company. Here QVT are in partnership with another activist Principle Capital which is run by Brian Myerson. Principle Capital is also the investment manager of SAPO via a company called Proteus Property Partners. With the support of QVT, Principle has threatened legal action unless SAPO pays out a disputed performance fee to Proteus. So far, SAPO have refused to pay. It will be interesting to see what happens as Proteus is set to have its management contract terminated in October 2010 in the wake of strategic review to help address a wide discount to net asset value.

Finally, readers may find it useful to know that some of the holdings in QVT's portfolio are also held by other hedge funds. Seth Klarman's Baupost Group and London based multi-strategy hedge fund GLG have a stake in ACP Capital (APL). Weiss Capital Management, an activist fund, has positions in CAD, CEB, and DIVA. Trafalgar, the London based long/short fund also has a position in CEB. Stephen Mandel's Lone Pine has a large 39% stake in Ishaan (ISH), the Indian property development company. See our latest article on Lone Pine's UK holdings here.

Below you'll find summaries of QVT's various positions in UK markets:

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That sums up QVT's positions and just yesterday we also covered Louis Bacon & Moore Capital's updated UK positions. Head to our coverage on other hedge fund UK positions as well.

What We're Reading ~ 1/22/09

Stop buying stocks and start buying businesses [Nick Gogerty]

Stephen Mandel's Lone Pine Capital: Some performance numbers [Teri Buhl]

PIMCO's Bill Gross sells treasuries, adds bonds and MBS [zero hedge]

Some more hedge fund performance numbers [zero hedge]

Advisor Perspectives interview with Fairholme Fund manager Bruce Berkowitz (direct .pdf link) [Advisor Perspectives]

Societe Generale's 2010 Outlook [Scribd]

Thursday, January 21, 2010

Hedge Fund Hovde Capital Still Bearish On General Growth Properties (GGWPQ)

Our apologies for not posting this up earlier, but we've been out of pocket. Eric Hovde's hedge fund firm Hovde Capital Advisors sent us their latest thoughts on mall REIT operator General Growth Properties (GGWPQ) and we wanted to post it up because we've detailed the 'back and forth' between various hedge funds in this very public debate over equity valuation.

For full disclosure: Hovde is still short GGWPQ and is also short another REIT operator mentioned in the presentation. Fellow hedgies Bill Ackman of Pershing Square Capital Management and Whitney Tilson of T2 Partners have been long GGWPQ equity and have taken issue with Hovde's previous analyses. Todd Sullivan over at has also been long and disputes Hovde's research.

We've covered the entire gamut of presentations and have assembled a timeline as such for those who may be new to the situation:

Here's the timeline:

- May 27, 2009: Bill Ackman's hedge fund Pershing Square Capital initially presents a bullish case for GGWPQ

- October 7, 2009: Pershing Square later issues a macro look at the mall REIT industry

- December 15h, 2009: Hedge fund Hovde Capital Advisors issues their case for a short position in GGWPQ, entitled "Fool's Gold"

- December 15, 2009: Todd Sullivan of issues a rebuttal to Hovde

- December 16, 2009: Whitney Tilson of hedge fund T2 Partners also issues a Hovde rebuttal

- December 22, 2009: Bill Ackman's Pershing Square issues a follow-up presentation as well

- December 29, 2009: Hovde Capital issues a second presentation

- December 30, 2009: Whitney Tilson (T2 Partners) refutes Hovde's work

- Today, January 21, 2010: Hovde comes out with another slide-deck

Embedded below is Hovde's third presentation on GGWPQ where they take issue with some of Pershing Square's research (RSS & Email readers come to the site to view it).

You can also download the .pdf here.

So, the analytical battle wages on. We haven't heard from Pershing Square on this subject in a little while, but Ackman did briefly touch on their GGWPQ position in his recent television interview. Ackman of course is limited in the information he conveys given that he is on General Growth's board. Not to mention, Pershing Square has been busy with other portfolio endeavors as their new stake in Kraft is now their largest position.

The battle over General Growth's equity valuation continues...

Goldman Sachs & Hedge Funds Bullish On Tower Stocks

While we don't typically highlight shifts in analyst sentiment, we found some moves out of Goldman Sachs late last week intriguing as they were out positive on tower stocks. They raised price targets on American Tower (AMT) from $52 to $53, on SBA Communications (SBAC) from $40 to $43, and on Crown Castle (CCI) from $42 to $46. While AMT is rated a 'buy,' SBAC in particular is on Goldman's Conviction Buy List.

With their updated coverage, Goldman also added Crown Castle to their Conviction Buy List. They believe that CCI trades at a discount to peers and note that shares have recently underperformed. Goldman also feels that of the tower companies, CCI is the most likely to increase guidance. So, now why did this recent adjustment catch our eye? Well, because plenty of hedge funds own these names, of course!

In our hedge fund portfolio tracking series we've noted that a sizable concentration of long/short equity hedge funds have built up large positions in these various tower companies. Now, before we begin, keep in mind that these funds are set to update their portfolio disclosures with the SEC in the next few weeks so their portfolios could have changed drastically. But for now, we want to focus on the data we have, as this has been a building trend for a few quarters now. Here's what we've found:

John Griffin's Blue Ridge Capital has held shares of Crown Castle for over 3 quarters now. It had previously been their 17th largest US equity holding but most recently CCI was their 6th largest position as they added to their stake in the third quarter of 2009.

David Stemerman's Conatus Capital has previously owned both American Tower and Crown Castle. Their most recent portfolio disclosures show they currently prefer SBAC and CCI (their 17th & 18th largest positions), as they sold out of AMT in favor of those names.

Lee Hobson's Highside Capital Management has owned American Tower (AMT) for at least three quarters now, although it has slipped from their 8th largest holding 3 quarters ago to now their 12th largest holding most recently (SBAC was their 14th largest).

Chase Coleman's Tiger Global has owned American Tower for the past few quarters and it has hovered around their 7th and 10th largest US equity holding. They had last sold some shares when we covered Tiger's portfolio.

Matt Iorio's White Elm Capital had CCI as their third largest US equity holding when we looked at their portfolio via 13F filing and we noted they had also started a new position in SBAC.

Chris Shumway's hedge fund Shumway Capital Partners has been involved with all three in some fashion as they were recently selling out of CCI, reducing their SBAC holdings and starting a new position in AMT which we noticed when looking at their portfolio.

So, quite a few prominent names involved in tower stocks as you can see (and that's not even all of them). Again, keep in mind that this data is set to be refreshed in a few weeks and we could see a completely different story then. However, the fact that many of the above funds have held various tower companies over the past three quarters should say something. We track fundamentally research driven hedge funds with longer-term investment timeframes in hope of finding their next big plays.

We've previously touched on how many of the 'Tiger Cub' funds often hold similar positions in their portfolios and this is no different. (A Tiger Cub is a fund started by someone who was previously involved with legendary hedge fund manager Julian Robertson's Tiger Management). In fact, hedge fund replicator Alphaclone even has a Tiger Cub portfolio that takes the most popular stocks amongst Tiger Cub hedge funds and combines them into a portfolio that outperforms the market by a wide margin. These tower stocks are by far some of their more common holdings.

So, given the recent bullishness out of Goldman Sachs on tower companies, we thought it would be prudent to examine the large hedge fund presence as well. We'll have to see if this theme continues when the new sets of portfolio disclosures come out in a few weeks. As always, we'll cover those in our hedge fund portfolio tracking series.

Louis Bacon's Hedge Fund Moore Capital Adds To Insurance Plays

We're back with an update in our hedge fund UK holdings series and this time we're focusing on Louis Bacon's hedge fund firm Moore Capital Management. A few days ago, the London Stock Exchange announced that Moore Capital Management held 22,750,000 shares in Insurance Broker Brightside Group (LSE: BRT), or 5.5% of the company's outstanding equity. This is a brand new position for Moore. Recently, we also saw that Moore increased its holding in another UK listed insurance operator. In December 2009, Louis Bacon's hedge fund firm increased their holdings in Lancashire Holdings (LSE: LRE) from a 4% to a 5% ownership stake. They now own 8,604,520 shares. We've previously covered the rest of Moore's UK positions as well.

This past year, Moore Capital's global fund was up 20.6% as noted in our 2009 hedge fund performance numbers post. Louis Bacon comes from the legendary Commodities Corp and is one of their 'offspring' along with Paul Tudor Jones and Bruce Kovner. Moore Capital is a $10 billion global macro set of hedge funds bearing Bacon's middle name. He is a well-known trader and more importantly, a risk manager.

Bacon actually got his firm started with help from Paul Tudor Jones. When Jones stopped accepting capital for his hedge fund, he turned investors to Bacon's firm. In the past, we had seen figures that Bacon had returned 30% annually since inception in 1990. He is notable because his returns often have low volatility and a low correlation to the stock market. In Barron's 2009 hedge fund rankings, Moore came in at #33 out of 100.

Bacon learned his risk management skills at an early age in the futures markets. Whlie getting his MBA at Columbia, he used his student loan money to trade and lost it all. Clearly, he learned a lesson he would never forget. Such a large mistake has made him an impeccable risk manager. After starting his own firm, he returned 86% in his first year. He likes to identify long-term macro trends and will trade around the position in the short-term. We'll continue to pass along portfolio developments as they surface. In the mean time, you can view the rest of Moore's UK positions here.

Taken From Google Finance - "Brightside Group plc, through its subsidiaries, provides insurance broking, the provision of premium finance, the provision of medical reports, lead generation and the provision of debt management solutions. The Company operates in four segments: insurance broking; finance provider; medical reporting; and lead generation and debt management. Some of the Company's subsidiaries include Brightside Holdings Limited, David & Co. Consultants Limited, Aust Holdings Limited, Minibus Direct Limited, Group Direct Broking Limited, E Group Limited and Commercial Vehicle Direct Insurance Services Limited."

Eddie Lampert Distributes Sears, AutoZone, & AutoNation Shares

The following is a guest post from, a site focused on event driven value investments.

As most of you know, Eddie Lampert's investment vehicles ESL Investments and RBS Partners have substantial stakes in three businesses: Sears Holdings (SHLD), AutoZone (AZO), and AutoNation (AN).

(HT: Matt Miller) On January 11, his investment vehicles filed three SEC Form 4 filings, detailing an interesting transaction.

Sears Holdings

ESL Institutional Partners, L.P. (“Institutional”) distributed these shares of common stock, par value $0.01 per share, of Sears Holdings Corporation (“Shares”) to its general partner, RBS Investment Management, L.L.C. (“RBSIM”), in an in-kind pro rata distribution for no consideration. RBSIM then distributed these Shares to its members in an in-kind pro rata distribution for no consideration. RBS Partners, L.P. (“RBS”) distributed these Shares to its partners in an in-kind pro rata distribution for no consideration. ESL Investment Management, L.P. (“ESLIM”) distributed these Shares to its partners in an in-kind pro rata distribution for no consideration. These Shares include 3,565,316 Shares distributed by RBS in an in-kind pro rata distribution for no consideration, 244,153 Shares distributed by RBSIM in an in-kind pro rata distribution for no consideration and 15,678 Shares distributed by ESLIM in an in-kind pro rata distribution for no consideration. As a result of these distributions, Mr. Lampert directly holds Shares in which he previously had an indirect interest. The distributions did not change Mr. Lampert’s overall pecuniary interest in securities of Sears Holdings Corporation. (Sears Holdings SEC Form 4).


ESL Institutional Partners, L.P. (“Institutional”) distributed these shares of common stock, par value $0.01 per share, of AutoZone, Inc. (“Shares”) to its general partner, RBS Investment Management, L.L.C. (“RBSIM”), in an in-kind pro rata distribution for no consideration. RBSIM then distributed these Shares to its members in an in-kind pro rata distribution for no consideration. RBS Partners, L.P. (“RBS”) distributed these Shares to its partners in an in-kind pro rata distribution for no consideration. These Shares include 792,882 Shares distributed by RBS in an in-kind pro rata distribution for no consideration and 48,659 Shares distributed by RBSIM in an in-kind pro rata distribution for no consideration. As a result of these distributions, Mr. Lampert directly holds Shares in which he previously had an indirect interest. The distributions did not change Mr. Lampert’s overall pecuniary interest in securities of AutoZone, Inc. (AutoZone SEC Form 4).


ESL Institutional Partners, L.P. (“Institutional”) distributed these shares of common stock, par value $0.01 per share, of AutoNation, Inc. (“Shares”) to its general partner, RBS Investment Management, L.L.C. (“RBSIM”), in an in-kind pro rata distribution for no consideration. RBSIM then distributed these Shares to its members in an in-kind pro rata distribution for no consideration. (AutoNation SEC Form 4).

These transactions all appear to be doing the same thing, taking major holdings of ESL/RBS and giving them to investors in their funds. The reasons for doing such a transaction can vary. Think back to when Warren Buffett decided to unwind his partnership. He liquidated assets, paying a small dividend, and also distributed shares of Berkshire — which he was chairman of. For an investor in his partnership, they could either keep their faith in him and hold on to their Berkshire shares or sell. You all know how that turned out. We also note that William C. Crowley made similar filings. Crowley is Executive Vice President and Chief Administrative Officer at Sears Holding Corporation.

For Lampert, there could be other reasons too. Some funds that take controlling stakes and then decide to wind down find it more efficient to distribute out large holdings rather than sell them onto the open market. Or, it could be a way to give investors in the fund an opportunity to be extricated from having such large holdings have a dominant influence on returns. This will be a situation to watch for any Sears, AutoZone, or AutoNation holder.

The above was a guest post from, a site focused on event driven value investments.


For more coverage of SEC filings, check out our series of hedge fund portfolio movements where we track the portfolios of some of the most prominent investors out there.

Wednesday, January 20, 2010

Warren Buffett & Bill Ackman Interviews

Warren Buffett of Berkshire Hathaway and Bill Ackman of hedge fund Pershing Square recently sat down with CNBC in two separate interviews. While the two men shared a talking point in the recent Kraft deal (they are both large shareholders), we thought it was interesting to hear their recent takes on the economy and markets.

In his interview, hedge fund manager Bill Ackman says that you are buying Kraft (KFT) at less than 14 times earnings and get a 4% dividend yield. He liked the fact that Kraft used a limited amount of shares (and used more cash) in the deal and in the end paid a fair price to get the deal done. As we covered earlier, Kraft is now Pershing Square's largest holding.

Ackman argues that Kraft's purchase of confectioner Cadbury now makes Kraft a more 'defensive' play. Obviously it will take a bit of time to integrate the two businesses, but the Pershing Square hedge fund manager points out that Kraft has done it numerous times before with other transactions.

Embedded below is Ackman's video interview where he outlines his thoughts on the Kraft and Cadbury deal. RSS & Email readers will want to come to the site to view this post as there are a lot of videos included:

And here is part two of Ackman's video interview where he talks about some of his other portfolio activity and his take on the economy:

Moving next to Warren Buffett, we see that he shares a different opinion on the matter of the Kraft and Cadbury deal. Below he gives his thoughts on Wells Fargo (WFC), the economy, Ben Bernanke, and much more.

We've followed these two gentlemen extensively before and have covered numerous resources such as Warren Buffett's recommended reading list, Pershing Square's research on General Growth Properties (GGWPQ). For more insight from these two big time investors, head to our resources on Warren Buffett as well as our resources on Bill Ackman.

The Billion Dollar Mistake By Stephen Weiss: Book Review

We're back with the next installment of our book review series and today we want to give you a look at Stephen L. Weiss' new book, The Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors. As the title implies, the book teaches you to learn from mistakes. And in particular, it teaches you to learn from the mistakes of some of the greatest investors out there.

Let's face it, there are many great books out there on the topic of an investor's greatest scores. One of our favorites is The Greatest Trade Ever as it details John Paulson's big bet against subprime. We mentioned in our review of that book that we could not put it down and read it all in one sitting. Well, we can now say the same about The Billion Dollar Mistake. It was that entertaining.

While success stories make for good reads, Weiss' book goes a step further by teaching you practical and valuable lessons that you can immediately implement into your own investment process. Winning investments make you money. Losing investments teach you unforgettable lessons. Flowing like a novel, The Billion Dollar Mistake is a series of narratives detailing the mistakes of legendary investors Leon Cooperman, David Bonderman, Kirk Kerkorian, Bill Ackman, Aubrey McClendon, Nick Maounis, Richard Pzena, Geoff Grant, Chris Davis, and Adolf Merckle.

Weiss' book focuses on many lessons including:

- Declining stock prices do not always equal opportunity
- Leverage is a double-edged sword
- Passion is not an investment strategy
- Always do your due diligence
- Don't be blinded by outsized returns

Given that making a mistake in financial markets can cost you hundreds, thousands, millions, or even billions of dollars, these are valuable lessons to say the least. No matter the amount of money you manage or your investment pedigree, the mistakes made by professional and everyday investors are often one and the same.

Weiss takes the massive world of investing and drills it down into easy to understand principles. Everyone is human and makes mistakes. Investors are no different. Great investors are no different. The Billion Dollar Mistake fully highlights this and allows everyday investors to relate to some of the most well-known investors out there. Weiss' book lets you live their mistakes and makes you realize that some of the smartest minds out there have made the exact same missteps you have. Great investors are often put on a pedestal and worshiped by those trying to emulate them. This book removes the pedestal and allows you to truly learn from them.

Author Stephen Weiss' career on Wall Street has spanned 23 years with stops at Oppenheimer, Salomon Brothers, hedge fund SAC Capital and more. He has truly crafted a great read and has transformed the lessons of legendary investors into an entertaining and educational narrative. Definitely check out The Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors as you're bound to become a better investor (or save yourself from losing lots of money) because of it.


This joins our growing series of book reviews:

- Think Twice: Harnessing the Power of Counterintuition by Michael Mauboussin
- Riches Among The Ruins by Robert P. Smith
- The Greatest Trade Ever by Gregory Zuckerman
- The Murder of Lehman Brothers by Joseph Tibman
- Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly
- The Ivy Portfolio: How To Invest Like the Top Endowments by Mebane Faber
- Hoodwinked by John Perkins

For more great books check out our various recommended reading lists as well.

Whitney Tilson Says Berkshire Hathaway Is Undervalued (BRK.A)

T2 Partners hedge fund manager Whitney Tilson thinks shares of Berkshire Hathaway are undervalued. Speaking about the A shares (BRK.A), Tilson was recently on CNBC commenting that he thinks Berkshire has an intrinsic value of $130,000-140,000 per share. Under this assumption, this would mean Berkshire's A-shares are massively undervalued since they currently trade around $100,000.

Tilson also talks about the B-shares (BRK.B), noting that the potential 50:1 stock split could serve as a catalyst. Burlington Northern (BNI), a company Berkshire is purchasing, is currently in the S&P 500. Once this acquisition closes, BNI will cease to be in the S&P 500 and a spot will open up for a new stock to be admitted. Tilson thinks this could serve as a catalyst for Berkshire B-shares if the stock split is approved and shares become more 'affordable' on a per share basis. After all, Berkshire Hathaway is by far the largest company by market capitalization that is currently not in the S&P 500. Tilson also said in his weekly email that Berkshire Hathaway was now T2's largest position.

One of the main concerns for investors going forward is the succession plan at Berkshire once Warren Buffett steps down (if he ever does hah). He is obviously responsible for a large part of their success and this could potentially serve as a negative catalyst should anything happen to Buffett. Tilson has been a longtime believer in shares of Berkshire and we've covered his previous thoughts on the subject.

Tilson also focuses on some short selling opportunities as he singles out the homebuilders and regional banks. Due to all the foreclosures around the nation and housing inventory levels, he feels homebuilders will have a rough road ahead as there is already so much supply. Turning to regional banks, Tilson thinks those with a lot of commercial real estate exposure are good short candidates given that he expects further losses in the CRE segment. We already knew this because we had previously gotten a glimpse at what companies Tilson's hedge fund T2 was shorting. For long positions, make sure to check out Tilson's case for General Growth Properties (GGWPQ) as well.

Here's the video of Tilson's recent interview:

For more insight from Tilson, check out him and many other prominent hedge fund managers at the Value Investing Congress May 4th & 5th in Pasadena, California. We've secured a discount for our readers with code P10MF4 so make sure to take advantage of it to receive investment ideas from some of the smartest investors out there.

Thomas Steyer Shows 9.9% Stake in FreightCar America (RAIL)

Thomas Steyer's hedge fund Farallon Capital has filed an amended 13G with the SEC on shares of FreightCar America (RAIL). Farallon is now showing a 9.9% ownership stake with an aggregate of 1,180,000 shares. While this is an increase from the 6.2% Farallon stake we covered back in March of 2009, Farallon has not added shares since September 30th, 2009. Their 13F filing (which details positions as of Sept. 30th) shows the same share total of 1,180,000. So, nothing really new to report here other than the fact that they still own it. Recent activity out of Farallon includes them selling shares of Knology (KNOL) and adding to their Beacon Roofing position (BECN).

Taken from Google Finance, FreightCar America is "a manufacturer of aluminum-bodied railcars in North America, based on the number of railcars delivered. The Company specializes in the production of aluminum-bodied coal-carrying railcars, with a range of railcar types, including aluminum-bodied and steel-bodied railcars. It also refurbish and rebuild railcars and sell forged, cast and fabricated parts for all of the railcars it produces, as well as those manufactured by others. The Company’s primary customers are railroads, shippers and financial institutions."

Tuesday, January 19, 2010

Jeff Saut Of Raymond James: Cautious, Not Bearish On Equity Markets

Raymond James' Chief Investment Strategist Jeff Saut is back with his weekly market commentary. In this week's investment strategy entitled "Neverland?!," Saut focuses on the increasing divergence between perception and reality, a topic we've touched on in the past as well.

Saut outlines two options for US equity markets and he notes that "the valuation disparities between the two have rarely been so great." His first option claims that investors are too defensively positioned given the strength of global growth. His second option claims that markets have been running on fumes from year-end window dressing and new year repositioning. Obviously, the two options are wildly divergent and give one pause for thought as to which is reality.

Saut ends by noting that Raymond James had been 'cheerleading' the market along with everyone else since the March 2009 lows. However, they have since become cautious (but not bearish) as we enter the new year. He writes, "While we think the 4Q09 earnings reductions are simply an anomaly caused by corporations attempting to get earnings back in line with what auditors will agree with for yearend purposes, it could give the equity markets a 'pause for cause' when combined with the other worries we cite. Hence, we remain cautious."

His latest note comes after we covered Saut's 2010 outlook and his commentary from last week where he said to watch the US dollar.

Embedded below is the document of Jeff Saut's investment strategy from this week:

You can download the .pdf here.

For more research out of Saut's firm, check out Raymond James' analyst best stock picks for 2010. In terms of other recommended investment strategy, Bank of America was recently out saying to overweight equities & underweight bonds.

The debate over perception versus reality continues...

Oak Value Fund Adds Activision Blizzard (ATVI) & Intuit (INTU): Investor Letter

We recently came across the fourth quarter 2009 investor letter from David Carr Jr's Oak Value Fund and thought our readers would enjoy it. After all, we like to track investment managers that employ fundamental research processes with a long-term time horizon. Oak Value certainly fits the bill, so let's see what they were up to in the fourth quarter of last year.

They made a few additions to their portfolio as they bought shares of Activision Blizzard (ATVI), Intuit (INTU), and XTO Energy (XTO). They added shares of ATVI because they believe this company is the industry leader in the subscriber-based revenue model of gaming. They were fond of Intuit because of its large consumer base, high operating profit margins, high returns on capital and significant free cash flow. Lastly, they purchased shares of XTO under the belief that natural gas is a viable energy alternative. Right after Oak Value's investment into XTO, Exxon Mobil came in with an offer to purchase the company.

Sales in their portfolio from the fourth quarter include Cadbury (CBY) and Syngenta (SYT). Their sale of Cadbury is notable because it appears they exited the position too soon as a potential deal has finally been struck between Cadbury and Kraft Foods. We've seen many hedge funds play both sides of this event-driven scenario as Bill Ackman's Pershing Square owns a lot of Kraft, as does legendary investor Warren Buffett. On the other side, we saw John Paulson's hedge fund Paulson & Co with a large Cadbury stake.

Oak Value sold their shares of Syngenta due to a decreased margin of safety as well as the fact that they saw more opportunistic areas to deploy their capital.

Here are Oak Value Fund's Top Ten Holdings as of December 31st, 2009:

  1. Berkshire Hathaway (BRK.A): 6.75%
  2. Avon Products (AVP): 5.5%
  3. Coach (COH): 5.47%
  4. American Express (AXP): 5.06%
  5. Oracle (ORCL): 4.85%
  6. Cisco Systems (CSCO): 4.57%
  7. Praxair (PX): 4.56%
  8. Republic Services (RSG): 4.54%
  9. Diageo (DEO): 4.31%
  10. 3M (MMM): 4.1%

Interestingly enough, one of their top 10 holdings is also on the list of most popular stocks held by hedge funds. Here is Oak Value Fund's fourth quarter 2009 letter to investors:

You can also download the .pdf of the letter here.

For background on Oak Value Fund, here's what you need to know: Taken from their website, they "approach investing with the philosophy, supported by a long historical background, that current market price is not always an accurate reflection of the true worth of a business. Our essential investing premise is that we can be successful over time by buying high quality companies with solid competitive advantages, run by capable, fair-minded management teams, purchased at sizable discounts from their intrinsic values."

More Hedge Fund Performance Numbers From 2009

Bloomberg had an interesting graphic up depicting returns from some other prominent hedge funds for 2009. There is one caveat though: their numbers were as of October 31st. So, keep that in mind when viewing. This comes after we posted our annual hedge fund performance numbers post for 2009 where we've already detailed how many prominent hedge funds fared last year.

(click to enlarge)

What's interesting here is we see Bloomberg's estimate for Jim Simons' secretive fund, Medallion. This quant fund at Renaissance Technologies is not open to outside investors and has garnered RenTec's highest returns. Medallion had a stellar 2008, finishing up over 80%. They did well in 2009 it looks like as well, as Bloomberg estimates they were up 38% and made $1.1 billion through the first ten months of 2009.

RenTec's other fund, RIEF, is a contrast to Medallion in two major ways. Firstly, RIEF accepts investments from outsiders while Medallion does not. Secondly, RIEF's performance has been quite lackluster when compared to that of Medallion. However, one does need to keep in mind that each fund is pursuing a different strategy and as such they are not comparable. Their RIEF fund had a rough 2009 due to the large swings in 'junk' stocks and was amongst the worst hedge fund performers when we last checked on it back in August.

So, their Medallion fund had a solid year while RIEF had a rough 2009. Overall, it is just intriguing to see estimates for Medallion. This fund is closely guarded and has an aura of mystique as it is often talked about for it's stellar returns. As we detailed previously, founder Jim Simons' was set to retire from the firm he founded at the end of 2009.

Check out our list of 2009 hedge fund performances for further data.

Hayman Capital's Kyle Bass Outlines How To Fix the Financial System

Recently, Hayman Capital hedge fund manager Kyle Bass was on CNBC talking about how to fix the financial system and also about sovereign debt and the possibilities of default. This area is definitely Bass' niche as we've covered his predictions of sovereign default back in May of 2009. In the video, Bass outlines how to fix the financial system by focusing on three talking points: OTC derivatives, bank leverage & reserves, and Fannie Mae/Freddie Mac.

Bass also goes on to talk about Japan and the United States as it pertains to sovereign debt issues. He calls Japan the 'canary in the coal mine' and says that Japan could default or devalue its currency within 3-4 years and that the United States could do the same in 10-12 years. He cites that sovereign balance sheets expand 86% from pre-crisis levels once governments start acquiring formerly private sector assets in attempts to thwart the crisis.

Embedded below is Kyle Bass' interview with CNBC, so email and RSS readers will need to come to the site in order to see the video:

Interesting thoughts from Bass as always, as his Hayman Capital hedge fund seems to be one of the few you hear about in the 'mainstream' warning about the potential for large sovereign defaults. We previously got a glimpse as to what Bass was investing in back in October, as 50% of his assets were invested in mortgages then. We haven't seen any updates out of his hedge fund since then, so if you are 'in the know,' please get in contact with us.

For those unfamiliar with Bass, here's what you need to know: Kyle Bass attended Texas Christian University (TCU) in Fort Worth, TX and now runs his firm Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. He eventually turned $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit and he has also in the past headed an office of Legg Mason. His first major prediction was centered around leverage. We'll have to see if his second leverage-based prediction plays out.

Monday, January 18, 2010

Steven Cohen's Hedge Fund SAC Capital: Portfolio Update

We recently saw two SEC filings of note out of Steven Cohen's hedge fund firm SAC Capital. Firstly, in a 13G filed with the SEC, SAC Capital has disclosed a 5.5% ownership stake in Dendreon (DNDN). The filing was made due to activity on January 7th, 2010 and they now own 7,282,030 shares. The breakdown of their share ownership is a bit complex and you have to dig into the footnotes to gain clarification. These totals include 3,900 shares subject to call options held by SAC Select Fund and 375,000 Shares subject to call options held by SAC Capital Associates, and 425,000 shares subject to call options held by CR Intrinsic Investments.

Secondly, SAC Capital filed another 13G on shares of Vermillion (VRMLQ). The filing was made due to activity on January 7th, 2010 and they now show a 9.9% ownership stake with 1,015,000 shares.

SAC Capital finished 2009 up over 28% as noted in our hedge fund 2009 performance numbers post. Keep in mind that Cohen's SAC Capital uses trading as their primary strategy and as such they move in and out of positions much more frequently than the other hedge funds we track here at Market Folly. We also note a common link in SAC's SEC filings. Of the large stakes they often disclose via 13D or 13G filings, the vast majority are in various biotech, pharmaceutical, and medical companies. Our past coverage on SAC & Steven Cohen includes a piece on the link between hedge fund managers and poker.

Previously, they were ranked #17 in Barron's hedge fund top 100 rankings. Taken from SAC's website earlier this year, “SAC is a multi-strategy, private asset management firm founded by Steven A. Cohen in 1992 with 9 employees and $25 million in assets under management. As of July 2008, the firm has grown to over 800 employees with approximately $14 billion in assets under management. SAC's initial investment style was "trading" oriented. However, we have evolved into a multi-strategy, multi-disciplinary, investment management firm emphasizing rigorous research and risk management practices. SAC's investment strategies include, but are not limited to: Fundamental and Technical Long/Short Equity Portfolios, Global Quantitative Strategies, Fixed Income and Credit, Global Macro Strategies, Convertible Bonds, and Emerging Markets.”

Taken from Google Finance, Dendreon is "a biotechnology company focused on the discovery, development and commercialization of therapeutics that improve cancer treatment options for patients. Dendreon’s most advanced product candidate is Provenge (sipuleucel-T), an active cellular immunotherapy that has completed two Phase III trials for the treatment of asymptomatic, metastatic, androgen-independent prostate cancer."

Vermillion is "is involved in the discovery, development and commercialization of diagnostic tests that help physicians diagnose, treat and improve outcomes for patients. The Company uses the process of utilizing advanced protein separation methods to identify and resolve variants of specific biomarkers (known as translational proteomics) for developing a procedure to measure a property or concentration of an analyte (known as an assay) and commercializing diagnostic tests. Vermillion has focuses in the areas of oncology, hematology, cardiology and women’s health."

Kraft Foods: Pershing Square's New Largest Holding

Bill Ackman's hedge fund firm Pershing Square Capital Management has unveiled their latest position. Their largest holding is now Kraft Foods (KFT) as they have purchased a $950 million stake. Given Ackman's tendency to gravitate toward activist and event-driven situations, this should come as no surprise. After all, Kraft Foods is involved in the recent bidding for confectionery company Cadbury (CBY).

Pershing purchased 32 million shares of Kraft and Ackman recently said he plans to purchase more as he seeks to limit the amount of stock Kraft uses in their bid for Cadbury. Legendary investor and Kraft's largest shareholder Warren Buffett recently spoke out on this issue as he too did not want to see Kraft raise their bid. Ackman was recently quoted as saying that the deal makes "tremendous sense" and that shares of Kraft are currently "extremely undervalued." However, he just doesn't want Kraft to spend too much to acquire them. Ackman said, "There were so many investment banks working on the deal that there hasn't been good research on what the combination would look like. We think that's among the reasons that Kraft is undervalued." He also went onto say that, "The more Kraft stock they issue, the less interesting this deal is. Fortunately, the seller also prefers cash."

Ackman clearly has conviction in this play as it is now his firm's largest holding. This is not the first time Pershing has been involved, as they had previously purchased shares of Cadbury in 2007 in hopes of a takeover, a play they eventually sold out of in 2008 as it wasn't panning out. Pershing Square now jumps back into this hedge fund laden event-driven play with their purchase of Kraft shares.

As we've covered previously, there are many hedge funds involved in this potentially catalytic situation. John Paulson's hedge fund Paulson & Co bought Cadbury shares amidst takeover speculation and then doubled down on their stake. Additionally, we saw that Eric Mindich's hedge fund Eton Park Capital adding shares of Cadbury. And as we mentioned earlier, Warren Buffett's Berkshire Hathaway is Kraft's largest shareholder and is obviously involved in the situation as well. We'll have to see if this deal pans out and who comes away as the major victors.

Bill Ackman's hedge fund firm has been quite busy lately as we recently saw their research on General Growth Properties (GGWPQ), a REIT emerging from bankruptcy. Additionally, in a recent Pershing investor letter, we learned that Ackman picked up a new stake in Nestle. We've got plenty of other coverage of Pershing Square for those interested as well.

Taken from Google Finance,

Kraft is "engaged in manufacturing and marketing packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products."

Cadbury is "is a confectionery company. The Company is engaged in the confectionery business, with participation across the three categories of chocolate, gum and candy. The Company’s seven business units are Britain and Ireland, Middle East and Africa, North America, South America, Europe, Asia, and Pacific. Cadbury plc has developed a global portfolio of brands. The Company’s brands in chocolate are Cadbury Dairy Milk, Creme Egg, Flake, and Green & Black’s. Trident is the Company’s gum brand. Other gum brands include Hollywood, Stimorol, Dentyne, Clorets and Bubbaloo. Halls is a candy brand of the Company. Other brands are Maynards, The Natural Confectionery Co. and Cadbury Eclairs."