Hillhouse Capital's Lei Zhang Talk at Goldman Sachs (Notes & Video)

Lei Zhang of Hillhouse Capital recently had a talk at Goldman Sachs filmed at the Builders + Innovators Summit in Asia.  Zhang runs one of the most prominent funds in Asia after starting with $20 million from Yale University and now growing into a $60 billion firm.


Lei Zhang's Talk at Goldman Sachs 2019

- He says entrepreneurship is about doing something you love, not doing what's trendy or for the money

- Unbelievable change and opportunities created in China over the past 30 years; highlights Chinese people's drive

- Hillhouse was named after the street at Yale Endowment where he previously worked, but in Chinese it also refers to a high vantage point of being able to see everything.  He says Hillhouse is a blend of eastern and western philosophies: being a long-term investor, being thoughtful, entrepreneurship.  Has 45 people on his team.  "We believe you do the right things, you build your reputation, you stand up for what you believe in... and entrepreneurs will find you."

- On what he looks for in people:  persistence, smart, teamwork.  But he emphasizes empathy and the ability to connect with people who are different from you.  Lifetime learning is also essential and not to learn to make more money but a genuine desire to learn.  Also added humility is a great trait.  He likes entrepreneurs who build a culture like a sports team... it's like family but you want to win.

-  "One of the most exciting things of investing in China is you're always embracing change.  And one of the most fascinating changes in the past has been the consumer internet."  First wave was Baidu, Tencent, Alibaba, but the core was connection (people to information, people, and goods).  Now the second wave is coming "Innovation 2.0" it's not just about connection, it's about leveraging AI, SaaS, lots of vision.  Likened it to the industrial internet.

- Belle shoe retailer was being attacked on all sides (especially with e-commerce from JD and Alibaba, etc).   Hillhouse invested and 3 years later it's seen double digit growth.  For instance, they made changes like put a sensor that could tell them that x shoe was getting picked up a ton of times but no one was buying it, so they can make changes faster.  They also brought in a lean manufacturing process (Danaher).  This helped with inventory so they had less to discount which helped maintain the brand.

-  "In investing at a Hillhouse level, we're always joking the best investment is the investment you don't have to think about (an) exit." 

Embedded below is the video of Lei Zhang's talk:




For more on this manager, we've also highlighted Lei Zhang old lecture at Columbia Business School.

Carl Icahn Buys Dell Technologies Tracking Stock, Opposes Merger, Sends Letter

Activist investor Carl Icahn today unveiled a new 8.3% ownership stake in Dell Technologies tracking stock (DVMT) with over 16.5 million shares.  He opposes the DVMT merger and released a very detailed lettering outlining his thesis and thoughts (all emphasis his):


Icahn's Letter to DVMT Shareholders

"Fellow DVMT Stockholders:

Over the decades I’ve spent much of my time searching for undervalued companies.  We are very proud of our record.  In fact, an investment in Icahn Enterprises depositary units made at the beginning of 2000 (when Icahn Enterprises began to fully embrace the activist strategy) has increased by approximately 1,514%, or an annualized return of 16%, through October 11, 2018 (assuming reinvestment of dividends).  We have also made hundreds of billions of dollars for stockholders in companies in which we have been activist investors.  However, we freely admit that many of the companies we have invested in were identified to us by stockholders who sought our assistance against mediocre management who were attempting to profit at stockholder expense.  As you know, even the worst management and boards in this country are extremely difficult to dislodge.

A few months ago, several large holders of Dell Technologies Inc.’s tracking stock (“DVMT” or the “Tracker”) contacted me to express their concerns regarding, and their opposition to, Michael Dell’s and Silver Lake’s machinations and activities related to the Tracker, as well as stressing that the Tracker was, and is, deeply undervalued.  (Five years ago, I vehemently fought Michael Dell who many stockholders believed was severely underpaying for the company in a going-private transaction).  After researching the current situation, I quickly realized that while we have unearthed many undervalued opportunities in the past, very few companies compare to the current opportunity and the massive undervaluation of DVMT — which exists in plain sight for all to see.

We Don't Say This Lightly: 

Over The Past Few Months We Have Acquired Beneficial Ownership Of Over 16.5 Million, or 8.3%, DVMT Shares.

We Will Vote AGAINST.

And Will File A Proxy Statement To Solicit Your Vote AGAINST, Dell's Proposed DVMT Merger!

The Dell Tracker currently sells for approximately $92 per share but is worth on a pure mathematical basis approximately $144 per share[1].  In my opinion, this massive distortion exists because (i) as a result of the 2013 going-private transaction, we believe the market does not trust Michael Dell or Silver Lake; (ii) the Tracker has basically zero governance rights and is trapped within a capital structure that has some of the worst corporate governance in America (at Dell, the Certificate of Incorporation even requires that the CEO has to agree to replace the CEO!), however, investor fear of this poor governance is overdone and we believe strong activism combined with litigation, if necessary, can mitigate the governance risks; and (iii) for the better part of the past year, Dell and Silver Lake worked to destroy the value of the Tracker by (1) raising the possibility of a Dell IPO, (2) floating the idea of a merger with VMware and (3) threatening a forced conversion of the Tracker into Dell common stock, among other tactics. These scare tactics are reminiscent of the tactics Machiavelli advised the Borgia rulers to use centuries ago.

The Facts

Several years ago, I believe Dell and Silver Lake realized that Dell Technologies was simply a highly-leveraged hardware company facing great secular challenges and would never enjoy the growth and success of Apple and Microsoft. Therefore, they levered up dramatically to purchase EMC Corporation (“EMC”), a better positioned hybrid hardware and software company, whose crown jewel was its 82% ownership interest in VMware, Inc. (“VMware” or “VMW”).  But, to purchase EMC, Dell needed $10 billion more than its bankers could possibly arrange, and they also needed to convince EMC stockholders that Dell’s offer was worth accepting.  They accomplished this by engineering the DVMT Tracker that they said would allow EMC stockholders to continue to participate in VMware’s upside.

Because a tracking stock is unusual and rarely included as merger consideration, Dell and its bankers had to convince EMC stockholders that the Tracker would efficiently “track” the economic value of VMware shares.  To that end, one of Dell’s bankers at the time delivered a fairness opinion that assumed the Tracker would trade at a range of +/- 5% to VMware shares; while another banker assumed the Tracker would not trade at more than a 0-10% discount to VMware shares.[2]  Dell sold EMC stockholders the Tracker assuming, at most, no more than a 10% discount, yet today, Dell and some of those same bankers are now soliciting your vote to agree to exchange your DVMT shares at a 36% discount![3]

It seems clear that Dell has long-planned to repurchase the Tracker at bargain basement prices.  For two years, Dell management have publicly boasted about Dell’s “…opportunistic opportunities in the market to take advantage of the discount between the two securities”[4] and have repurchased over 23 million DVMT shares at substantial discounts.  This plan significantly benefits Michael Dell and Silver Lake, but at a huge cost to the DVMT stockholders.  Why hasn’t the Dell Board been exercising its fiduciary duties owed to the DVMT stockholders, as opposed to just the controlling stockholders?  Make no mistake, if the current “opportunistic” deal succeeds, 100% of the discount, approximately $11 billion, will be an economic windfall mostly attributable to Michael Dell and his Silver Lake partners.  It is clear to me that Dell and Silver Lake have followed Machiavelli’s advice to the letter:  It is better to be respected than loved, but better still to be feared than respected.

Creating the Fear

In January 2018, Dell commenced its fear campaign by telling stockholders that Dell was evaluating potential business combinations between Dell and VMware, Inc.  DVMT stockholders and the market generally feared that this meant a possible reverse-merger with VMware which would result in a significant multiple contraction for the combined companies which would mean a much lower combined company stock price for the former VMware stockholders.  This obviously would also result in a lower value for the DVMT stock.  For good reason, these disclosures sowed fear and uncertainty that resulted in a precipitous fall in price for both VMW shares and DVMT shares.  In a two-week period both stocks dropped over 25%.  It is very hard to believe that Michael Dell and Silver Lake did not fully anticipate this drop and we believe this was a carefully calculated (and successful) attempt to frighten VMW and DVMT stockholders.  It appears to us that VMW management and the VMW independent board members wanted no part of a merger with Dell.  Instead, they agreed to dividend $9 billion to Dell to obtain some relief from, and at least postpone, a merger with Dell.  Once the threat of a merger was effectively off the table, VMW and DVMT shares recovered a good part of their lost value and the discount narrowed modestly, but it continues to persist.

But, Michael Dell’s and Silver Lake’s ultimate objective was, and still is, to purchase the Tracker at a large discount and they would not be deterred.  They therefore successfully struck a deal with Dell’s independent directors to exchange DVMT shares for cash and Dell stock, at a ridiculously low valuation.  Instead of paying the mathematical value of $144 per share for the Tracker, they are currently offering to pay what we estimate is only $94 per share.[5]  Although I know and respect one of the Dell independent directors, by agreeing to this deal, I can only conclude the independent directors must have been misinformed by advisors working for Dell and Silver Lake or by Michael Dell and Silver Lake themselves.  Otherwise, it is unquestionable, in my opinion, that the independent directors breached their fiduciary duties to the DVMT stockholders.  How else can one explain an agreement that so obviously transfers $11 billion in value to the controlling stockholders at the expense of the minority stockholders?  The one thing these independent directors did get right, however, was to condition the deal on DVMT stockholder approval.  I believe the Dell independent directors must take their fiduciary duties to the DVMT stockholders seriously.  Any future transactions proposed by the controlling stockholders must always be assumed to be at the expense of the DVMT stockholders and the independent directors must always demand robust protections for the DVMT stockholders. The Board’s fiduciary duty to all stockholders demands nothing less, especially after this fiasco!

Dell now appears to be realizing that DVMT stockholders are uniformly and stubbornly against the proposed DVMT merger and is now moving into the next phase of its fear-mongering campaign.  By using the scare tactic of disclosing that they have met with investment bankers to explore a potential IPO of Dell’s Class C common stock, Dell is effectively telling its public stockholders that if we, the DVMT stockholders, do not approve their proposed DVMT merger, they will invoke a draconian provision in their Charter and force us to convert our DVMT shares into Dell stock following a Dell IPO.  Fortunately, in my opinion, their threat to “cram down” a forced IPO conversion is another empty one, if we stand together.  

An Empty and Ridiculous IPO Threat 

We believe that a Dell IPO would face significant challenges and trade very poorly given the possibility of the issuance of a tsunami of stock in connection with a forced conversion.  I believe Dell’s IPO valuation would be severely penalized with: 1) a larger than average IPO discount for its abominable corporate governance, 2) a conglomerate discount for the myriad of partially owned assets and complex structure and 3) a large and incalculable discount for the up to $20 billion of backflowing shares that could hit the market following a forced conversion of DVMT stock.  It would also be one of the most closely watched and scrutinized IPOs in history – the spotlight’s glare would be blinding!  In short, we are not intimidated by Dell’s threat of a forced IPO conversion, and ultimately, we ask ourselves: “Who would ever buy Dell stock knowing that a tsunami of stock may hit the market?” And, given these chaotic dynamics and uncertainties, as well my and other DVMT stockholders strong opposition to a forced IPO conversion, can you imagine the required disclosures or the roadshow?  Could you even find an investment bank willing to risk its reputation (not to mention the potential liability) with a Dell IPO under such circumstances?  

Even in the almost impossible event that Dell overcomes these massive execution challenges of the IPO “cram down,” we believe applicable law will suffocate Dell’s ability to achieve the draconian outcome they so desire.  The Delaware courts are clear that controlling stockholder transactions must be reviewed under the stringent entire fairness standard, not business judgment, unless certain procedural safeguards are satisfied.  If Dell invokes the forced IPO conversion, we believe the Board must treat such a transaction as a conflicted controlling stockholder transaction and obtain protections for the DVMT stockholders, otherwise the Board’s decisions will be reviewed under the entire fairness standard.  Particularly because a forced IPO conversion would result in irreparable harm to DVMT stockholders, we also believe that any transaction that fails to include minority stockholder safeguards will be exposed to an injunction and/or substantial damages.

Importantly, against the backdrop of DVMT stockholders rejecting the proposed DVMT merger transaction, it will be very difficult not to conclude that the forced IPO conversion was pursued in retaliation against DVMT stockholders. Given the fact that in one recent discussion, a very reputable stockholder told us that Goldman Sachs, one of Dell’s advisors, has been telling stockholders that (and I paraphrase) “…the IPO could be for a small number of shares and who knows how that will trade…”, Dell’s and Silver Lake’s current vote solicitation activities already appear to be tainted by coercion.  In my view, this is obviously another threat to take advantage of DVMT stockholders who do not understand that an IPO is nearly impossible!  Dell, Silver Lake and Goldman Sachs should all absolutely understand that Delaware jurisprudence has developed to protect minority stockholders from coercive controlling stockholders, and I strongly believe, as do my lawyers, that the Delaware courts will protect DVMT stockholders from Dell’s and Silver Lake’s coercive actions. Even if we fail to obtain an injunction, we believe we would have valid claims for substantial damages, which Dell would have to defend under entire fairness, for many years, which is not something either Dell or the Board will want to do.  Suffice it to say, we believe it is obvious that the threat of a forced IPO conversion is empty, no matter what they say.

Continuing the "Status Quo" - Another Empty Threat

Another threat Dell has made is that they will do nothing and will continue with the “status quo”.  But this is ridiculous!  Time is Dell’s enemy and our friend!  As time goes on, we expect Dell’s very cyclical business to be basically stagnant or to decline, while VMware’s business should continue to grow and become more profitable.  This dynamic will largely put our 50% economic ownership in VMware out of their reach.  We therefore believe that Dell purchasing the Tracker is a “must have” for Dell.  Today Dell, ex-VMware, is a mundane highly-levered hardware company that will only face greater disruption and competition.  The combination of high leverage and the cyclicality of Dell’s business means that it is possible that Dell’s cash flow may be severely impaired by any downturn in its business, making it very important for them to get control of VMware’s more stable recurring cash flow.  Dell has over $46 billion in gross debt, and its recent debt paydown has substantially relied on cash generation from asset sales and working capital, instead of operating income.  To continue paying down debt, we believe that Dell has a more pressing need for VMware’s cash flow than management would have you believe.

It is our strong opinion that capturing the discount is only the first step in Dell’s grand expropriation of value.  As astute technology investors, we believe that Michael Dell and Silver Lake perceive that VMware is right at the beginning of a multi-year inflection point.  As its fast-growing network and cloud solutions gain scale, we believe VMware is likely to experience the business nirvana of both accelerating growth and expanding margins.  We believe this could result in over $12 per share of free-cash flow generation in a few years, and a stock price of potentially over $250 per share.[6]  Clearly Michael Dell and Silver Lake take us for fools if they think that we would exchange this future value potential for only $94 per share.

THE Next Steps

We believe Dell’s next step will be to modestly increase the deal price in an attempt to receive voting commitments from those willing to sell at a discount, just not as large as the current 36% discount.  We strongly believe that DVMT stockholders should not consider accepting any discount, but if they do, in no event should that discount be greater than the 0 to 10% discount that was assumed when the DVMT Tracker was first issued.  Even then, note, I merely say “consider.”

Despite the numerous arguments I have made to explain why DVMT stockholders should not accept Dell’s proposed deal, or for that matter, even a new deal unless it contains a very, very substantial increase, I understand that some DVMT stockholders may want to exit their investment and accept an improved offer.  For that reason, and in preparation for the possible announcement of an improved offer, I am considering several options.  I believe that if Dell does raise the offer, it will be important to provide liquidity to the DVMT stockholders that want to sell, while also protecting the DVMT stockholders that do not want to sell from being forced out in a merger.  In my opinion the best way to balance these competing interests would be to offer a competing partial bid that provides partial liquidity without forcing a merger.  As such, I intend to continue evaluating this idea and determine whether other interested parties, including financing sources, may want to participate in, or finance, a transaction of this nature.

VOTE AGAINST THE PROPOSED DVMT MERGER!

In conclusion, I firmly believe Dell and Silver Lake are trying to capture $11 billion of value that rightly belongs to us, the DVMT stockholders.  As such, I intend to do everything in my power to STOP this proposed DVMT merger. In my opinion, it is better to have peace than war, but be assured, I still enjoy a good fight for the right reasons, and in the current situation, I do not see peace arriving quickly!  Stay tuned!

Sincerely,

Carl C. Icahn"



[1] Based on DVMT share price of $91.74 and VMware stock price of $141.49, as of October 11, 2018.  Assumes Class V Common Stock interest in 61.1% of the 331 million VMW shares attributable to the Class V Group, per Dell Technologies Inc.’s Form S-4/A, filed with the Securities and Exchange Commission, on October 4, 2018.

[2] As disclosed in the EMC Definitive Proxy Statement, dated June 6, 2016.

[3] Based on the value of 199 million outstanding DVMT shares, at $91.74 per share, compared to the value of 61.1% of Class V Group’s interest in 331 million VMware shares, at $141.29 per share.

[4] Dell Chief Financial Officer comments made during Dell’s earnings call on March 30, 2017.

[5] Based on a 5.0x multiple of FY2019E “Core Dell” EBITDA of $7 billion and market prices as of October 11, 2018 for VMware, Pivotal and SecureWorks. Assumes DVMT shares exchanged for $9 billion of cash and 1.3665 subject to proration.

[6] Cash flow projections based on Bank of America Merrill Lynch report, dated July 16, 2018.  FCF valuation multiple based on comparable company analysis, including MSFT, RHT and CTXS.

Top 10 Stocks That Matter Most To Hedge Funds Per Goldman Sachs (Q4 2016)

Goldman Sachs' quarterly hedge fund trend monitor outlines what stocks matter most to hedge funds.  Here's the list as the fourth quarter 2016:


Top 10 Stocks That Matter Most To Hedge Funds: Q4 2016

- Alphabet (GOOGL / GOOG)

- Facebook (FB)

- Amazon.com (AMZN)

- Bank of America (BAC)

- Charter Communications (CHTR)

- Apple (AAPL)

- Microsoft (MSFT)

- Yahoo (YHOO)

- Time Warner (TWX)

- NXP Semiconductor (NXPI)


As you can see, it's quite tech-heavy.   The major exception is Bank of America (BAC), which was a consensus buy in Q4 among hedge funds we track in our newsletter.

For more on what stocks hedge funds have been buying & selling, check out the brand new issue of our premium newsletter that reveals the portfolios of 25 top funds.

Hedge Fund Links ~ 11/11/16

Hedge funds are hiding out in gold [Bloomberg]

Carl Icahn left Trump victory party to bet $1 billion on stocks [Bloomberg]

Bridgewater: stocks will tank if Trump wins [Business Insider]

The money management gospel of Yale's endowment guru [NYTimes]

One hedge fund laid out why the market feels so dangerous right now [Yahoo]

New Goldman Sachs ETF tracks popular hedge fund stock bets [Reuters]

Cliff Asness' Talk at Capitalize For Kids Conference 2016

We're posting up notes from the Capitalize For Kids conference 2016.  Next up is Cliff Asness of AQR Capital who had a fireside chat on various finance topics.


Cliff Asness' Talk at Capitalize For Kids Conference 2016

•    Believes the role of hedge funds for a long time was to provide alpha and systematic strategies. Now there is generally not much value in the “hedge” aspect since many funds are correlated with the market

•    Regarding fees, thinks 2/20 is appropriate if you are able to isolate alpha (by hedging out beta using derivatives), essentially to make sure it is real market outperformance – however, true alpha is hard to find. Says the current fee structure is not sustainable for everyone.

•    Suggested two ideas for investment firms/allocators: have lower fees due to longer lockups periods which should better align all stakeholders. Secondly, with zero beta strategies management and performance fees that move inverse of correlation to the markets.

•    Sharpe Ratio: It a decent measure but not perfect. Believes it can generally add value to a portfolio if they are not correlated with markets.

•    Founded in late 1998 following tenure with Goldman Sachs. Initial focus was on systematic value however ran into difficulties as firm was essentially short expensive and long value. For AQR, capacity is a problem since liquidity is very important. They have closed strategies in the past.

•    Believes machine learning (AI) can disrupt anyone doing something with high frequency, generally thinks fundamental stock picking will continue to work.

•    Return distribution is quite “visible” in bonds. Limited returns since rates are so low.

•    Same with stocks since they are expensive. It’s tough to “buy at the 90th percentile and sell at the 99th”. Key is to find lots of uncorrelated assets


Be sure to check out the rest of the presentations from Capitalize For Kids/Sohn Canada Conference. 

Corvex Management Boosts Signet Jewelers Stake, Files 13D

Keith Meister's activist hedge fund Corvex Management has filed an amended 13D with the SEC on shares of Signet Jewelers (SIG).  Per the filing, Corvex now owns 8.3% of Signet with over 6.52 million shares.

The filing notes that Corvex "commend the Issuer for the announcement in its quarterly earnings call on May 26, 2016 of its commitment to conduct, along with its advisor Goldman Sachs, a strategic evaluation of its credit portfolio.  The Reporting Persons strongly support the Issuer’s review of credit portfolio alternatives, and believes that it is essential that the Issuer complete this review as quickly as reasonably practicable, and thereafter promptly both announce to the shareholders and implement the actions which were determined to create the greatest enhancement to financial and shareholder value."

Corvex also indicates they purchased shares of SIG in April and May with the bulk of the activity coming on May 26th at $98.25 per share.

The firm previously owned 5.93 million Signet shares at the end of the first quarter.

Per Google Finance, Signet Jewelers is "a retailer of jewelry, watches and associated services in the United States, Canada and the United Kingdom. The Company's segments are the Sterling Jewelers division, the UK Jewelry division, the Zale division, which consists of Zale Jewelry and Piercing Pagoda, and the Other segment. The Other segment includes subsidiaries involved in purchasing and conversion of rough diamonds to polished stones. The Company operates retail jewelry stores in various real estate formats, including mall-based, free-standing, strip center and outlet store locations. It operates approximately 3,620 stores and kiosks across approximately five million square feet of retail space. The Sterling Jewelers division operates approximately 1,540 stores. Its stores operate nationally in malls and off-mall locations as Kay Jewelers, and regionally under various mall-based brands. Zale Jewelry consists of brands, including Zales Jewelers and Zales Outlet."

Hedge Fund Links ~ 5/27/16

The 2016 rich list of the world's top earning hedge fund managers [ii alpha]

3 lessons from hedge funds' rise and (partial) fall [Morningstar]

John Burbank sees US recession, China devaluation within year [Bloomberg]

Some recent thoughts from David Tepper [Forbes]

Is stock shorting smart if you aren't Jim Chanos? [Barrons]

Tudor cuts fees on some funds [Bloomberg]

UBS prime brokerage crowded positions report [LadyFOHF]

Concerns grow over hedge fund bunching effect [eFinancialNews]

Hedge funds aren't what they used to be [Marketplace]

Calling the bottom for the hedge fund industry [CNBC]

We asked an expert why hedge funds still exist [Vice]

Insurance industry falling out of love with hedge funds [Bloomberg]

Hedge funds hold onto last year's favorites [ii alpha]

Goldman Sachs explains why hedge funds aren't magic anymore [Yahoo Fin]

Rise of the billionaire robots [The Guardian]

Money managers seek AIs 'deep learning' [FT]

Hedge funds may lose 25% of assets, Blackstone says [Bloomberg]

One hedge fund goes against industry titans on big China banks [Bloomberg]

Notes From Berkshire Hathaway 50th Anniversary Symposium: Klarman, Ackman & More

The Berkshire Hathaway 50th Anniversary symposium just took place and featured conversations with the likes of Seth Klarman, Bill Ackman, Tom Gayner, Byron Trott, Carol Loomis, Roger Lowenstein, Tom Russo, John Phelan, and Whitney Tilson.  The notes were compiled by Jacques Romano, MD.


Notes From Berkshire Hathaway 50th Anniversary Symposium

Carol Loomis (CL) and Byron Trott's (BT) Conversation

Warren Buffett (WB) was invited but he graciously declined explaining his presence would change the nature of the discussions. BT met WB because the GS partner that had handled his account, Tom Murphy, Jr., had retired.  Hank Paulsen told Warren that BT was the only guy for him.  Initial one hour meeting lasted about three hours.  This was in early 2002.

WB created through GS a negative coupon convertible bond of about $300 million called SQUARZ in April 2002, whereby he was paid to borrow money and the institutional holder of the security was able to purchase Berkshire Hathaway (BRK) stock in the future at a higher price.  Charlie didn’t like the idea.

BT represented Pritzker in the Marmon deal and was involved with MacLeans and Pampered Chef transactions.  BT also involved in Wrigley and Mars deal.

BT describes WB as a perfect ten times two.  He has an incredible mind and able to do math in his head and his discipline is incredible.  On the human side, he is humble and has the best sense of humor.  He is someone you want to be with and is always positive about anyone.

Regarding discipline, he cited some KKR transaction that WB could have done for 10-15% more in price while having a cheaper cost of capital but WB felt he could use that cash more effectively at another time.  He waits for his pitch.  “You should see the stuff he turns down over the years”.

WB looks at cash on cash returns and doesn’t factor in leverage.  He looks for durable long lasting cash flow stream businesses.  He realizes that sometimes to get great businesses you have to reach but he is incredibly disciplined and completely unemotional.

WB told BT that CL started as a reporter but is great in accounting and finance and is a stickler for details.  She’s from Missouri.  CL expanded on a vignette about her dating Ty Cobb.  She had come to NYC in 1950s and was on the quiz show Tic Tac Dough where she did well and was subsequently contacted by Ty’s nephew for an invite by Ty to the 21 Club.  “How could a baseball fan turn that down?”  She was his subsequent “date” to Yankee Stadium during an Old Timer’s Game where she was presented with a Mantle, Maris, Whitey Ford autographed baseball.  That’s about where it went.  She was in her late 20s and he was in his late 60s.

In 2008, Goldman Sachs was experiencing a small but daily run on the bank and wanted to raise capital.  BT said it was about a 20 minute negotiation with WB.  In addition to making his BRK investment, WB wanted to make a big statement about being confident in that investing climate.  He subsequently made his GE investment and wrote his Oct. 2008 NY Times op-ed.  One of his points was that markets go up first and that there is reasonable cause to regain confidence.

WB is an American icon.  The world doesn’t understand how important WB was to the solutions during the financial crisis of 2008.  I would describe him as a “pragmatic optimist grounded in reality”.  

Hank Paulson told BT that during a late night phone call, it was Warren’s idea to make TARP capital attractive to banks and for it not to be stigmatized so all the banks should receive it and none look particularly weak or strong.  But he also wanted to make it more expensive for the banks if they kept this capital for a longer period.  

WB was doing this to help the country.  Some may be cynical about this because he owned Wells but Hank knew and everyone else who knows WB knew that he was creatively playing a constructive role.

Warren is disciplined, opportunistic and long term.   Charlie is not my number two; he is my equal and has kept us on the straight and narrow. Warren doesn’t want to do small deals but will do minority deals as long as it is big.

Warren’s the greatest, nicest and most accessible person.  He’s a great teacher and a great student of investing and business.  He provides a safe home for business owners that want liquidity and still passionately want to run their businesses. Warren is one of a kind and will be the best investor of all time and his record will not be beaten. 

He thinks very long term and Berkshire will still be intact a century from now. “Warren, you can’t control things from below the ground.” “Maybe not, but I can try.” The term “investor” is not quite expansive enough to describe Warren.  He’s also a great acquirer, manager and owner of businesses. Matt Rose of Burlington Northern told me that Warren knows more about the railroad now than I do.  And he can interconnect it to everything else.  He makes the complex seem simple.  When I talk to Warren, I feel like I’m 2 steps behind him.

They discussed how Andrew Carnegie is known more now as a philanthropist than as a businessman and Warren may have similar impact and be known more expansively.


Seth Klarman (SK), Bill Ackman (BA), and Roger Lowenstein's (RL) Conversation

Bill went to Larry Cunningham’s Cardoza symposium in 1996 and fortuitously sat next to Suzzie Buffett who invited him to sit next to Warren at lunch!  When he went to HBS, there were not any classes in investing although there were classes in investment management.  There were no investment clubs at that time either.  He read Graham’s Intelligent Investor and then Warren’s annual reports.

Seth Klarman took a job at Mutual Shares after college and “Warren” was common parlance once I got into the business.  He thought Warren’s Superinvestor article was very logical.  SK feels that there must be some type of gene that makes people have an affinity for value and value investing.  He told a story about a friend of his whom enthusiastically tried value investing full time but three months later ended up quitting:  “It doesn’t work”.  

BA says some of the things he tries to emulate are Buffett’s focus on quality, durability and concentration.  Although given “my” experience in Valeant, perhaps I should change one of his aphorisms to “be fearful when others are fearful”.  

Making good investments is not about performing discounted cash flow analyses or reading footnotes but more about assessing the moat in our dynamic world. Many of Buffett’s investments in the 1970s like encyclopedias and newspapers did not hold their advantages.  You can’t “just buy and hold”.  The world has changed rapidly.

The difficulty is the qualitative assessment and the implementation. Railroads now seem to pass the 100 year test but how many businesses can pass that test? Lowenstein made the point that Wall Street loves those 99:1 bets but not WB.

SK said that the maxim of “don’t lose money” does not mean at every time and in every instance but to the extent that it puts you out of business.  Sometimes you can bet or invest in favorable expected value situations where you lose the bet.  This is similar to an insurance operation.  Some investments in a portfolio will lose but you don’t put the operation at risk.  

SK: In the 1980s you could actually buy quality inexpensively; you didn’t have to pay up.  I remember Nabisco selling for 7 times after tax earnings.   You can’t just kneel at the temple of Graham and Dodd, you and the world will change.  We will evolve and ought to evolve because the world requires us to.  WB teaches us how to make our own map.

I don’t know WB well enough to know how he feels, but I suspect that he feels that him being held as an investing demigod is a bit silly.  WB isn’t about that. WB is not about giving you a formula.  “Business is hard.  Everything is overlaid with judgment”. WB has been fortuitous to invest at a time when you could get quality inexpensively.  He has built on certain advantages.  No one else gets the calls that he gets. Some people are overly focused on him as opposed to understanding how he thinks.

BA: Buffett has made more people rich than anyone else in history.  And he gives it all away.  He’s one of the great educators. I believe in response to a questioner, BA went into a diatribe about Coca Cola (KO).  It does enormous damage to society and people consume too much sugar contributing to obesity and diabetes.  He wouldn’t be against supermarkets that sell coke.  And he owns Mondelez: all things in moderation.  But Coke doesn’t seem to have had a bad effect on Buffett.  I believe he has said WB hasn’t had water since the 1950s!  He thinks Coke has great distribution and marketing but it is not good for children to get too much sugar water.

There was some discussion that the BRK model with insurance, concentrated positions and possible illiquidity may have problems in future.  You need to be a fortress and inspire confidence and trust with regulators.  Will that survive Buffett? Conglomerates do not have a great history.

Buffett is a fabulous communicator.  He has stayed on the right side of politics and has avoided becoming a target of Washington.  It is not automatic that the next CEO will be able to tell the story of the company as well. SK said he stole the idea of writing meaningful partner letters from WB.  And he feels that the overall quality of fund letters in general has improved because of Buffett’s lead.  Consistency, reassurance, and transparency give shareholders comfort.

BRK can be a Warren centric model.  He is uninvolved in the management of the businesses and there may be an opportunity for “optimization”.  With 3G he is “outsourcing” the less attractive aspects of the business. Catastrophic risks can destroy enormous amounts of value.

SK: excessively raising prices on drugs may not be illegal but there are social costs.  Capitalism may face a more constrained environment as a result of bad behavior. WB has conducted himself generally beyond reproach.  He has not become a target.  The next CEO may not get a pass so easily. Value investing is nuanced but we will always have it.  “Human nature will not yield”.  Greed, fear and lack of intellectual honesty will result in bargains from time to time. There is always going to be a share of the investment business that is following the crowd.  There are those watching over their shoulder and who have misalignment of goals.  They may be forced to do things they may not want to do for human reasons.

Someone asked SK if he wanted to be an investment manager at BRK or if he had any discussions about this with WB.  He said he was never a candidate and loves his job. He said he was surprised on the upside with WB’s decisions about investment managers.  It was hard to do and it has gone incredibly well.  


Berkshire Shareholder Panel: Tom Russo, Paul Lountzis, Whitney Tilson

“Only WB can fill a room without even being in it”.

Whitney Tilson has been adding to his BRK position.  It is safe, cheap and with decent growth.  He puts fair value about $267,000 give or take 10%.  You can find his slide presentation on the Internet (there were no slides at this conference).

Tom Russo said there are no agency costs and an extraordinary alignment of interests.  WB owns 30% of the stock and makes $100,000 for managing. The corporate form allows for tax efficiency with respect to capital allocation.   He has the willingness to do anything if it makes sense and the capacity to do absolutely nothing if conditions warrant.  Great businesses can find a home at BRK where they will be protected.

Paul Lountzis tries to understand BRK broadly and deeply.  There is embedded optionality in BRK.  Regarding Berkshire, he is reminded of the Ralph Waldo Emerson quote: “Every institution is the length and shadow of one man.”  We try to understand it now and in the future. He mentioned that Geico is on the books for $2-3B but is worth 10-15 times that.

WT told WB that he is his role model in Jan. 1999 and he tries to emulate how he runs the business.  Given how WB communicates, BRK is the opposite of a black box.  He has incredible humility and even looks for ways to self-flagellate.

PL:  WB is a wonderful human being and exemplifies consistency and loyalty to a high degree.  He focuses on permanence over the long term and looks out 10-20 years. His example impacts everything you do both personally and professionally.  BRK values permeate seamlessly and consistently throughout its business. Despite the fact that BRK has gone down by 50% several times it has still been extraordinarily rewarding.

Few businesses have great reinvestment opportunities.  If you can defer taxes on unrealized gains, this is a great advantage. The problem with many public companies is their inability to take advantage of some of their potential opportunities, unlike family controlled companies.  Public companies may need to make earnings estimates as opposed to investing in opportunities that may penalize current earnings.  They may worry about activists.

BRK is a unique public marriage between private and public investments.  BRK gets $1.5B month in free cash.  It is effectively a source of permanent capital and a robust re-investment engine. During times of stunning market drops, WB was never forced to sell. Permanent capital is very valuable. The ability to do nothing is valuable in the investment business. Operationally, they can turn down the noise of Wall St. Buffett has the flexibility to do nothing.  He is unique and special and combines analytical strengths with strong people skills to a degree that is very rare. He has unique qualitative insights. You don’t see the 99% of opportunities he says “no” to.  

Buffett plays a very important cheerleading role.  Many company CEOs are rich and old and feel personally loyal to Buffett.  Are they going to be as loyal to the next CEO? There is somewhat limited corporate governance but Buffett holds it all together.  

What is the next BRK? The best BRK is BRK. One interesting point that was made: investors that held the S&P 500 going into the financial crisis more than likely sold when everyone was running for the hills.  But given their understanding of and loyalty toward BRK, shareholders were much more likely to garner the full return of the company and not otherwise sell low and buy high.  This is a point that can be missed when one compares BRK returns to the index.  The index’s returns are more likely illusory and less likely realized. Other companies “wave people in at the peak”. 


Partnership Session With Markel's Tom Gayner and John Phelan

John Phelan.  We don’t take 1% or more positions without visiting the company. Should you locate far from Wall St?  Mindset trumps location.   We think we have semi-permanent capital.  There is always a balance between the short term and long term. Our benchmark is not the S&P 500.  Our benchmark is to make money.  The risk free rate is your benchmark. We have the luxury of not being invested all the time. Simplicity is a virtue and we have fewer problems that way. If you hire someone that is not from a top school, they are less likely to think, “You’re lucky to get me”.  Some of our best hires are from the military.  They know how to get things done. We currently have 18% cash which is on the high side. We are company focused and not market focused.

Tom Gayner: “Good meat priced right is better than poor meat priced cheap”. JP worries about the credit markets.  Now a $250M 10 year Treasury trade moves the market whereas before $1B wouldn’t make it blink. We are defensively positioned but not bearish on the US economy.  We are seeing wage pressure in our companies.   The best hedge is a great attractively priced business. Paying up for a business is counter-intuitive.  It costs more but may be worth a lot more.

Lawrence Cunningham: Buffett’s presence here would steal the stage and by electing not to come, he is letting us have the conversation. LC organized a conference at Cardoza Law School in 1996.  One questioner asked what happens to the shareholders when Buffett dies.  Buffett said, “it won’t be as bad for you as it will for me!” BRK looks a lot different today than it did then but the core values have stayed the same.  He has created an institution that goes beyond him in the quality of the people, businesses and values and that is the best succession plan possible.

BRK gets funds from internal generation and insurance float versus the cost of borrowing to make acquisitions.  The float is currently $85B with no due dates, covenants or banker negotiations.

The Board is not there to monitor management but to partner with it.  They have no options, liability insurance and bought stock with their own cash. Company CEOs have clear and simple mandates.  Called out Bruce Whitman, CEO of Flight Safety who was at the conference. He has never sold a subsidiary and sometimes business sellers accept a discount compared with offers from other business buyers. We would rather bear the visible costs of a few bad decisions than suffer under stifling bureaucracy.

GenRe would have gone bankrupt after 9/11 without BRK! Dexter Shoe was another “mistake”. BRK sometimes is a juicy target for journalists-recently Clayton Homes and National Indemnity.

He spoke about a recent acquisition called Detlev Louis from Germany that sells motorcycle gear.  Similar to See’s being a small deal but defining the future of the company, he sees this company as a possible harbinger of future deals in Europe.  He points out that it only has about $40M in earnings which is less than WB’s minimum size but he made an exception to get a toehold in Germany and Europe.

He made mention that Pampered Chef’s sales have considerably decreased and that there is some turmoil in the capital intensive business of NetJets.

Don’t focus on beating the market but in finding the greatest discrepancy between price and value.

50% Discount to Next Week's Family Office Capital Raising Workshop in NYC

On Friday October 17th at the Harvard Club of New York, fund managers, investor relations  professionals, and business executives will gather for a full-day intensive workshop on raising capital from family offices and HNW investors. http://WilsonConferences.com/Family-Capital

Richard C. Wilson, author of The Family Office Book (Wiley) and founder of the Family Offices   Group, will lead a day of live training that will teach you how to attract family offices and HNW investors, expand your capital base to single and multi-family offices, and educate you on the in’s and out’s of this growing investor group. Be sure and reserve your seat for the Alternative Investment Networking Breakfast taking place at the Harvard Club on October 16th, too.

Market Folly as a media partner for this event has enabled the first 10 professionals who register a 50% discount, so you can attend this catered, full-day capital raising seminar for $295. This offer is only for the first 10 readers who use this code "300" on the registration form: http://WilsonConferences.com/Family-Capital

Past Attendees of our Capital Raising and Networking Breakfasts include: BNP Paribas, Jefferies, Bloomberg, PWC, the Rohatyn Group, Credit Suisse, JPMorgan, First Republic, Goldman Sachs, Wells Fargo, Invesco, and leading family offices, private equity firms, and hedge funds.

Workshop Chairman: Richard C. Wilson has raised over $200 million, he is founder of the #1 largest family office association in the world, and is CEO of Wilson Holding Company and Billionaire Family Office. Richard is one of the best-known capital raising authorities in the world with over 20 million views of his articles, videos, white papers, webinars, and books, and a weekly email reach of over 1 million professionals, he has developed the Wilson brand into a household name over the past 8 years. Richard has written extensively on capital raising and marketing (including two bestselling books), he has trained over 10,000 investment professionals through his speeches, workshops, and training programs, and he works every day with ultra-wealthy investors, family offices, and $1B+ families.

Conference Details: http://WilsonConferences.com/Family-Capital

Where: Harvard Club of New York

Limited Seating: Due to fully catered breakfast and lunch at the event seating is strictly limited, please reserve your seat now if you would like to attend.

When: October 17, 2014

Why: In order to successfully raise capital from family offices, you need to understand these investors, how they make allocation decisions, and what they are seeking in an investment partner. This is the perfect workshop for anyone looking to partner with family offices and improve your institutional capital raising strategies. Download the brochure: http://WilsonConferences.com/Capital-Raising-Workshop-Series.pdf

Register: To reserve your seat before they run out please call Yvette or Doug at (212) 729-5067  or complete the 1 minute registration form here: http://WilsonConferences.com/Family-Capital and don’t forget to use code 300 to save $300 off your registration.

Like all of our events we 100% guarantee that you will love the workshop and get far more than your money's worth of value from it or we will refund you instantly upon request.

Richard C. Wilson
(212) 729-5067
Wilson Conferences
Family Offices Group Association
3300 NW 185th Avenue Suite #108
Portland, Oregon 97229
Team@WilsonConferences.com
http://WilsonConferences.com/Super

Jim Chanos & Jim O'Neill on China At Bloomberg Markets 50 Summit (Video)

Kynikos Associates' hedge fund founder Jim Chanos sat down with Jim O'Neill, former Chairman of Goldman Sachs Asset Management at the Bloomberg Markets 50 Summit to chat about China, real estate, and markets.  Here are some of the highlights:

Chanos & O'Neill on China

O'Neill says that most of the reason why China's slowed is because they've deliberately slowed.

Chanos' caution in regards to China stems from credit.  He prefers to bet against China by playing miners, steel companies, construction companies, the building blocks that have boosted the expansion.

O'Neill asked Chanos if he would be against European luxury goods companies that have benefited from a wealthier Chinese consumer and Chanos said he doesn't need to play "third derivative" plays as he's more covered by betting against "first derivatives" such as the miners.

Chanos is bearish on iron ore because he says demand can rise or fall, but there's a ton of supply coming to the market late this year and next year.  Greenlight Capital's David Einhorn has also bet against iron ore.

O'Neill argues that the "old China" is dead and that's what Chanos is betting against.  He thinks it's a great stockpicker's market there as you can bet against old China and bet on new China.

Chanos also recommended a book about China: Red Capitalism.

For other coverage of the Bloomberg Markets 50 Summit, we also posted up video from the hedge fund panel featuring Glenn Dubin, Marc Lasry & Bruce Richards.


Embedded below is the video of Chanos' interview from the Bloomberg Markets 50 Summit:



For more coverage of the various conferences lately, head to:

- Notes from the Value Investing Congress (Ubben, Roepers, McGuire & more)

- Notes from the Alpha Hedge West Conference (Bass, Burbank, Richards & more)

Coatue's Philippe Laffont on Investing & Career Advice: Interview

Philippe Laffont, founder of hedge fund firm Coatue Management, recently sat down with OneWire to give an interview on investing, his career, how he got started, and advice for others.


Laffont on Investing

On how to think as an investor: "For us, the key to investing is thinking: how can a company perform 3 to 5 years out?  Not to focus so much on the short term, try to see the forest from the trees, think about the long term.  Few people in the market think about the long term, and that's our edge.  It's patience and long term thinking."


On going long:  "The long side is hard because you're trying to project what can happen 5 years out and then come back.  It so happens, it's much easier to disprove things."


On short selling:  "If there's enough red flags, sooner or later it's like a sand castle, there's too many bad pillars.  Sooner or later, the castle crumbles.  The short side is more about pattern recognition and seeing odd things.  If there's enough odd things, that leads you to believe the company is wrong.  There's a second type of short, which is opposite of your long, which is: if Google does well, the Yellow Pages are probably not going to do well.  If Apple does well, that's probably not great for Nokia/RIM.  So that's the sort of thesis/anti-thesis winner vs loser. There's a whole big other group of shorts that are like strange anomalies that you have to pick."


On Coatue's beginnings:  "We started with $50 million in 1999.  In our first few years, the Nasdaq was down 80%.  In your professional life, more than once, you're going to come across something that goes absolutely the opposite way of what you were hoping."


On how he started as an investor:  ""We (he and his brother) started buying tech stocks in the 90's, blue chip's like Microsoft, Intel, stuff we knew (like Peter Lynch's approach).  We confused luck with skill.  But nevertheless, it gave us the passion.  If the market had gone down in those three years, I would have been doing something else.  The luck is very important."


Laffont's Career Advice

His advice: "The career advice I would have for people, is you need to do two things when you graduate. You need to do them both passionately. You need to do one thing passionately that is the obvious thing that you are supposed to do after you graduate (if you are in business, go to Goldman Sachs or Morgan Stanley).  At the same time you do that, in my mind, you need to do one thing completely off the beaten path, but also passionately.”

If you're seeking an investment career, he strongly advocated going to the big investment banks for 2-3 years in a "competitive" environment because you'll get the training you need, you'll see if you have the passion for it, and you'll learn a lot.

On seizing the moment: "When someone opens a door for you.. and everyone in life will have a few times doors opened... you have to come to that meeting prepared to achieve one thing.  For me, I knew I would speak with (Julian Robertson) for 1 minute, I went right for it (asking for a job)."


For more on Coatue's founder, we posted up Laffont's most recent media appearance on technology trends.

Embedded below are the videos of Laffont's OneWire interview, h/t to ValueWalk:

Video 1




Video 2



For other rare interviews with 'Tiger Cub' hedge fund managers, we also posted up Viking Global's Andreas Halvorsen and his thoughts on investment process.

What We're Reading ~ Hedge Fund Links 6/14/13

No wind in sails of long/short equity [AllAboutAlpha]

Paulson gold fund down 54% this year [FINalternatives]

Why George Soros likes Japan [WealhDaily]

Hedge fund liquidations slow, fees weaken in Q1 [Boston Biz Journal]

Hedge fund marketing: 3 must know rules [ValueWalk]

Rival hedge funds hope to feast on SAC Capital redemptions [Reuters]

Goldman Sachs tops prime brokerage ranking [HFIntelligence]

Demand for alternative assets grows among investors [FT]

Risk, returns & regulation big topics at the EuroHedge summit [HFIntelligence]

Little reason for lack of transparency in hedge funds [FTAdviser]

Charting hedge funds' long term gains [WSJ]

Sony holdings blurred by Third Point swaps [Bloomberg]

Analyzing Dan Loeb's stock picks [Old School Value]

Institutions take divergent paths in revamping hedge fund portfolios [P&I]

Fund of hedge funds fight for survival [FT]

TiVo bump shows how hedge fund lawyers gain edge in court [Bloomberg]

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]

Ken Heebner's Interview on Consuelo Mack's WealthTrack

Ken Heebner is the founder of Capital Growth Management and he manages the CGM Focus Fund, among other actively managed mutual funds.  He has put up big numbers some years, but he also was hit big during the financial crisis.  However, his long-term numbers beat the market (10 year and 15 year performance) and put him in the top 1% of his peers.

He sat down with Consuelo Mack on WealthTrack and talked about the themes he's seeing these days and how he's playing them:


Resurgence In Housing = Big Theme

Heebner's big theme in the US is housing.  He says, "I think it's the single most important factor causing economic activity and the stock market to surprise on the upside."

He notes that after a large drawdown in prices during the financial crisis, housing starts declined as homebuilders cut back.  As such, demand has grown while supply was largely stagnant.  As such, supply needs to catch up with demand and home prices can head higher until supply catches up.

As a result of this, Heebner also sees consumer confidence rising due to improved personal balance sheets which can obviously translate into increased consumer spending.

However, he doesn't necessarily think homebuilder stocks offer the best value as they're well off their lows and the general perception is more favorable for the industry nowadays.  The time to really load up on shares was when the majority of people were pessimistic.


His Outlook For Banks

Other themes he's tracking include industry consolidation and corporate profit margins.

He points out that 5 major banks have almost 50% of deposits and this consolidation hasn't been seen in quite some time.  Additionally, Heebner highlights the low P/E ratios many banks trade it.  He also feels that business opportunities for banks are presenting themselves and they should have some solid pricing power.

In particular, he highlights Morgan Stanley (MS) and Goldman Sachs (GS), noting that they can see P/E multiple expansion and that half of the earnings from MS come from wealth management.  He also points out the negative sentiment surrounding MS in particular.  We've highlighted Dan Loeb and Third Point's pitch on Morgan Stanley as well.

Of the industry, Heebner says, ""I look for situations where I think the fundamentals are a lot better than everyone else thinks they are.  I wish there were more of them.  I'd say the big investment banks are in that category today."


On Running a Concentrated Portfolio & Cutting Losses Quickly

Heebner likes to focus on companies where the risk/reward is very skewed in his favor.  While there's a lot of companies he looks at possibly owning, he says he wants to place the most capital on the companies he feels best about.  He asks, "Why hold the ones that aren't as good?  The side effect is volatility that exceeds everyone else's portfolio."

A lot has been made of Heebner's high turnover.  This, he says, is partly due to the fact that he likes to cut losses quickly.  Many great investors over time have highlighted the importance of managing losses.


Embedded below is the video of Ken Heebner's interview with Consuelo Mack on WealthTrack:

What We're Reading ~ Analytical Links 4/10/13

Choosing simplicity as a default [Abnormal Returns]

Goldman Sachs on slipping into a slowdown [Business Insider]

On sustainable competitive advantages & profitability [Deloitte]

Finding alpha in short interest data [Thomson Reuters]

Lumber prices near housing bubble high [Calculated Risk]

Do you think you might be trying too hard? [Greenbackd]

An interesting presentation on floats and moats [Fundoo Professor]

The supply and demand of alpha is not static [Abnormal Returns]

Comparing returns between property and collectibles [FT]

Shodan: the scariest search engine on the internet [CNN Money]

A low growth world can also mean high profits [NYTimes]

Single family homes built for rent market [Eye on Housing]

College, Inc. [PBS Frontline]

Daniel Kahneman on the danger in trusting your gut [Forbes]

Carrefour (EPA:CA): up the right aisle [The Economist]

Holy buybacks Batman ~ DirecTV (DTV) [Fool]

How entrepreneurs really succeed [Malcom Gladwell]

Mark Cuban on lessons learned about leadership [Forbes]

The best undergraduate business schools for finance [Business Week]

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:

What We're Reading ~ Hedge Fund Links 3/1/13

Lessons from Hedge Fund Market Wizards: Steve Clark [Finance Trends]

Einhorn's Greenlight Re conference call transcript [Santangel's Review]

Looking for alpha? Try women hedge fund managers [Yield of Dreams]

Harbor Investment Conference: picks from McGuire, Ackman & more [HFIntelligence]

Tale of Loeb & Ackman's bike ride [Vanity Fair]

Outlook from Oaktree's Howard Marks [Outlook India]

Loeb sells part of long position in Herbalife (HLF) [CNBC]

Is RenTec falling off the mark? [II]

Tudor said to plan first equity funds since Pallotta left [Bloomberg]

Goldman Sachs: hedgies most bullish on stocks since 2007 [WSJ]

Gross, Dalio, Gundlach... Minerd? [aiCIO]

Deutsche Bank says new hedge fund deposits to triple [Bloomberg]

Hedge funds seen behind likely VIX short squeeze [Hedgeworld]

Ex-Soros CIO courting capital for new fund [Reuters]

ValueAct supports sale of Gardner Denver (GDI) [Reuters]

J.C. Penney's (JCP) poor showing is another retail miss for Ackman [NYTimes]

Ken Heebner bets 21% of his fund against Treasuries [Bloomberg]

Hedge funds grow nervous after credit rally [Reuters]

Pinterest valued at $2.5 billion following investment from Valiant Capital [Bloomberg]

What We're Reading ~ 12/5/12

Notes from the the Bloomberg Hedge Fund Summit [Reformed Broker]

More coverage from the summit [ValueWalk]

Goldman Sachs top 10 market themes for 2013 [ZeroHedge]

The confusion between volatility and risk [Jack Schwager]

Einhorn ramps up net long exposure [Institutional Investor]

The bullish case for gold [Sober Look]

John Paulson said to blame bet against Europe for most of loss [Bloomberg]

Aggregation of talks from the UVA Investment Conference [Santangel's Review]

Pondering fixed income in 2013 [Economic Musings]

Interview with Warren Buffett & Carol Loomis [Charlie Rose]

Xerox may be the next big writedown disaster [TheHour]

Pershing Square investors to convert into permanent capital vehicle [Reuters]

Kleinheinz Capital & Corriente return client money [Bloomberg]

In-depth look at DoubleLine's Jeff Gundlach [Bloomberg]

A holiday book giveaway [Abnormal Returns]

Nominees for the 2012 Absolute Return hedge fund awards [HF Intelligence]

Lunch with Warren Buffett [New Yorker]

Gene Munster's Apple presentation at Ignition [Business Insider]

Why Ruane Cunniff & Weitz Funds Like Valeant Pharmaceuticals (VRX)

We've seen past commentary from multiple managers on shares of Valeant Pharmaceuticals (VRX) and thought it was worth highlighting given that numerous respected managers own it.

Hedge Fund Activity

As of the end of the second quarter, prominent institutional owners of VRX include (in descending order): Ruane Cunniff, Jeff Ubben's ValueAct, Andreas Halvorsen's Viking Global, Glenn Greenberg's Brave Warrior, Lee Ainslie's Maverick Capital, and many more.  In the past, VRX has also made Goldman Sachs' VIP list of most important stocks to hedge funds.

Weitz Funds Commentary

While this perspective on Valeant is from June 30th, it still gives a good background of the story/thesis.

Weitz Funds' Portfolio Manager David Perkins, CFA penned the following note on VRX embedded below:





Ruane, Cunniff & Goldfarb Commentary

The well known manager of the Sequoia Fund holds quite a large position in VRX that has appreciated in value over time.  It initially started as a 6% position and has grown to a 10% position in the main fund.  They were the largest institutional owner of VRX as of the end of Q2.

They addressed their stake during their investor day back in May of this year.  Again, while dated, the comments still outline their rationale for owning shares:

"The reason that we still like Valeant is the reason we liked it in the first place. It is a pharmaceutical company that does not really function like a traditional pharmaceutical company. By that I mean most pharma companies, if you look at how much they spend on research and development might spend 10%, 15% or in the high teens as a percentage of sales on research and development. Last year Valeant did about $2.3 billion in sales and it spent $66 million on R&D, which is about 3% of sales. So instead of spending money on R&D, it spends money acquiring whole companies and/or products and other assets. And what it does is restructure those assets. So we think of it as a value investor in other companies or in the assets of other companies which are available for purchase.

The reason that Valeant can do that is that it has a good team at the top led by Mike Pearson, who has been an extraordinary and very aggressive manager. The types of returns that Valeant can generate by acquiring another company and cutting costs can be in the 15% to 20% range. Just to give you an idea of that, when Valeant merged with Biovail, Biovail was doing a billion dollars in sales, and management cut out — the year-end synergy target this year is $300 million to $350 million. Valeant is eliminating costs that represent 35% of sales. Because of the company’s tax structure, it pays taxes at very low rates. So a lot of that $350 million is going to flow through to the bottom line. You can generate huge returns if you do those kinds of deals. Last year Valeant acquired Ortho Dermatologics, Dermik, Sanitas, PharmaSwiss and a few other companies. In aggregate, these companies added another billion dollars in sales and the synergy target is $250 million. Again, a lot of that is going to fall through to the bottom line. So Valeant is generating really high returns by acquiring other businesses in the pharmaceutical industry.

One of the most attractive things about the company is that it is going to generate $1.3 billion in cash earnings this year and there are not many companies that can retain that amount of money and reinvest it at a rate of return of 15% to 20%, and we could potentially see Valeant doing that for a number of years. You can get a huge amount of growth if you can reinvest that amount of earnings at those rates of return. That is the main reason that we are excited about it."