Django Davidson's Presentation at London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Django Davidson of Hosking Partners.


Django Davidson's Presentation at London Value Investor Conference

Django Davidson is a portfolio manager and founding partner of Hosking Partners where he works with Ex-Marathon Asset Management investor, Jeremy Hosking. Before that Davidson worked at Algebris.

Hosking Partners refer to themselves behavioural investors. He noted that once people form an opinion they do not like to give it up. We get a rush of dopamine when people agree with us. Having people agree with you is the crack-cocaine of the middle-aged dinner party circuit.  Sticking to your guns is a widely perceived social good. Humans attach a huge premium to ideas they already have.

Davidson warned that the belief in Buffett style quality compounders/ franchise stocks in the investment world has taken on something close to religious dogma. The huge outperformance of quality compounders particularly since the financial crisis has led Davidson to take an outsiders view. Shareholder returns for many quality compounders have been very good over the last 5 years while their revenues have gone down - Kellogg’s, Coca-Cola, Pepsi, Colgate Palmolive.  The margins of quality compounders have been on a continuous three-decade rise but if the underlying moat premise works the revenues should be rising and they are not.

The danger is that the customer is not coming back as often as they used to. Jeff Bezos says that power is shifting from the company to the consumer. Technology is empowering the customer challenging companies to change. According to Bezos the best way for companies to respond is to put all their energies into creating a great product and put less effort into shouting about it through marketing. The old model is shareholder centric whilst the new model is customer centred.

The old shareholder focused companies used to be the only ones that could afford TV advertising. Now two-thirds of the screen times of under 25 year olds is spent on hand-held devices. When they do watch TV, they self-select their own channels. Linear TV is being propped up by an aging demographic. Today new businesses can reach their customers through social media and YouTube at a fraction of the cost. Often, they have better products to sell.

Why are customers leaving the old brands? Are the brands staying relevant in a multi-channel world? How will these brands react to people ordering their shopping through Amazon Alexa? What will the industry have to spend to retain customers? Are companies gouging their customers by providing low quality, high priced goods? Franchise investing appears to be a warm and cosy place, but is it?

Investment ideas: Long AIG Tarp Warrants (expiry 2021); Long: Michelmersh Brick (LON: MBH)


Be sure to check out the rest of the presentations from the London Value Investor Conference.

Berkowitz's Fairholme Fund Annual Report: AIG, Bank of America, Fannie/Freddie

Bruce Berkowitz is out with his Fairholme Fund's (FAIRX) annual report for 2014.  The concentrated investor outlines his thoughts on AIG (AIG), Bank of America (BAC), Fannie Mae & Freddie Mac, Sears (SHLD), Leucadia (LUK), and St. Joe (JOE).

Berkowitz dedicates the majority of his letter to his Fannie & Freddie investments, saying that, "Today, Washington bureaucrats are unlawfully holding these profitable companies captive in perpetual conservatorship."

Regarding his two largest positions (AIG and BAC), Fairholme's manager says that both need to "prove that core operations are capable of earning an average of 10% return on equity and demonstrate that such profits are distributable to shareholders.  We anticipate growing profits, dividends, and buybacks from both in the future, particularly when interest rates normalize."

Embedded below is the Fairholme Fund's annual report for 2014:



For more from this manager, be sure to also check out Berkowitz's Wealthtrack interview.

Bruce Berkowitz's Wealthtrack Interview: AIG, BAC, FNMA

Consuelo Mack's Wealthtrack recently sat down with Fairholme Capital's Bruce Berkowitz to talk about his investments.  These days, he manages around $8 billion and his largest holding continues to be AIG (AIG).

He says he's still focused on financials because that's what he knows and what's in his circle of competence.  The main thing he's drawn to is the huge stature of some of the companies he's invested in.  He likes systemically important institutions (such as AIG and Bank of America).


On AIG

Berkowitz notes that AIG's tangible book value is around $75 and he's waiting for the company to trade around book value.  He says he has to keep trimming the position slightly because as the price increases, it becomes an even larger part of his portfolio (and it's already almost 50% of his portfolio).


On Bank of America

He bought Bank of America (BAC) because he felt it would eventually become more like a bank like Wells Fargo after restructuring and settling litigation.  As it still sells below book or runoff value, he says he's getting the "future for free and a discount on the books."


Fannie/Freddie

He compares this situation to AIG in that it's a very important organization where the government is involved.


Curiously absent from the discussion was another of Berkowitz's holdings: Sears.  Shares have declined recently and Berkowitz has been interested in participating in the company's short-term loan.


Embedded below is the video of Berkowitz's interview with Wealthtrack:

What We're Reading ~ Analytical Links 8/13/14

Zero to One: Notes on Startups, or How to Build the Future [Peter Thiel]

The Buffett formula - how to get smarter [Farnam Street]

A look at Alstom as a potential sum of the parts play [Value and Opportunity]

Value stocks in market corrections [Brooklyn Investor]

What does sentiment suggest for future returns? [Fat Pitch]

What will happen when companies stop buying back so much stock [Business Insider]

Zillow shares could fall by half [Barrons]

Taking AIG from 'sucks' to 'rocks' [Business Week]

Why you should keep an eye on Sequoia Fund [Asset Builder]

Investors move into cash, bracing for market sell off [IFRE]

The power of shareholder yield [What Works on Wall Street]

Unfortunate realities of the investment business [Wealth of Common Sense]

Buy stock pickers, avoid sector pickers [Morningstar]

What We're Reading ~ 4/30/14

Why it's hard to win in investing [Aleph Blog]

On the flaws of human intuition [Abnormal Returns]

The importance of pricing power [Base Hit Investing]

The greatest predictor of future market returns [Philosophical Economics]

Google: The untold story of Larry Page's incredible comeback [Business Insider]

Jim Grant's case against Valeant Pharmaceuticals [Business in Canada]

An updated pitch on AIG [Barrons]

A look at Liberty Media [Weitz Investments]

Michael Kors and Kate Spade go head to head [CNBC]

Why the housing market is stalling the economy [NYTimes]

On China's economy [Economist]

Solar power burns old utilities' business models [Daily Beast]

On tech investing [Dasan]

Spain: where deflation becomes good news for headline GDP [Fistful of Euros]

Reining in predatory schools [NYTimes]

Joe Nocera on Warren Buffett [NYTimes]

Bruce Berkowitz Talks Fannie/Freddie Preferreds, AIG & Sears

Fairholme Capital's Bruce Berkowitz owns preferred shares of both Fannie Mae and Freddie Mac and joined David Faber of CNBC to talk about the securities in a rare interview.


Fannie/Freddie Preferreds

We've highlighted before that Berkowitz is seeking dividends on these securities.  The fund manager notes that you can buy the securities at such discounts with the potential for them to trade at par again if they start paying dividends.

Fairholme likes to buy stakes in systemically important institutions and Berkowitz says Fannie & Freddie are just that.


Berkowitz Talks AIG

He also touched on his stake in AIG (AIG).  He said: "Investing is all about comparing what you give versus what you get.  Now when you look at today's stock price with AIG, it still sells significantly below liquidation value.  So at some point the stock market price will meet the book value of AIG."  

He says book value is around $60 per share currently and he expects liquidation value will double in a few years. 

So when will he sell?  He said he'll have to consider the idea of selling in the event that shares eventually trade at book value & higher. 

He also addressed his large position size, noting that Benjamin Graham once distributed shares of GEICO rather than selling when the position size became too large for his fund.  So it sounds like Berkowitz is considering this option as well for the future.


Talks Sears (SHLD)

Berkowitz thinks Eddie Lampert has been doing a good job and he notes he's in the minority in that opinion.  He compares Sears to Simon Properties (SPG) and it's clear Berkowitz views as SHLD as a real estate play.


Embedded below is the video of Berkowitz's interview:



For more on this manager, you can check out Fairholme's latest portfolio in the new issue of our premium newsletter.

What We're Reading ~ Analytical Links 5/29/13

Is the U.S. the next hot 'emerging market'? [WSJ]

Margin debt hits a record [WSJ]

The bull case on Hertz Global (HTZ) [Barron's]

TripAdvisor's (TRIP) margins could expand after years of slimming [Trefis]

On cutting your losses [The Atlantic]

Goldman Sachs says AIG shares still most loved by hedge funds [Marketwatch]

On share repurchase fever [Capital Observer]

What happens when QE ends [AllStarCharts]

Searching for yield [Mebane Faber]

If you only know 5 things about investing, make it these [Motley Fool]

Bid on lunch with Warren Buffett [eBay]

Activist investors: let's do it my way [The Economist]

Atlas of public stocks: mapping all publicly listed companies [Simoleon Sense]

Embrace the business model that threatens you [Harvard Business Review]

Behavioral investing principles are more relevant than ever [Institutional Investor]

PepsiCo (PEP) resistance against activists looks futile [Reuters]

A rush to recruit young analysts only months on the job [Dealbook]

Studying the dark art of leaking deal talks [Dealbook]

House flipping back in style [WSJ]

Jeremy Hosking's Presentation at London Value Conference: Long AIG & US Airways

Continuing our notes from the London Value Investor Conference 2013, the next speaker is Jeremy Hosking, an entrepreneur and fund manager.  He presented the long case on both AIG (AIG) and US Airways (LCC).


On Opportunities in Markets

The theme of Jeremy Hosking's presentation was how the money management industry can produce  opportunities for value investors. There is a limited amount of opportunity in markets and we are all  fighting over it, Hosking said. It helps to have someone making opportunity at the poker table and  that is a role often played by institutional asset managers. Institutional funds cause:

-  Agent principal damage via high fees
-  Diseconomies of scale. The bigger the pool of assets the harder to outperform
-  Product proliferation (often at the top of the market)
-  Herding by fund managers is a disservice to the client

Herding by fund managers takes many forms: short termism, inside asset classes (“better to fail  conventionally”), volatility avoidance, excessive information processing, preference for high liquidity stocks, too much investment in mega cap stocks, high fees.

And while Hosking talked about herding, it is slightly ironic that he then went on to pitch AIG.  While the bull case on the company makes sense, it is held by many prominent US hedge funds as a top long and could be considered a 'herding' pick in and of itself.  But to be fair, perhaps it's not a consensus long over in the UK.  


Idea: Long AIG (AIG: NYSE)  

Cheap at 0.6x book. Cyclical improvement in underwriting. Sale of non-core assets nearly always  helps the share price. $5bn per annum in share buybacks. 30% reduction in share count between  2011-15. Use of data mining/ analytics will improve product mix and growth rate.


Idea: Long US Airways (LCC: NYSE)  

Industrial consolidation leaves US Airways as one of the big three. Operating cost compression  reinforces oligopoly. Shares to merge into New American on 1-for-1 basis Q3 2013. Post merger  EBITDAR of $8.3bn produces EV target of $50bn (6x multiple) or $50 per share target after net  debt.


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.

Lee Cooperman at the Skybridge Alternatives Conference (SALT 2013): Stockpicks & Market Thoughts

We wanted to highlight some notes from the Skybridge Alternative Conference, a.k.a. SALT 2013 taking place in Vegas this week.  Lee Cooperman of Omega Advisors gave his thoughts on the market and some of his holdings.


Market Thoughts From Cooperman

Cooperman says the market might be a little ahead of itself, the economy is limping along.  He doesn't see a reason for the market to decline a lot and says the only two ways that would happen is 1. a recession and 2. the market getting too frothy and the Fed removing quantitative easing.

The Omega Advisors man argued that the economic cycle could be longer than usual and also noted that many investors have de-risked since the financial crisis.  That said, he feels the market is ahead of the fundamentals.


Cooperman's Stock Picks

When asked where he would put new money to work today, he said he'd look to add to existing positions in his portfolio and singled out Monitise in the UK.  We highlighted Cooperman's Monitise stake before as it's a mobile wallet platform.

He also revealed he's been buying an engineering and construction firm Technip, involved in LNG platforms and after exiting Apple earlier, he's dipped back in around the low $400's in a "small size" position.

The Omega founder was asked about housing plays and noted he's missed the homebuilder trade, but has exposure via proxies like Ocwen Financial (OCN) and Altisource Portfolio Solutions (ASPS).  This week at the Ira Sohn Conference, Steve Eisman pitched OCN as a long.

Cooperman also touched on some other of his holdings that are trading below book value that he thinks are attractive:  American International Group (AIG), MetLife (MET), and Citigroup (C).

Omega also owns Facebook (FB) and they think people are underestimating the mobility opportunity and can achieve a much higher multiple.

At the SALT Conference, Cooperman was on the best ideas panel as well and said he likes Express Scripts (ESRX), the pharmacy benefit management company and Transocean (RIG), the deepwater driller.

Embedded below is a clip of Cooperman on CNBC from the SALT conference:



Lee Cooperman was named as one of the top 10 highest paid hedge fund managers of 2012.

Notes From Value Investing Congress Las Vegas 2013: Day 2

Yesterday we posted up some quick notes from day 1 of the 2013 Value Investing Congress in Las Vegas and today we'll highlight key takeaways from day 2 below:


Whitney Tilson, Kase Capital: AIG, Hertz (HTZ)

He talked about how American International Group (AIG) is still a position he likes as it's still cheap and the company has been streamlined to something much easier to understand and there's been a lot of advancement since the financial crisis and even since last year.  It's around 14% of his portfolio and was his largest position as of last month.  Tilson also likes his long of Berkshire Hathaway (BRK.A / BRK.B) and recently adjusted his intrinsic value figure to just north of $193,000.  Additionally, he mentioned he's started a new position in Hertz (HTZ) and you can read the pitch on Hertz in this newsletter that convinced him.


Guy Gottfried, Rational Investment Group: WPX Energy (WPX)

His pitch was on WPX Energy, a spin-off from Williams Companies last year.  He says it trades at 8x free cashflow and .66x book value.  Gottfried feels it's a very cheap stock for a play on natural gas that doesn't require gas prices to head higher.


Mark Boyar, Boyar Value Group: Weight Watchers (WTW), Dole Foods (DOLE), Western Union (WU)

He thinks we might be in the midst of multiple expansion.  Boyar likes Weight Watchers (WTW) as a play on the weight management industry and notes it's down 50% over the past 12 months.  He also pitched Dole Foods (DOLE) as the company reduced its debt load by selling the packaged foods business.  His third and final pick was Western Union (WU).


Vitaliy Katsenelson, Investment Management Associates: Whistler Blackcomb (WB.TO)

He said that profit growth is slowing down and that the market is actually getting expensive on a P/E basis.  Katsenelson argued that there's no secular bull market, at least not yet.  In the mean time, he likes stocks with solid dividends and says that the vast majority of returns in sideways markets are derived from dividends.  He's the author of The Little Book of Sideways Markets, by the way.  His pick was a high dividend payer (over 7%) in Whistler Blackcomb, the owner of the popular ski resort.  He likes their lower costs due to no property development etc.


Zeke Ashton, Centaur Capital Partners: Fidelity National (FNF), First American (FAF)

He emphasized the importance of learning from mistakes.  While you will encounter your own mistakes as an investor, it's also easy to learn from others' mistakes too.  Ashton argued that emotional mistakes are much more prevalent than analytical ones and so obviously behavioral finance is an important part of investing.  As far as current opportunities in the market go, he's having a hard time finding good ones as so many shares have been bid up.  He's not a big fan of homebuilders but if you want a play on housing, he said to look at the title insurers as a proxy with lower risk.  His picks were Fidelity National (FNF) and First American (FAF).


Joe Altman & Chris Kyriopoulos, COMPOUND Capital: TARP Warrants, Nathan's (NATH)

They launched their fund at a hell of a time: during the financial crisis when Lehman Brothers failed.  These two mentioned that they like TARP warrants, which we'd note has been a hedge fund favorite (especially AIG and BAC warrants, though Compound prefers AIG and COF ones).  They note these are liquid plays that are often underfollowed.  However, their pitch today was Nathan's (NATH), the popular hot dog proprietor.


David Hurwitz, SC Fundamental: Long KISCO, Short Salesforce.com (CRM)

He pitched one long: KISCO in Korea (001940.KRX) and one short: Salesforce.com (CRM).  He says KISCO is much cheaper than CRM.


Chris Mittleman, Mittleman Brothers:  Revlon (REV)

He pitched this as a turnaround story, praising management for a good effort.  Ron Perelman owns a ton of the company and that's partially the reason it's so cheap.  Mittleman likes that it's essentially a recession resistant business.  A solid portion of their revenues come from Walmart.  He also mentioned Carmike Cinemas (CKEC).


Ori Eyal, Emerging Value Capital: Hilan Tech

Eyal talked about the opportunities to invest in Israel, somewhere he specializes in (launching the Emerging Value Israel Fund).  He says the country is stable and pro-business and has a growing economy.  He pitched Hilan Tech, which he dubbed the 'ADP of Israel.'  He says Israeli stocks on the whole are cheap as they've largely traded sideways the past few years.


Harris Kupperman, Mongolia Growth Group: Real Estate

He touched on how there's too many investors out there all doing the exact same thing (i.e. herding).  One place that there certainly aren't many investors involved is Mongolia.  He says the country's GDP will explode 10x over the next decade or so, creating a big opportunity and he recommended real estate there.


For more from this event, head to notes from day 1 of the Value Investing Congress.

Third Point Shows Japan Tobacco Stake, International Paper Now Top 5 Holding

Dan Loeb's Third Point Offshore Fund finished April up 1.4% and is now up 10.5% for the year.  In their latest exposure report, we see a few holdings revealed, including positions in Japan Tobacco (a top winner last month) and Banco do Brasil SA (a top loser last month).  The former has been a large holding at Children's Investment Fund.

The other takeaway from April is that Third Point has listed International Paper (IP) as a top holding.  Loeb's firm outlined their thesis on IP in Third Point's Q1 letter and sized up the position in the first quarter.  But now we get some context as to how big of a position it is since it's now a top 5 holding.

The hedge fund originally started a position in this company in the fourth quarter of 2012 and at the end of December, this position was worth almost $60 million.  Since then, IP has run up from $38 to a high of $49 thus far this year so part of the position size could also be attributed to price appreciation.  We've also highlighted how fellow hedge fund Senator Investment Group added to their IP position as well.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. Virgin Media (VMED)
3. American International Group (AIG)
4. International Paper (IP)
5. Ally Financial (multiple securities held)

Looking at their top holdings compared to last month, gold has fallen out of the list (most likely due to the fact that gold prices have fallen this year).

Third Point's net long equity exposure came in at 45.4% at the end of April.  This is largely unchanged compared to the month prior at 45.1% net long.

Dan Loeb was recently listed among the top 10 highest paid hedge fund managers of 2012.

Whitney Tilson's Kase Capital Q1 Letter: Pitch on Deckers, Sears Hometown & Outlet Stores

The hedge fund duo of Whitney Tilson and Glenn Tongue split up last year and now Tilson is managing his Kase Capital solo.  He just sent out his first quarter letter to investors where he outlines two of his new investments: Deckers (DECK) and Sears Hometown & Outlet Stores (SHOS), which you can read in the letter below.

Kase Capital's Top Holdings

In Kase Capital's letter, Tilson also lists his largest positions:

1. AIG (AIG)
2. Berkshire Hathaway (BRK.A)
3. Howard Hughes (HHC)
4. Deckers (DECK)
5. Citigroup (C)
6. Goldman Sachs (GS)
7. Netflix (NFLX)
8. Canadian Pacific (CP)
9. dELiA*s (DLIA)
10. Iridium (IRDM)
11. Grupo Prisa (B Shares)
12. Sears Hometown & Outlet (SHOS)
13. Spark Networks (LOV)


Tilson's Shorts & Exposure Levels

Tilson also reiterated a few stocks that he's short: InterOil (IOC), K-12 (LRN), and Nokia (NOK).  He's also holding a large cash balance, waiting for better opportunities to deploy capital.  His equity exposure comes in at 66% long and 22% short currently.


Embedded below is Whitney Tilson's Kase Capital first quarter letter to investors for 2013:

Dan Loeb's Third Point Discloses Porsche & Volkswagen Stakes: March Exposure Report

Dan Loeb's Third Point Offshore Fund finished March up 2.9% and is now up 9% for 2013.  Managing $11.7 billion, the fund has current net long equity exposure of 45.1%, down around 2% from February.


Top Positions

1. Yahoo! (YHOO)
2. Virgin Media (VMED)
3. Gold
4. American International Group (AIG)
5. Ally Financial (multiple securities held)

Third Point's top holdings remain unchanged from the month prior.  Their position in Virgin Media was a new addition to the portfolio in 2013.


Newly Disclosed Positions

In their March "top winners" and "top losers" columns, Third Point discloses a few positions we haven't seen before.  In their "top losers" column from last month, they show holdings in Volkswagen AG, Porsche Automobil Holding SE, and Bond Street Holdings.  Porsche is notable because as of 2012 year-end, it was the top holding at Children's Investment Fund (see TCI's Porsche thesis from a conference late last year).

Additionally, Third Point shows positions in Cheniere Energy (LNG) and DE Master Blenders in their top winners category.  The latter was spun-off from Sara Lee, a position Third Point previously owned (and most likely where those shares came from).

Embedded below is Third Point's March exposure report:




For more on this hedge fund, head to Third Point's Q4 letter.

Dan Loeb's Third Point Reveals Positions in Virgin Media & EADS

Dan Loeb's hedge fund firm Third Point is out with its latest exposure report and they were up 1.2% for February and are up 6% year-to-date.

New Positions Revealed

The major news in their portfolio is newly revealed positions in Virgin Media (VMED) and EADS in Europe.  Virgin Media is set to be acquired by Liberty Global (LBTYA) so this is now a merger arbitrage play.

They did not own a stake at the end of 2012 so all buying has been done in 2013.  And they certainly did a lot of buying as VMED is now their second largest position.  We've also detailed how Philippe Laffont's Coatue Management has been a big owner of VMED (and they also own LBTYA as well).

Third Point's position in European Aeronautic Defence and Space Company (EADS) was listed as a 'top winner' for the month and this is the first time this position has appeared on their sheet.  The Dutch based company is listed in the French stock market and Third Point hasn't had to file with regulators there since it's a large cap and they haven't crossed the ownership thresholds. So, it's hard to say when they actually initiated the position. 

Thomson Reuters' data also lists Andreas Halvorsen's Viking Global as holding 1.44% of shares (although it appears as though they've been selling rather than buying recently.)


Third Point's Top Holdings

As of the end of February, here are Loeb's top positions:

1. Yahoo! (YHOO)
2. Virgin Media (VMED)
3. Gold
4. American International Group (AIG)
5. Ally Financial (Multiple securities held)


Exposure Levels

In terms of equity exposure, Third Point is now 47.3% net long.  This is an increase from the month prior as they were 37.8% net long in January.  One sector they are now net short is healthcare (-0.6%).

Their top winners last month included Morgan Stanley (MS) and Herbalife (HLF).  Their investment theses on both stocks were detailed in Third Point's Q4 letter.

Third Point is 27.1% net long credit, -9.4% and net short macro trades (largely government securities it looks like).

Notes From Bruce Berkowitz's CSIMA Presentation

Last week we posted up notes from the Columbia Investment Management Conference.  While those notes weren't directly attributed to particular speakers, one speaker did go 'on the record' at the event.  So today we present notes from comments made by Bruce Berkowitz of Fairholme Capital at CSIMA 2013.


Notes From Bruce Berkowitz's CSIMA Talk

- On diversification: it dumbs us down because we can't focus on a few things that can make a difference.  You're most likely not the only fund your investors are in so you have to be more risk averse for your own job safety.  Most managers hold too many positions.  Less than 10 positions typically equals career risk.  The benefits of diversification fall off between 10-30 stocks in a given portfolio.  If investors put around 10% in one fund and that fund holds 10 stocks, they effectively hold 100 stocks.

- On spending time with clients: it's actually a disservice to them to spend time away from investment research.  You need to be focused on your investment process as it will benefit them more than spending time with them.

- On time management:  the best way to maximize your time is to say "no" to a lot of people.  He likes to get the most out of every minute so he's even listening to books on tapes.


- On investing: If you hustle on the investment trail and do it 24/7 you'll be a great investor 30 years from now.  Take 2 steps back to take 10 steps forward, sometimes it's necessary. He reads company reports before going to bed and is always listening to conference calls.  He also emphasized decoupling from the herd or the groupthink of Wall Street (most likely why he's in Miami instead of New York).  To do well in life, you've got to be excited. 


- On Sears (SHLD): He still likes the stock and the real estate is what's attractive to him.  It has more commercial square feet than Simon Property Group (SPG), but SPG is worth 10x more than Sears (using enterprise value).  Some investors argue that Eddie Lampert isn't a retailer, but look at AutoNation  (AN), which he's also been involved in.  Berkowitz feels that he has a nice margin of safety at the prices he bought at and has the potential to make a lot of money.  (We've previously posted Berkowitz's case study on Sears.)

- On Bank of America (BAC): A lot of people are fixated on the Countrywide problems, but great earnings are there and in the future that Countrywide drain won't be there so the earnings power is just starting to show.  (We've also posted Berkowitz's Bank of America case study.)

- On American International Group (AIG): The company will eventually become a profitable insurance business as they're the price leader. (You can also view Berkowitz's thesis on AIG here.)



Update: There's also some audio from Berkowitz's talk which we've embedded below via Investing In Knowledge:
 

For more from the Columbia Investment Management Conference, be sure to check out more notes from CSIMA 2013.

And for more from the Fairholme manager, be sure to also check out Berkowitz's interview at the University of Miami.

What We're Reading ~ Analytical Links 1/17/13

By popular demand from readers, we're expanding the "what we're reading" linkfests to twice a week, starting now.  To differentiate the lists, we'll be posting:

- 1 set of news links focused on hedge fund and finance industry updates 
- 1 set of analytical links focused on security analysis, investment process, etc.

If you come across (or have written) something interesting, please don't hesitate to email it over: marketfolly (at) gmail (dot) com.  Today we'll post the first installment of the 'analytical links' and tomorrow will feature the 'hedge fund links.'  Enjoy!

Analytical Links


The Success Equation: Untangling Skill & Luck in Business, Sports and Investing [Mauboussin]

A checklist to qualify and disqualify ideas [SimoleonSense]

Curating your financial life [Abnormal Returns]

AIG downgraded as shares appreciate [ValueWalk]

Finding value in HMO's [Contrarian Edge]

Notes on visiting Herbalife (HLF) [Bronte Capital]

12 cognitive biases that prevent you from being rational [io9]

Don't go to business school unless it's a top school [Daily Beast]

Bargain hunting at JC Penney (JCP) [Contrarian Edge]

Ensco (ESV): Drilling deep for value [Barrons]

Indecent proposal for SuperValu (SVU)? [Stone Street Advisors]

Actually worth a read: Jim Cramer's 10 themes for 2013 [TheStreet]

Michael Dell's grand plan? [Term Sheet]

Why console gaming is dying [CNN]

How America drinks: water and wine replace cheap beer and soda [Atlantic]

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.

Dan Loeb's Third Point November Exposure Report

Dan Loeb's Third Point Offshore Fund is out with its latest exposure report for November.  They finished the month up 2.9% and sit up 17% year-to-date and manage $10 billion.


Exposure Levels

Loeb's firm reduced net long equity exposure by a noticeable amount.  They went from 44% net long in October down to 38% net long at the end of November.  Their largest sector exposure continues to be tech, media & telecom (primarily due to their large stake in Yahoo).

In credit, Third Point is 27.7% net long, a 1% increase from the month prior.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. Greek Government Bonds
3. American International Group (AIG)
4. Gold
5. Murphy Oil (MUR)

Their top holdings as a group remain unchanged this month, though their GGB and AIG stakes flipped position ranks.


Top Winners & Losers

Third Point's top winners included Greek Government bonds, Yahoo, Delphi (DLPH), Aveta, and Ally Financial (multiple securities held).  Their top losers included AIG, Short A, Short B, Apple (AAPL), and Liberty Global (LBTYA).

Embedded below is Third Point's November exposure report:




Overall, not too many notable changes in Loeb's portfolio aside from the reduction in net long equity exposure.  Head to Third Point's Q3 letter for more color on their positions.

Bruce Berkowitz Interview at University of Miami

Fairholme Capital's Bruce Berkowitz recently sat down for a conversation with the "Executive in Residence" program at University of Miami's business school.  Here are some key takeaways and select quotes from him:

On the macro: "At Fairholme, we tend not to think too much about the macro picture... but it's clear: a recovery."

On his approach: "We buy that which is hated.  When it's hated, it's usually cheap.  We usually are too early, we suffer from premature accumulation ...  We want to make sure that when we invest in something, that there's a big margin of safety."

On why he focuses less on the income statement: "There are less ways to cheat on a balance sheet than on an income statement."

On a question he asks: "What's the worst thing that can happen, and can we still make money?" (assuming that bad thing happens)

On mistakes: "Why do so many people make the same mistake over and over again?  One of the reasons has to do with biology ... with how your brain is wired.  In the last couple of years, you've had to be more a psychologist than an accountant. That's where the behavioral finance issue comes in.  You get into all the issues how people can be their own worst enemy."

His last point is one of the most important as so many great investors have talked about setting aside emotion when managing money.  We've also highlighted Blue Ridge Capital's behavioral finance reading list which is recommended.

On permanent capital:  "That is the secret sauce: permanent capital.  That is essential.  I think that's the reason Buffett gave up his partnership.  You need it, because when push comes to shove, people run ... That's why we keep a lot of cash around."


Embedded below is the video of Berkowitz's full interview:



More resources on this investor: an additional interview with Berkowitz on portfolio concentration as well as Berkowitz's checklist for investing.

Dan Loeb's Third Point: October Exposure Report & Top Holdings

Dan Loeb's Third Point Offshore Fund is out with its latest exposure report for October and in it we see that they were up 2.6% for the month and are up 13.8% for the year.


Net Exposure Levels

Their equity exposure continues to rise as they are now net long 44.1%, an increase of 2.4% in net long exposure from the month prior.  This looks to mainly be attributed to a reduction in their short exposure. 

Their largest net long equity exposure continues to come from the technology sector (largely due to their Yahoo position) at 18.8% net long, followed by financials at 8.7% net long (mainly due to their AIG stake).

In credit, they were 26.7% net long at the end of October, down from 30.4% the month prior.


Top Winners & Losers

Their stake in Dolphin Capital Investors was a top winner during the month.  We were the first to reveal that Third Point was set to buy a stake in the Greek property & land company.

Other winners for Third Point include their new stake in Greek Government Bonds as well as Yahoo, AIG, and Murphy Oil.  Murphy recently announced it would spin off its US downstream subsidiary.

Their top losers in the month were Apple, gold, and Overseas Shipholding Group, a new name we've not seen listed in their reports previously.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. American International Group (AIG)
3. Greek Government Bonds (GGB)
4. Gold
5. Murphy Oil (MUR)

You can read Loeb's thesis on AIG, GGB & Murphy in Third Point's Q3 letter.