Thursday, March 1, 2018

Free Chapter From Dear Chairman Book: Dan Loeb and Hedge Fund Activism

Jeff Gramm's book, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, has been featured on the site before and we reviewed it here.

We wanted to let everyone know that Gramm has generously made the chapter about Third Point's Dan Loeb available for free.  The chapter is entitled: Daniel Loeb and Hedge Fund Activism: The Shame Game.  This was one of our favorite parts of the book so if you haven't read it yet, check it out.

You can download a .pdf copy of the free chapter on the book's website here.

And if you haven't already, definitely be sure to pick up a copy of Dear Chairman.

Carl Icahn Reveals Newell Brands Stake

Per an interview with CNBC today, activist investor Carl Icahn reveals he has taken a stake in Newell Brands (NWL).  "I believe Newell itself is undervalued and that's why I bought it" Icahn noted.

He says he bought NWL around $25 and has a less than 5% stake in the company, though Icahn feels he has one of the largest positions in the company.

Another activist investor, Jeff Smith's Starboard Value is also involved in the company and has joined Jarden executive Martin Franklin in trying to replace the entire board.

Newell merged with Jarden and the Starboard contingent feels that the Newell management team has not managed the integration well.  The company features prominent consumer brands such as Rubbermaid, Elmer's glue, and more.

NWL was featured in the investment thesis summary section of  the Q3 2017 issue of our Hedge Fund Wisdom newsletter if you're looking to catch-up on the company's background.

Wednesday, February 28, 2018

What We're Reading ~ 2/28/18

On decision regret [A Wealth of Common Sense]

Why competitive advantages die [Collaborative Fund]

Notes from the Wharton restructuring & distressed conference [Reddit]

The case against Google [NYTimes]

Consumer goods: big brands battle with the little guys [FT]

The end of the low volatility regime [13D]

Myths and facts about "risk parity" [FT Alphaville]

Inside Facebook's two years of hell [Wired]

How Softbank, world's biggest tech investor, throws around its cash [WSJ]

Canada's housing market flirts with disaster [FT]

Everything you need to know about 5G [IEEE Spectrum]

Inside T-Mobile's big, brash comeback [Fortune]

Boeing is killing it by squeezing its suppliers [Bloomberg]

From imitation to innovation: how China became a tech superpower [Wired]

Chinese tourists are taking over the earth [Bloomberg]

There's a global race to control batteries - and China is winning [WSJ]

Didi Chuxing took on Uber and won, now it's taking on the world [Wired]

Autonomous cars: no one wants to let Google win the war for maps all over again [Bloomberg]

Dyson bets on electric cars to shakeup industry [FT]

How to succeed in business?  Do less [WSJ]

Pershing Square Building United Technologies Stake; Covers Herbalife Short

Per CNBC, Bill Ackman's Pershing Square has reportedly been building a stake in United Technologies (UTX).  Ackman told Scott Wapner that he thought the company was "great."  The company has been awaiting the closure of its acquisition of Rockwell Collins (COL).  Additionally, UTX management has said they've been evaluating splitting up into a few different entities.

Secondly, Ackman has exited his bet against Herbalife (HLF).  He had previously been outright short shares, but then this past November restructured the short via put options.  Now, he's out of his short bet entirely.  

This comes after he said back in 2013 that he'd go to the "ends of the earth" to shut the company down, dubbing it a pyramid scheme.  Shares of HLF are already up 36% year-to-date after being up a similar amount already last year.

Pershing Square has been active lately, as it also recently revealed a new Nike (NKE) position.

For more from this investor, you can view a recent Pershing Square presentation here.

Tiger Global Selling eHi Car Service Stake

Chase Coleman's hedge fund firm Tiger Global has filed a 13D with the SEC regarding its stake in eHi Car Services (EHIC).  Per the filing, Tiger Global is selling 5.26 million ADR shares representing 10.52 million class A shares.

The SEC filing specifies the details:

"On February 23, 2018, Global Mauritius, a Reporting Person, entered into a Securities Purchase Agreement (the "Purchase Agreement") with BPEA Teamsport Limited (the "Purchaser") for the sale of 5,264,080 ADSs, representing 10,528,160 Class A Shares, to the Purchaser.  The closing of the transaction contemplated by the Purchase Agreement is scheduled to occur on or prior to May 30, 2018. The initial purchase price is US$12.00 per ADS, subject to adjustment as provided in the Purchase Agreement. The Purchaser is participating in that certain consortium including Mr. Ray RuiPing Zhang, the Chairman and Chief Executive Officer of the Issuer, and other potential investors, in connection with the proposed acquisition of the Issuer in a "going-private" transaction for US$13.35 in cash per ADS, as disclosed in Exhibit 99.1 to the Issuer's Form 6-K furnished with the United States Securities and Exchange Commission on January 2, 2018."

The entire securities purchase agreement is found here.

Per Google Finance, Ehi Car Services "is engaged in car rentals and car services. The Company provides self-drive car rental services to both individual customers, as well as corporate and institutional clients to meet travel, leisure, business and ground transportation needs. The Company operates its car rentals business primarily through its subsidiaries, including Shanghai eHi Car Rental Co., Ltd. (eHi Rental), eHi Auto Services (Jiangsu) Co., Ltd. (eHi Jiangsu), and their subsidiaries and branches. For its car services business, the Company provides vehicles and chauffeur services through different subsidiaries. The Company provides chauffeur services through its subsidiary, Shanghai Smart Brand Auto Driving Services Co., Ltd. (Shanghai Smart Brand), and its subsidiaries and branches. The Company has a limited operating history."

Tuesday, February 27, 2018

Warren Buffett CNBC Interview: Summary & Transcript

CNBC's Becky Quick interviewed Berkshire Hathaway's Warren Buffett on a range of topics yesterday.  Below is a summary of noteworthy comments and a link to the full transcript.

On tax reform:  "It's a huge tailwind. And it's particularly a tailwind if you've got-- particularly for companies that have had lots of depreciation and taken bonus depreciation up front. So it's a big item-- there. Not as many companies have lots of appreciation and marketable securities, but it's a big item for those that do."

On market valuation:  "I mean, it--in fact, I-- the market-- the stock market relative to the long-term bond market-- people have free choices, pretty much, if they're going to be in marketable securities. They can own reasonably long-term bonds, they can own equities, or they can keep it in short-term cash equivalents. And--- if-you had to choose between buying long-term bonds or equities-- I would choose equities in a minute now ...

That doesn't mean I think the stock market is gonna go up or anything else. But if- I were going to own a 30-year government bond or own equity for 30 years, I think equities will considerably outperform that 30-year bond over the 30 years. I don't know what they're gonna do in any day or week or month ...

In-- so far this year we've been-- a net buyer, although we sold-- a chunk of Phillips to get below 10%"

On whether he would buy any parts of General Electric (GE):  "If we like the business and the price was right, we could write a check for cash. And that would apply to GE. They've got a few big businesses. I don't think they want to sell them, but they have some smaller units that they're interested in selling. But we're always in the market for a big business that we can understand and that we like, and we think that we've got the management for and so on."

On Buffett's favorite stock, besides Berkshire:  "Well, if you look at our holdings, you would assume that we like them in the order in which they rank by dollar value of holdings. But if you look at them in terms of recent purchases, you know, over the last year, we've bought more Apple than anything else ... I haven't told you what I might have been buying in the last week. Or month"

Shoutout to CNBC for asking the question we submitted on Twitter via the #AskWarren hashtag:  Has Buffett ever disagreed with any of Todd (Combs) or Ted's (Weschler) investments, and why?

"Yeah, well, they make their own decisions, 100% and they each manage $12 billion or $13 billion now. Well, they started actually, I think when Todd came about a year ahead of Ted. And I think maybe it was $2 billion, but it has increased at various points and then they've earned a lot of money for Berkshire, which builds up for them, too. There's certainly – they've done things I wouldn't have done. But I've done things they wouldn't do, too. I mean, I want them to figure out their own. The choices – they are good at managing money, and they've got the advantage of managing smaller sums than I'm running. But they've got the disadvantage of running quite a bit larger sums than most people run. I mean, it gets more difficult with size. But they not only have done a good job of managing the money and trusted them. But they've contributed to Berkshire in just dozens of ways. They were sensational hires."

Becky Quick then followed up and asked if he talks to Todd/Ted about investments beforehand:

"No, not ahead a time. And there's a number of them I haven't talked with them at all. I couldn't even – I couldn't name three quarters of their portfolio. I couldn't tell you the amounts. I don't remember that well. But I've gotten ideas from them. But they take on other tasks. I mean, Todd is on the health care situation. He's there on Saturday. I was there on Saturday. He's there all day talking to people around the country in terms of looking for the right CEO and that sort of thing. They are enormous contributors to Berkshire."

On owning Samsung in the past:  "I don't own them, and Berkshire doesn't own them now. But Berkshire has owned Samsung. It doesn't get reported in our 13F.  But I think I'm right on that. I'm 99% sure. And so we bought some when Samsung was at about a million yuan – you got to divide that by something over 1,000 – we bought a reasonable amount. We did sell it when it went up. It's higher than this now. It went up to 1.8 million, or something. I think it's around 2 million, 2.3 million or 2.4 million. The yuan went in our favor a little bit too. So we did a little bit better in dollars."

On why he sold IBM in favor of buying more Apple (AAPL):  "Well I was wrong on – at least I felt I was wrong on IBM. Now, I may have been wrong when I sold it, too. But I certainly was wrong when I bought it. And I've felt that Apple has an extraordinary consumer franchise. Apple's a different kind of business than IBM. They're both tech, obviously, in a major way. And they even have a joint venture, you know, on some things. But I think I understand consumer behavior perhaps better than I do the tech business. It wouldn't take much to beat it. And I liked it, I like Tim Cook very much. I like their policies. I see how strong that ecosystem is. It's to an extraordinary degree. I mean, I look at my grandchildren, my great grandchildren and everybody in the office, I mean, their families. I talk to the people at the Furniture Mart when the ten hadn't arrived, nobody goes over to, you know, buy an Android. I mean, you are very, very, very locked in at least psychologically and mentally, to the product you're using. I mean, you got all kinds of stuff up on there. It's a very sticky product."

On the airline industry (he owns stakes in AAL, UAL, DAL, LUV): "It's-- a business that's-- always subject to somebody doing something very dumb competitively. And—-- they've done it a lot in the past. There was more chance of them doing it when there were seven of 'em than the big ones, than-- than four. I mean, the industry was suicidally competitive for decades. I mean, they net lost money-- and-- while they were growing like crazy in units. And I was on the board of U.S. Air so I saw how it all happened. And it can turn into fierce competitive battles that'll wipe out earnings. Or it can be a business that's more decent, but still subject to lots of competition. And-- it's really hard to know, you know, for sure how it will develop. It's-- not risk free in their competition at all. In-- in the railroad business, all the tracks have been pretty much laid and all of that. So that settled into a business. Now, it's regulated and means that your earnings, you know, can only-- you're a common carrier. And-- many places, you compete with another railroad, and other places, you don't. And there're different rules that apply even in terms of pricing in those cases. But it's a perfectly decent business. It will lose volume in coal over time. And that's an important product. But it'll probably gain in other areas. So it's-- it's two different animals."

On stocks and volatility:  "Well, some people should not own stocks at all because they just get too upset with price fluctuations. If you're going to do dumb things because a stock goes down, you shouldn't own a stock at all ... But some people are not actually emotionally or psychologically fit to own stocks. But I think more of them would be if you get educated on what you're really buying, which is part of a business. And the longer you hold stocks, the less risky they become, whereas the longer the maturity of a bond, the more risky it becomes."

Here's a link to the full CNBC Warren Buffett interview transcript.

And for even more, be also sure to check out Warren Buffett's 2017 annual letter.

Charlie Munger Daily Journal Meeting 2018 Summary, Transcript, Audio Recording

Charlie Munger recently concluded his Daily Journal (DJCO) meeting for 2018.  We've pulled select quotes from a full transcript and an audio recording, thanks to LatticeWorkInvesting's great effort.  Here's select quotes from Munger with links to the other options below.

Summary of Charlie Munger's Daily Journal 2018 Meeting

On the banking industry: "Well, banking is a very peculiar business.  The temptations that come to a banking CEO are way…the temptations to do something stupid are way greater in banking than they are in most businesses.  Therefore it’s a dangerous place to invest because there are a lot of way in banking to make the near term future look good by taking risks you really shouldn’t take for the sake of the long-term future.  And so banking is a dangerous place to invest and there are a few exceptions.  And Berkshire has tried to (pick) the exceptions as best it could."

On incentive fees:  "Suppose you’re charging say 1 and 20, one percent off the top and twenty percent of profits…or even worse, two percent off the top and twenty percent of profits…and you’ve got $30 billion or so under management and an army of young ambitious people, all of whom want to get unreasonably rich very fast.  What are your chances of doing better for your clients?  Well the average entity that charges those fees, the chances the clients will do well is pretty poor.  That’s the reason Warren won that bet against the hedge funds.  Where he bet on the S&P averages and they bet on carefully selected bunch of geniuses charging very high fees.  And of course the high fees will just kill you.  It’s so hard in a competitive world to get big advantages just buying securities, particularly when you’re doing it by the billion, and then you add the burden of very high fees and think that by working hard and reading a lot of sell-side research and so forth, that you’re going to do well.  It’s delusional.  It’s not good to face the world in a delusional way.  And I don’t think, when Berkshire came up, we had an easier world than you people are facing this point forward, and I don’t think you’re going to get the kind of results we got by just doing what we did. "

On the best fee structure for investment funds:  He said it's the original Buffett Partnership structure and went on to say:  "Yeah, Buffett copied that from Graham.  And Mohnish Pabrai is probably here…is Mohnish here?  Stand up and wave to them Mohnish.  This man uses the Buffett formula, and always has, he just copied it.  And Mohnish has just completed 10 years…where he was making up for a high water-mark.  So he took nothing off the top at all for 10 years, he sucked his living out of his own capital for ten long years, because that’s what a good money manager should be cheerfully willing to do.  But there aren’t many Mohnish’s.  Everybody else wants to scrape it off the top in gobs.  And it’s a wrong system.  Why shouldn’t a man who has to manage your money whose 40 years of age be already rich?  Why would you want to give your money to somebody who hasn’t accumulated anything by the time he was 40.  If he has some money, why should he on the downside suffer right along with you the investor?  I’m not talking about the employees under the top manager.  But I like the Buffett formula.  Here he is, he’s had these huge successes.  Huge in Buffett’s career.  But who is copying the Buffett formula?  Well we got Mohnish and maybe there are a few others, probably in the room.  But everybody wants to scrape it off the top, because that’s what everybody really needs, is a check every month.  That’s what is comforting to human nature.  And of course half the population, that’s all they have, they’re living pay check to pay check.  The Buffett formula was that he took 25% of the profits over 6% per annum with a high water mark.  So if the investor didn’t get 6%, Buffett would get nothing.  And that’s Mohnish’s system.  And I like that system, but it’s like many things that I like and I think should spread, we get like almost no successes spreading that system.  It’s too hard.  The people who are capable of attracting money on more lenient terms, it just seems too hard.  If it were easier, I think there would be more copying of the Buffett system."

On investor Li Lu: "What was unusual about Li Lu.  Li Lu is one of the most successful investors.  Imagine him, he just popped out of somebody’s womb and he just assaulted life the best he could and he ended up pretty good at it.  But he was very good at a lot.  He’s ferociously smart.  It really helps to be intelligent.  He’s very energetic.  That also helps.  And he has a good temperament.  And he’s very aggressive, and he’s willing to patiently wait and then aggressively pounce. A very desirable temperament to have.  And if the reverse comes, he takes it well.  Also a good quality to have.  So it’s not very hard to figure out what works.  But there aren’t that many Li Lu’s.  In my life, I’ve given money to one outside manager, and that’s Li Lu.  No others in my whole life.  And I have no feelings that it would be easy to find a second.  It’s not that there aren’t others out there, but they’re hard to find.  It doesn’t help you if a stock is a wonderful thing to buy if you can’t figure it out."

On his view of big consumer brand moats in the age of Amazon and Costco Kirkland etc:  "Well the big consumer brands are still very valuable.  But they had an easier time in a former era than they’re going to have in the future era.  So you’re right about that.  And of course Amazon I don’t know that much about except that it’s unbelievably aggressive.  And the man who heads it is ferociously smart.  On the other hand he’s trying to do things that are difficult.  Costco I know a lot about because I’ve been a director for about 20 years and I think Costco will continue to flourish and it’s a damn miracle the way the Kirkland brand keeps getting more and more accepted.  You’re right about that.  So you’re right that it’s going to be harder for the big brands, but they’re still quite valuable.  If you could own say, the Snicker’s Bar trademarks and so forth, it will still be a good asset 60 years from now.  Now it may not be quite as good for the owner as it was in the last 60 years.  But it doesn’t have to be.  But in fact it makes it harder for you investors.  It use to be the groupie could buy Nestle and they’d think, ‘Well, I’ll just sit on…(inaudible)’.  I don’t think it’s quite that simple anymore.  It’s harder.  You’re right.  But you know that."

On Buffett's claim in 1999 he could return 50% if he ran only $1 million & if that's achievable today:  "Well I do think that a very smart man who’s patient and aggressive in combination, is willing to work hard, to root around in untraveled places like thinly traded stocks and other odd places.  I do think a person with a lot of shrewdness, working with a small amount of capital, can probably earn high returns on capital even today ... Generally speaking, I would say, if you’re shrewd enough with small sums of money, I think you can compound pretty well.  The minute you get bigger sums, I think it starts getting difficult.  It’s way more difficult for all you people sitting here than it was for me when I was in your position.  But I’m about to die and you have a lot of years ahead. You would not want to trade your position for mine"

On the airline industry and Berkshire's decision to invest:  "Well, we did change our mind.  For a long time, Warren and I (painted over) the railroad because there were too many of them, and it was too competitive, and union rules were too crazy.  They were lousy investments for about 75 years.  And then they finally…the world changed and they double decked all the trains and they got down to four big rail systems in all the United States in terms of freight and all of a sudden we liked railroads.  It took about 75 years.  Warren and I never looked at railroads for about 50 years, and then we bought one ... Now airlines, Warren use to joke about them.  He’d say that the investing class would have done better if the Wright Brothers would never have invented flight.  But given the conditions that were present when the stock was purchased and given the conditions of Berkshire Hathaway where it was drowning in money, we thought it was ok to buy a bunch of airline stocks.  What more can I say?  Certainly it’s ok to change your mind when the facts change.  And to some extent the facts had changed, and to some extent they haven’t.  It is harder to create the little competing airlines than it was.  And the industry has maybe learned something.  I hope it works better, but I don’t think its…I think the chances of us buying airlines and holding them for 100 years is going to work that well.  I think that’s pretty low."

General quote:  "Why would you risk what you have and need in order to get what you don’t have and don’t need?  It really is stupid."

Here's the link to the full transcript and to a soft audio recording of the event; shout out to LatticeWork again for posting these up.

And for more from this great investor, head to Charlie Munger's recommended reading list.

Warren Buffett Annual Letter 2017

Warren Buffett is out with his 2017 annual letter to Berkshire Hathaway shareholders.  In it, he details the full results of his hedge fund bet pitting fund of funds versus an index fund which is worth reading in full.  TLDR: They performed well the first year, but then not so much after that. Not to mention layers of fees.

In the mean time, here are some select quotes with the full document below.

"Despite our recent drought of acquisitions, Charlie and I believe that from time to time Berkshire will have opportunities to make very large purchases. In the meantime, we will stick with our simple guideline: The less the prudence with which others conduct their affairs, the greater the prudence with which we must conduct our own."

"There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary. And an unsettled mind will not make good decisions.

"Investing is an activity in which consumption today is foregone in an attempt to allow greater consumptionat a later date. “Risk” is the possibility that this objective won’t be attained."

"I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates."

Embedded below is Warren Buffett's 2017 annual letter:

You can download a .pdf copy here.

For more from the Oracle of Omaha, be sure to also check out Warren Buffett's interview with CNBC this week.