Friday, July 13, 2012

Berkshire Hathaway Buys Phillips 66 (PSX) Shares

Warren Buffett this morning on Bloomberg TV said that his Berkshire Hathaway has invested in Phillips 66 (PSX).  We've also posted up a summary of Buffett's lengthy interview.

PSX was spun-off from ConocoPhillips (COP) on May 1st and Buffett said one of his portfolio managers (either Todd Combs or Ted Weschler) have reduced holdings in COP and bought into the refining operations ~ PSX.

Owners of COP shares received 1 share of PSX for every 2 shares of COP owned as of April 16th.  Berkshire owned just over 29 million COP shares as of March 31st (before the spin-off).  Assuming that number, that would mean they received just over 14.5 million shares of PSX in the spin.

But it sounds like they've gone a step further by selling some of their post-spin COP shares and adding to their PSX stake.

For more from Berkshire Hathaway's leading man, head to notes from Buffett's meeting with MBA students.

Warren Buffett on the Economy, Wells Fargo, Newspapers & More (Lengthy Interview)

Warren Buffett co-hosted Bloomberg TV's "In the Loop" this morning and we wanted to summarize his interview with the main talking points.  One of the main takeaways is that Berkshire has invested in Phillips 66 which we broke down in a separate post.

Here are some takeaways from Buffett's interview:

On the Housing Market:  "It is starting to recover. The general economy has probably slowed down a little in the last few months. The bank the housing market is recovering…We are seeing an improvement. We have moved noticeably in the last few months. It was just a question of getting households in balance with housing units. That happens at different paces in different parts of the country. You have seen a much better balance developing here in recent months. That is why you are seeing a pickup in prices.”

Will the US Fall Off the Fiscal Cliff?  “It depends on the election, but I think people are quite disgusted with Congress. The idea of having a debt ceiling -- as this country grows, our debt capacity grows. To go through this charade, we are going to increase the debt ceiling, so why Congress does not do it in five minutes instead of spending weeks and weeks posturing and complaining and holding other things hostage, I think it is disgusting. I think they ought to do it this afternoon. They know they are going to do it, and they are all just sitting around using it as a little pond in the game to try to embarrass the other side. Only Congress passes bills, and the debt ceiling is up -- to me it is the most obvious of all. I do not know why the majority and minority leaders of both houses do not say we are going to do that this afternoon. I think it would give the American public the confidence that at least these people will not use everything in the world as a political.”

On Wells Fargo (WFC): “I like Wells Fargo better than anything by far. It complicates life when I and buying things as opposed to the Berkshire Hathaway. I get what is left over…I like Wells Fargo better [than JPMorgan]. We have been buying Wells Fargo month after month for a lot of years. Among the big banks, I think it is the best. “

On Why He's Investing in Newspapers:  “These are smaller newspapers generally. Newspapers used to be primary virtually everything. They have lost their primacy in many areas. If you lived in Nebraska and you are interested in at Nebraska football or your high school and what is going on with your neighbors, you are only going to find it in the independent papers. The smaller paper is still primary to many areas of interest.”

Would He Invest in News Corp's Publishing Unit?  “I would rather buy newspapers myself directly…I like buying individual papers at the right price. The prices should be low because their revenues are going to decline over time. We are not buying into a business where revenues are going to increase. We have to buy them at the right price. We have to buy papers that are subject to less erosion because they have lost their primacy.”

And embedded below is the video of Warren Buffett's full appearance this morning on Bloomberg TV:

 For more on the Oracle of Omaha, head to a tour of Warren Buffett's office as well as Warren Buffett's recommended reading list.

Leon Cooperman on 14 Attributes That Make a Good Portfolio Manager

Leon Cooperman founded hedge fund Omega Advisors in 1991 and is now worth $2 billion.  The hedgie has listed 14 attributes that make a good portfolio manager in an article by Julie Steinberg over at FINS.  We wanted to highlight a few of the key attributes below and add some commentary:

Attributes That Make a Good Portfolio Manager

1.  The desire and commitment to be the best.  Cooperman lists this as his top reason and Julian Robertson of Tiger Managment would certainly agree.  In an in-depth interview, Robertson listed competitiveness as the top quality he looks for when seeding a manager.

2. Can identify his or her comparative advantage.  Cooperman asks, "What is that person's knowledge base? Are they knowledgeable about structured credit?  Where is their skill set the greatest?  Where does their expertise lie?  How can they capitalize on that expertise?"

This is right along the lines of what Warren Buffett has been preaching for years: invest in your circle of competence.  Not to mention, longtime fund manager Peter Lynch has also said to invest in what you know and even wrote a book about it.

3.  Thorough and penetrating analysis/in-depth research with a strong analytical foundation.  This, of course, is the backbone of managing investments. Dig into company filings, read the footnotes, do channel checks, talk to other investors. 

Third Point's founder Dan Loeb also said to get out in the real world and see what's going on.  He listed that as one of the lessons he's learned as an investor.  And of course, research both the bull and the bear case. Which leads us to Cooperman's next attribute:

4. Identify variant perception.  Cooperman asks, "Where does your view differ from the consensus that could spark the reason you're getting the return you're looking for?  You see things that someone else doesn't see."  This is also what Baupost Group's Seth Klarman attempts to do everyday.  It's important to distinguish between the herd's activity and the contrarian view.

Also, more often than not, investors seek out confirming information that reinforces their viewpoint.  Don't.  Instead, seek out the alternative view.  Berkshire Hathaway's Charlie Munger also favors this approach, saying to "invert, always invert."  Lastly, we've also highlighted thoughts from Oaktree Capital's founder Howard Marks on contrarianism.

5.  Have conviction with respect to investment recommendations and confidence to add to a position if fundamentals are intact but stock is down.  Cooperman says, "When a stock goes down and is not performing in a manner that's anticipated, you capitalize on the weakness.  If you know what you're doing, buy more ... be able to defend your ideas."

This one is easier said than done.  You have to be able to set emotion aside (seeing unrealized losses) and buckle down and do the work to confirm your thesis is still in tact.  This one almost certainly applies more-so to value investors as falling knives can be dangerous to catch.

6.  Good communication skills are critical.  Can easily write a several page summary of his or her investment views.  The Omega founder says, "People need to be able to communicate effectively.  They have to sell me on their ideas.  When I read something, I write questions in the margin and discuss them.  If you can't write, you're at a disadvantage."

This applies more to analysts than portfolio managers as the analysts are the ones pitching ideas to the PM.  In Sam Zell's advice on investing, he said that something is only worth buying if you can explain the thesis in a few sentences.

7.  Unbiased and willing to admit mistakes, skeptical, creative, curious, bold/edgy, able to take risk.  Cooperman has bundled a lot of adjectives in there but they're all relevant to the field of investing.  This harkens back to the old adage, "cut losses quickly" if your thesis is not working out.

While the ability to take risk is key, you also need to know your level of risk tolerance and how to manage risk.  This tolerance is often discoverable under the point of most stress when a position is moving against you.  Can you still sleep at night?  Set emotion aside and think rationally.  It certainly helps if you always look at things on a percentage basis rather than in absolute dollars. 

For the other 7 attributes Leon Cooperman says make good portfolio managers, head over to the full list at FINS.

And for further resources on how to become a better investor, head to these posts:

- George Soros' best investment advice

- Notes from Seth Klarman's Margin of Safety

- Bruce Berkowitz's checklist for investing

- Lessons Dan Loeb learned as an investor

- Jim Chanos on the psychology of short selling

- Sam Zell's advice on investing

- Chuck Akre on good judgment in investing

Thursday, July 12, 2012

George Soros' Best Investment Advice

Today we have a guest post from Williams Equity Analysis who have graciously allowed us to post their piece in its entirety from Seeking Alpha: The Best Investment Advice George Soros Ever Gave.  Here it is:

"Economic history is a never-ending series of episodes based on falsehoods and lies, not truths.  It represents the path to big money.  The object is to recognize the trend whose premise is false, ride that trend and step off before it is discredited."  ~ George Soros

Think about that statement for a minute. For everyone who is in the so-called bear camp, and thinks the current "recovery" belongs in quotation marks, this is an exceptionally meaningful quote.

Of course, everyone who has been bearish on the markets since 2009 has largely lost money, and been quite aggravated in the process. Had trillions in stimulus and quantitative easing not been injected into the economy (the big banks for the latter), our economy would have simply restructured and our markets would have bottomed at values far lower than they did. Bearish market participants have been investing with the philosophy that this will still happen.

Many bearish market participants have recognized the dynamic that there are long-term structural deficit and various economic issues, and that the economy is simply being goosed by trillions in cash and dangerously low interest rates. In other words, the bears scream that "the economy is unsustainable;" If and when rates rise, servicing trillions in debt is going to require even more debt issuance, leading to ever higher rates and a crowding out of the private sector. At this point, people draw different conclusions as to what happens next.

Others note that the euro is going to break apart, and it too is only being held together by programs like LTRO and other central bank intervention.

Regardless, many have come to the conclusion that our equity markets are fundamentally overvalued and do not discount the structural issues we face. The best argument I've heard for overvaluation is that corporate profit margins will contract rapidly when the U.S. government needs to start cutting its budget; we may be approaching that day with the creeping "fiscal cliff" at the end of the year.

With lower margins and lower aggregate demand (less government spending), both sales and bottom lines will contract. The earnings of companies in the S&P 500 (SPY) will decline, and stock prices will follow them downwards. With analysts currently expecting at least $100 in earnings for 2012, and $113 in 2013, the market is definitely not discounting any type of drop in aggregate demand or corporate profit margins.

Utilizing Mr. Soros' Advice

The important factor, however, is what this means for traders and investors trying to make money. After all, making money is a lot more important than being right, isn't it?

What we're seeing today isn't anything new at all. While the Fed's intervention this time around may be unprecedented, it's fair to say that FDR's government programs following the Great Depression were unmatched as well. How about interest rates of 1% following 9/11 to stimulate demand and get everyone shopping again? It contributed to a housing bubble, widened the wealth gap, and harmed our political system.

During those periods, the bears complained about the same things: the unsustainability of low rates, government intervention, and huge deficits.

However, markets boomed for most of the 1930s, set record highs right before the recession, and have doubled since all these actions have started taking place. There have been three camps of market participants during these times:

1. "Everything is great, the economy has clearly restructured and the bears are just whining that they missed out."

2. "We're doomed.  Markets are going to zero, another Great Depression is near, and unconstitutional government intervention has made things far worse."

3. "I don't care.  I'm either going to keep buying my dividend stocks, buy assets that do well when governments print money, or go long the broader market until the government either gives up or can't prop it up any longer."

The last of these three, of course, is George Soros. Over the past several years, Soros has made money owning gold, equities, bonds, and currencies. He knows Europe really is doomed. The EU is going to have to at some point write down trillions in private and public sector debt, and an actual, painful restructuring will finally take place. He knows gold's price moves in cycles, that it's not a compounding investment, and that it will plummet once the macro landscape shifts to a more positive one. He also knows that investors buy gold at times like these.

Jim Rogers hates the US dollar. He is certain that the U.S. government has spent its way into a hole so deep it'll have to default either by printing or not paying its creditors. Jim Rogers also knows that the market perceives the dollar as a safe haven right now, so he owns millions in US dollar currency futures for the time being. My bet is that he'll sell long before the dollar loses its safe haven status.


One of the best things you can do as an investor or trader is to have a sober, analytical, pragmatic view of the economy. Always invert your thinking, and try to understand all possible viewpoints. The obvious macroeconomic dynamics are obvious because they're true. What's not so obvious is the underpinnings of market perceptions. The beauty of markets, though, is that you don't have to understand the reasons for why investors buy certain assets or equities to be profitable.

Jim Rogers can't understand why investors have been flocking to the USD recently instead of gold. Instead of whining about "the manipulated price of gold", however, he's been hedging his positions in gold and buying the dollar to take advantage of its rising value.

George Soros' quote sums up what the best investors and traders know about macroeconomic and market dynamics: most of it is noise, all that matters is the trends and a few indicators and analytical skills to tell when the train is slowing down.

Next time you think you've got the economy figured out, ask yourself if your long-term viewpoint has matched up with the market trend. If not, then you're not making money, and not taking advantage of everything you know.

Thanks again to Williams Equity Analysis for allowing us to re-post their piece from Seeking Alpha.

What We're Reading ~ 7/12/12

7 factors to watch for a slowing economy [Big Picture]

Recession risk in perspective [Capital Spectator]

10 reasons to like stocks for the second half of the year [Reformed Broker]

Tiger Global leads outperforming funds this year [Institutional Investor]

Hedge fund withdrawals highest since 2009 [HedgeWorld]

The strange takeover limbo of CVR Energy [Dealbook]

Kyle Bass' timing on Japan is a little off [Institutional Investor]

Are hedge funds burning investors? [Pension Pulse]

The challenges in hedging tail risk [Dealbook]

Longacre co-founder plans spinoff [WSJ]

Paolo Pellegrini caught in Paulson's fund slide [WSJ]

Bruce Berkowitz bounces back after rough 2011 [WSJ]

SAC's Cohen starts reinsurer for capital [Bloomberg]

Bank fees squeeze retailers [WSJ]

Square: the mega-disrupter everyone wants to be in [PandoDaily]

On Microsoft's downfall [Vanity Fair]

Bill Ackman's Pershing Square Cleared To Take Stake in Procter & Gamble (PG)

Bill Ackman's hedge fund firm Pershing Square Capital Management looks as though they're taking a stake in Procter & Gamble (PG).  The Federal Trade Commission (FTC) cleared Pershing to take a stake in the company via this page on their site.

There's no way to know how big Pershing's investment is/will be.  We'll have to wait until SEC filings for clarification.  However, this would be a new stake for the firm.  In Pershing Square's Q1 letter, Ackman said that they had identified their latest investment but declined to name it at the time.  It seems as though PG is the mystery candidate.

The logical play here given Ackman's style would be to break-up the company, but with no formal plans announced we'll have to wait and see.  Ackman already has activist investments in Canadian Pacific (CP) and J.C. Penney (JCP) so it will be interesting to see how many corporate campaigns he can take on at once.

Per Google Finance, Procter & Gamble is "focused on providing consumer packaged goods. The Company’s products are sold in more than 180 countries primarily through mass merchandisers, grocery stores, membership club stores, drug stores and high-frequency stores, the neighborhood stores, which serve many consumers in developing markets."

For more on this manager, we just yesterday posted Bill Ackman's recommended reading list.

Wednesday, July 11, 2012

Bill Ackman's Recommended Reading List

Bill Ackman is the founder of Pershing Square Capital Management and he is the subject of the book Confidence Game.  In it, Ackman lists his recommended books on investing which he sent to an analyst. Here are his picks:

Security Analysis by Benjamin Graham (with foreword by Warren Buffett):  This is the classic text on analyzing companies and has been recommended by countless other top investors.

One Up on Wall Street by Peter Lynch: Written by one of the top fund managers in the past, this book teaches you how to use what you already know to make money in the market.

Quality of Earnings by Thornton O'Glove: A lesser-known but excellent recommendation that teaches you how to understand the various financial information companies provide.

The Essays of Warren Buffett:  This is a fantastic compilation of Buffett's letters to Berkshire Hathaway shareholders over the years containing tons of wisdom.

The Intelligent Investor by Benjamin Graham: "The definitive book on value investing" written by one of the greats.

And if you've missed them in the past, be sure to check out picks from other top investors:

- Seth Klarman's recommended reading list

- David Einhorn's suggested reading

- Warren Buffett's top picks

- Dan Loeb's favorite books

- Blue Ridge Capital's recommendations

Tuesday, July 10, 2012

Jim Chanos on Psychology of Short Selling, China & More (Interview)

Noted short seller and founder of hedge fund Kynikos Associates Jim Chanos was recently interviewed by Opalesque.  In it, Chanos talks about the psychology of short selling and his first great short idea in Baldwin United.

The hedgie also talked about the asymmetries between the long and short side of investing.  While both sides of the table require a similar skillset (ability to analyze companies), good short sellers have to be able to withstand the "giant positive reinforcement machine." 

Chanos says that this is where most managers fail on the short side as most cannot withstand all the positivity.  Along the same lines, we've in the past highlighted Chanos on the power of negative thinking.

Chanos has been very vocal about his stance on China and we've detailed his bearish view on China.  In the interview, he continued to voice caution as he thinks they're in trouble due to bad credit and credit extension.  And just recently we posted up a summary of hedge fund bearish China thesis.

Embedded below is Jim Chanos' video interview:

For more from this manager, we've detailed what stocks Chanos has been shorting recently.

David Einhorn on Apple, Green Mountain Coffee & Amazon (Interview)

Fresh off taking third place in a World Series of Poker tournament with a $1 million dollar buy-in (and donating winnings to charity), David Einhorn of hedge fund Greenlight Capital gave a rare appearance on CNBC this morning talking about a myriad of topics.

Here are the major takeaways from his talk with the full video below:

- Einhorn thinks near-zero interest rates are depriving savers and raising prices on food and other necessary items.  He'd tell Bernanke to raise rates.

- It would appear that he's still short Green Mountain Coffee Roasters (GMCR) as he said "Yeah, the Keurig is on the way out."  Einhorn talked about some of his other short positions in his Ira Sohn Conference presentation.

- Thinks he'll be in the Apple (AAPL) investment for "a good while longer" and he thinks it's "substantially undervalued ... it's the best big growth company we have ... and it trades at a multiple below the average of the S&P 500."  He's already been in the investment for 2-3 years.

- On Amazon, Einhorn is not long or short.  He made comments about Amazon in his Ira Sohn presentation that caused confusion a few months ago.  Today he said that "AMZN is very tough on its competitors... it doesn't feel compelled to make a profit ... it's very hard to compete against someone who doesn't want to make a profit."  He clarified that he was mainly talking about how AMZN is negatively affecting other companies.

- On Herbalife (HLF):  Commentators pressed Einhorn on whether or not he was invested in Herbalife.  Einhorn showed up on one of the company's recent earnings calls and asked some questions.  The stock sold off heavily as many assumed Einhorn was short or was planning to short HLF.  Today, Einhorn declined to talk about whether he had a position in the name long or short.  But he did so with a big smile, so all you poker players out there can try to read into his body language to see if he might be giving a "tell."

Embedded below is the video of David Einhorn's video interview:

For more on this manager, we've highlighted how Einhorn recently added to his Seagate stake and you can also check out Greenlight Capital's Q1 letter.

SAC Capital Increases Wellcare Health Stake (WCG)

Steve Cohen's hedge fund firm SAC Capital yesterday after market close filed a 13G with the SEC on shares of Wellcare Health Plans (WCG).  Per the filing, SAC has revealed a 5% ownership stake in the company with 2,155,721 shares.

This marks a 105% increase in their position size since the end of the first quarter.  The filing was required due to portfolio activity on July 6th.

Shares of WCG have recently seen two surges higher.  First, under the Supreme Court's upholding of Obamacare, WellCare Health Plans shares surged from $50 to $55 on the news.

Then, just yesterday, it was announced that Amerigroup (AGP) would be acquired by Wellpoint (WLP).  It seems shares of WCG rose in tandem on hopes that the company could also potentially be a takeover target in the space.  WCG traded from $59 up to $62.

Per Google Finance, Wellcare Health Plans "provides managed care services to government-sponsored health care programs. WellCare operates in three segments: Medicaid, Medicare Advantage (MA) and Prescription Drug Plan (PDP), which are within its two main business lines: Medicaid and Medicare."

For more on this hedgie, head to more recent portfolio activity from SAC Capital.