Friday, January 11, 2013

Charlie Munger & Warren Buffett's Secrets To Investing Success

Value investor Mohnish Pabrai recently sat down for an interview with The Motley Fool and he talked about what he learned from his lunches with Charlie Munger and Warren Buffett.

Charlie Munger's 3 Secrets To Investment Success

Pabrai talked about how Munger revealed 3 things investors can do to be successful:

1. Carefully watch what other investors are doing
2.  "Look at the cannibals" - look at businesses buying back huge amounts of stock
3. Carefully study spin-offs

Point number one is quite interesting as Munger flat out tells you to watch other investors (i.e. 13Fs, 13G's, public appearances, etc), something Market Folly's expanded on in our premium newsletter.  Rather than blindly copying their picks, we'd assume Munger means to use this as a source of idea generation and a starting place to do more work.

The second point (stock buyback) is something that numerous hedge funds take into consideration when evaluating ideas.  Steve Mandel of Lone Pine Capital is said to be a fan of 'share count shrinkers'. 

Lastly, the third point (spin-offs) is an excellent place to source ideas and Joel Greenblatt talks about spin-offs in his book.  In fact, many hedge funds buy companies that announce a spin-off and then once the split is complete, hold onto one piece of the company that they like most. 

An example that many hedge funds played was Expedia (EXPE) spinning off TripAdvisor (TRIP).  We'd assume Charlie also meant 'split-ups' and a recent example of that would be Tyco splitting up into PentAir (PNR), Tyco (TYC), and ADT (ADT).  

Warren Buffett's Words of Wisdom

Pabrai relayed a story Warren Buffett told him about his former partner Rick Guerin, who fell off the map so to speak.  Buffett, Guerin, and Munger used to all invest together but Guerin was in a hurry to get wealthy whereas Munger and Buffett weren't.  Buffett's outlined two lessons:

1. Avoid leverage
2. Be patient

Guerin was levered with margin loans in the 1973/74 downturn and received tons of margin calls, so he was forced to sell his Berkshire Hathaway (to Buffett).

So Pabrai described the lesson from Buffett as, "if you're even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient.  And so the lesson was, don't use leverage, right?  And be patient.  These are attributes he's talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it."

Embedded below is the video of Pabrai sharing what he learned:

For more from these great investors, head to Warren Buffett's recommended reading list as well as Charlie Munger on the psychology of human misjudgment.

Glenview Capital Reduces Spirit Pub Stake

Larry Robbins’ hedge fund, Glenview Capital, has been steadily reducing its position in  London listed Spirit Pub Company (LON: SPRT). When Spirit was spun off from Punch Taverns (LON:  PUB) in May of last year, Glenview held 18.37% of Spirits voting rights. Due to selling in July, August,  November and now January, Glenview now hold only 11.7%.

Despite the selling, Glenview are still Spirit’s largest shareholder.  Glenview has not sold any of their Punch Taverns stake though, which stands at 18.77%. It seems Robbins prefers the Punch Taverns side of the business. 

Also worth noting: Glenview has a large holding in rival London listed pub group, Enterprise Inns (LON: ETI)  where they hold 12.27% of voting rights. 

Glenview had a big year in 2012 as they returned almost 30% in their main fund.  Robbins has made a big bet on many hospitals and we've highlighted his other recent portfolio activity here.

Per Google Finance – “Spirit Pub Company is a United Kingdom-based company. As of July 1,  2011, the Company’s business comprised the managed pub business and the leased pub business  comprising, 803 managed pubs and 549 leased pubs, which were carried on within the Punch  Group by Spirit Pub Company (Holdco) Limited and its subsidiaries. In April 2011, Punch Taverns plc  announced its plans to demerge its Managed business to create a business, Spirit Pub Company.”

Ross Turner's Pelham Capital Buys Vesuvius Stake

Ross Turner’s hedge fund, Pelham Capital, has disclosed a new position in London listed Vesuvius (LON: VSVS). Turner, previously the youngest partner at London hedge fund Lansdowne Partners, established his long/short fund in 2007, raising $500m. 

Due to trading on December 19th, Pelham now holds 5.9% of VSVS’s voting rights.  Vesuvius and Alent , both FTSE 250 midcap companies, were formed by a de-merger of Cookson Group in December last year. 

Per – “Vesuvius PLC is engaged in metal flow engineering, developing, manufacturing and marketing ceramic consumable products and systems to the global steel and foundry industries and in industries that require refractory materials for high temperature, abrasion resistant and corrosion resistant applications such as the aluminium, cement, glass and solar industries. It has three business segments: the Steel and Foundry businesses, both of which are providers of engineered ceramics, and Precious Metals Processing business. Its products are specialised ceramics, including shrouds, stoppers, nozzles, slide gates, lining refractories and fluxes for the steel production industry and filters, feeding systems, coatings and binders for the foundry industry. On May 1, 2012, the Company disposed the United States business of the Precious Metals Processing business to Richline Group Inc. In November 2011, SERT was acquired by the Company. On March 29, 2012, it acquired Metallurgica.”

Wednesday, January 9, 2013

Dan Loeb Buys Herbalife, Morgan Stanley & Tesoro: Third Point Q4 Letter

Let the battle begin.  Dan Loeb's hedge fund Third Point has started a long position in Herbalife (HLF), he revealed in his Q4 letter to investors.  He also filed a 13G with the SEC disclosing that Third Point owns 8.24% of the company as of January 3rd.

Loeb Long Herbalife

Readers will recall that we recently posted up Bill Ackman's short presentation on HLF where he called it a pyramid scheme.  Brian Sullivan tweeted that Andrew Ross Sorkin spoke with Third Point, who believe there's no evidence HLF is a pyramid scheme in their research.

Third Point believes in the compounder thesis that the stock was trading at an attractive discount (after Ackman's short presentation).  Third Point writes,

"Applying a modest 10-12x earnings multiple suggests Herbalife's shares are worth $55-68, offering 40-70% upside from here and making the company a compelling long investment ... Given that the company has historically traded more in the 12-14x range (and traded at 16-20x earnings through much of 2011 and early 2012), the opportunity for the company to tell its side of the story tomorrow at its Analyst Day in New York, and the significant short interest, we believe shares could even trade well about our current price target."

So, you now have two hedge fund heavyweights: 1 long, 1 short.  Who wins?  Only time will tell.  Now all we need is David Einhorn to toss his hat in the ring as well.  After all, in May of this year Einhorn popped up on a HLF earnings call and started asking questions.  However, he has not disclosed a position long or short.

Third Point Starts Morgan Stanley & Tesoro Positions

While the HLF position will get all the focus, we also wanted to highlight that Third Point disclosed a new position in Morgan Stanley in their Q4 letter as well. They feel the company is a turnaround story and point to the stock trading at a 20% discount to tangible book, down from the 35% discount when they acquired shares at an average price of $16.77 per share.

The hedge fund also bought shares of refiner Tesoro (TSO).  They write, "we see Tesoro generating about $9 per share in annual excess FCF on a normalized basis and our expectation is that shares can double from the current price of $40.  We believe the Q3 story was only the beginning, and are happy to own Tesoro for its next few chapters."

Embedded below is Dan Loeb & Third Point's Q4 2012 letter to investors:


For more on this hedge fund manager, we just yesterday posted up how Third Point ramped up net long equity exposure.

Odey Discloses Regus Stake

Crispin Odey’s hedge fund, Odey Asset Management, has disclosed a new position in London  traded Regus (LON: RGU). Due to trading on January 4th, Odey now own 5.15% of Regus’s voting rights.

Odey hold the equivalent of 1.88% of Regus’s voting right via contract for difference (CFD), something we've explained in the past via that link for those unfamiliar.

In terms of shorts positions in the UK property sector, Odey also has a -0.91% short in Capital Shopping Centres (LON: CSCG).  CSCG is a real estate investment trust (REIT) that owns 14 regional shopping centres in the UK.

For more information on Odey’s recent activity in UK markets see our posts on their stakes in Shanta  Gold (LON: SHG) and fellow hedge fund, Man Group (LON:EMG). 

Per Google Finance – “Regus plc is a provider of global office outsourcing services. Its primary  activity and business segment is the provision of global workplace solutions. There are three parts  to the Company’s business: Mature, New and Third Place. The Company’s products and services  include outsourcing, workplace recovery, business lounges, businessworld, meeting rooms, video  communications, offices and virtual offices. It offers bespoke packages for starting a business,  home based business, mall and medium business, international business and corporate workspace  solutions. It has some 1,203 locations across 550 cities in 94 countries serving more than a million  customers. Its principal geographical segments include Americas; Europe, Middle East and Africa  (EMEA); Asia Pacific; and the United Kingdom. During the year ended December 31, 2011, it opened  139 locations, and added 62 centers, including a center in Omaha, Nebraska. In September 2012, it  opened a new business center in Rwanda, Kigali.”

Howard Marks: Fixed Income Returns Not Worth The Risk (Latest Memo)

Longtime readers will know we're big fans of Howard Marks' commentary mainly because he often tackles investment process and other key concepts of investing.  The latest memo from the Oaktree Capital chairman is entitled "Ditto" outlines how history doesn't repeat itself but it does rhyme and he outlines some of these repeating themes in financial markets:

- Importance of risk and risk control
- Repetitiveness of behavior patterns and mistakes
- Role of cycles and pendulums
- Volatility of credit market conditions
- Brevity of financial memory
- Errors of the herd
- Importance of gauging investor psychology
- Desirability of contrarianism and counter-cyclicality (we've highlighted an excerpt from Marks' book on contrarianism in the past)
- futility of macro forecasting

As you'll notice, many of the above are related to behavior/emotion (see recommended reading on the topic here).  Because while fundamentals, technicals, or whatever metrics you follow matter, you also have to worry about the two factors that seemingly move markets the most: greed and fear.

He goes on to write, "The good news is that today's investors are painfully aware of the many uncertainties.  The bad news is that, regardless, they're being forced by the low interest rates to bear substantial risk at returns that have been bid down.  Their scramble for return has brought elements of pre-crisis behavior very much back to life."

The key here, is that he's referring mainly to fixed income securities.  After the financial crisis, everyone was looking for "safety."  And then during the low interest rate years, everyone began to stretch for yield.

Marks reiterates something he said in 2004 by saying that, "there are times for aggressiveness.  I think this is a time for caution.  Here as 2013 begins, I have only one word to add: ditto."

Marks' latest memo "Ditto" is embedded below:

You can download a .pdf copy here.

For more wisdom from this manager, be sure to check out Marks' previous letter.

What We're Reading ~ 1/9/2013

Fund manager search and selection tips [CFA Institute]

Remembering what's important when it comes to investing [Abnormal Returns]

Latest interview with Jim Chanos [Barrons]

Irving Kahn: The 107-year old stock picker [WSJ]

A profile on fund manager Don Yacktman [Fortune]

Interviews with Marc Lasry & Thomas Wagner [Distressed Debt Investing]

Smart money has many forms [Invanoff]

Leading investment indicators [Above the Market]

How would Buffett invest if he started over today? [Geoff Gannon]

When is a hedge fund not a hedge fund [Market Safari]

On implementing the Peter Lynch approach to stocks [Guru Investor]

Hedge funds going nowhere fast [Economist]

Profile of Ryan Morris, a 28-year old activist investor [BusinessWeek]

A rare interview with Google's Larry Page [Fortune]

A qualitative look at Apple (AAPL) [Brooklyn Investor]

Why Bill Ackman is wrong about Herbalife [Kid Dynamite]

A look at Abbott Labs spinoff Abbvie [Stock Spinoffs]

Amazon: The hidden empire [Scribd]

How TV still made money off the internet [The Atlantic]

Mortgage rates won't get much lower [Fortune]

Tuesday, January 8, 2013

What We're Reading ~ 2013 Predictions Edition

Our normal weekly linkfest will be published tomorrow (Wednesday) as usual.  But today we wanted to highlight a set of links focused on picks and predictions for the new year.  Enjoy 2013:

10 new, must-read investing blogs for the new year [Marketwatch]

Crowd-sourced 2013 stock and market picks [Forbes]

The 2013 buy list [Crossing Wall Street]

Stories to watch for in 2013 [Marginal Revolution]

Byron Wien's 2013 predictions [Zero Hedge]

Walt Mossberg's 2013 tech predictions [WSJ]

Top 10 predictions for 2013 [FirstAdopter]

The 10 best stocks for 2013 [Old School Value]

10 favorite stocks and trends for 2013 [Leigh Drogen]

And looking back on 2012:

Wall Street geniuses and their favorite charts of 2012 [Business Insider]

At the end of the year, a time for reflection [Adam Grimes]

Market Strategist Jeff Saut: Short-Term Conflicted, Long-Term Bullish

It's been a while since we checked in on market strategist Jeff Saut, so now that the new year is upon us, let's see how he's positioned and approaching this market.  His latest commentary, entitled "White Noise?" talks about how investors need to filter out the daily noise they hear from media.

As far as his positioning goes, Saut notes that "I am currently short-term conflicted.  While the long-term case remains strongly bullish based on a more collegial Congress, a continuation of the housing boom, strengthening auto sales, improving employment, low inflation, liquidity, etc, the short-term is becoming suspect."

The reasons for his short-term concern stem from the McClellan Oscillator remaining overbought and the fact that highly shorted stocks rallied profusely (implying a massive short squeeze in some of these popular shorts).

He thinks the rally will stall at certain technical levels (1475) and pullback in February, a dip he thinks should be bought.  He likes all sectors except for Consumer Staples, saying they're too expensive currently.

Embedded below are Jeff Saut's latest investment strategy comments:

You can download a .pdf copy here.

Third Point Ramps Up Net Long Equity Exposure in December

Dan Loeb's Third Point Offshore Fund finished 2012 up 21.2%, managing just over $5 billion.  In the hedge fund's most recent December report, we see their exposure levels and latest top holdings:

Exposure Levels

The main takeaway from Third Point's latest exposure report is their sizable increase in net long equity exposure.  They went from being 27.7% net long at the end of November to 43.1% net long at the end of December.

They are slightly net short healthcare and their largest net long exposure comes in the TMT (tech, media & telecom) and industrial sectors.

In credit, Loeb's firm is net long 29.5% and their largest allocation there continues to be asset backed securities.

Third Point's Top Positions

1. Yahoo! (YHOO)
2. American International Group (AIG)
3. Gold
4. Ally Financial (multiple securities held)
5. Murphy Oil (MUR)

Compared to the month prior, there are two notable changes.  First, their position in Greek Government Bonds (GGB's) falls out of their top holdings.  We posted an article about them trimming this position in our weekly linkfest. The second change is that Ally Financial has climbed up the position sheet.

Top winners for Third Point in December included GGB's, AIG, Delphi (DLPH), and Nexen (NXY).  The government exited its stake in AIG, one of the many catalysts Third Point outlined in their thesis on AIG.

NXY has been a big arbitrage play among hedge funds as their merger deal was approved by Canadian authorities.  This stock was flagged as a consensus buy among hedge funds in our November Hedge Fund Wisdom issue.