Tag: buffett

Here is an interview with the man who just paid $650,000 for lunch with Warren Buffett. It was sent to me by the interviewer and can be found at Investorguide.com

July 11, 2007

Interview conducted by Tom Murcko.

It is my privilege to bring you the following interview I recently conducted with value investing superstar Mohnish Pabrai. Mohnish is one of my favorite investors who doesn’t have the initials W.B. His investment style is similar to the low risk, high value style followed by Warren Buffett and myself, and has led his portfolios to perform marvelously since the 1990s.

How successful have his techniques been? I’ll let the numbers speak for themselves: A $100,000 investment in Pabrai Funds at inception (on July 1, 1999) was worth $722,200 on March 31, 2007. That works out to an annualized return of 29.1%, and is after all fees and expenses. Assets under management are over $500 million, up from $1 million at inception. Although a person probably can’t get into the investing hall of fame with eight years of outperformance (even if they crush the indices), Pabrai is already mentioned in most articles about the search for the next Warren Buffett, and justifiably so.

Equally important, he genuinely wants to help others become better investors, and in that spirit has just published his second book, The Dhandho Investor. The book is both illuminating and easy to read, and it deserves to be on every investor’s bookshelf next to Benjamin Graham’s The Intelligent Investor.

I felt extremely fortunate when he recently agreed to answer some questions about his investment strategy in this exclusive interview, conducted by email. I hope you find it useful, and that it inspires you to pick up a copy of his book if you haven’t already.

Happy Investing,
Tom Murcko
CEO, InvestorGuide.com

InvestorGuide: You have compared Pabrai Funds to the original Buffett parternships, and there are obvious similarities: investing only in companies within your circle of competence that have solid management and a competitive moat; knowing the intrinsic value now and having a confident estimate of it over the next few years, and being confident that both of these numbers are at least double the current price; and placing a very small number of very large bets where there is minimal downside risk. Are there any ways in which your approach differs from that of the early Buffett partnerships (or Benjamin Graham’s approach), either because you have found ways to improve upon that strategy or because the investing world has changed since then?

Mohnish Pabrai: The similarity between Pabrai Funds and the Buffett Partnerships that I refer to is related to the structure of the partnerships. I copied Mr. Buffett’s structure as much as I could since it made so much sense. The fact that it created a very enduring and deep moat wasn’t bad either. These structural similarities are the fees (no management fees and 1/4 of the returns over 6% annually with high water marks), the investor base (initially mostly close friends and virtually no institutional participation), minimal discussion of portfolio holdings, annual redemptions and the promotion of looking at long term results etc. Of course, there is similarity in investment style, but as Charlie Munger says, “All intelligent investing is value investing.”

My thoughts on this front are covered in more detail in Chapter 14 of The Dhandho Investor.

Regarding the investment style, Mr. Buffett is forced today to mostly be a buy and hold forever investor today due to size and corporate structure. Buying at 50 cents and selling at a dollar is likely to generate better returns than buy and hold forever. I believe both Mr. Munger and he would follow this modus operandi if they were working with a much smaller pool of capital. In his personal portfolio, even today, Mr. Buffett is not a buy and hold forever investor.

In the early days Mr. Buffett (and Benjamin Graham) focused on buying a fair business at a cheap price. Later, with Mr. Munger’s influence, he changed to buying good businesses at a fair price. At Pabrai Funds, the ideal scenario is to buy a good business at a cheap price. That’s very hard to always do. If we can’t find enough of those, we go to buying fair businesses at cheap prices. So it has more similarity to the Buffett of the 1960s than the Buffett of 1990s. BTW, even the present day Buffett buys fair businesses at cheap prices for his personal portfolio.

Value investing is pretty straight-forward – you try to get $1 worth of assets for much less than $1. There is no way to improve on that basic truth. It’s timeless.

InvestorGuide: Another possible difference between your style and Buffett’s relates to the importance of moats. Your book does emphasize investing in companies that have strategic advantages which will enable them to achieve long-term profitability in the face of competition. But are moats less important if you’re only expecting to hold a position for a couple years? Can you see the future clearly enough that you can identify a company whose moat may be under attack in 5 or 10 years, but be confident that that “Mr. Market” will not perceive that threat within the next few years? And how much do moats matter when you’re investing in special situations? Would you pass on a special situation if it met all the other criteria on your checklist but didn’t have a moat?

Pabrai: Moats are critically important. They are usually critical to the ability to generate future cash flows. Even if one invests with a time horizon of 2-3 years, the moat is quite important. The value of the business after 2-3 years is a function of the future cash it is expected to generate beyond that point. All I’m trying to do is buy a business for 1/2 (or less) than its intrinsic value 2-3 years out. In some cases intrinsic value grows dramatically over time. That’s ideal. But even if intrinsic value does not change much over time, if you buy at 50 cents and sell at 90 cents in 2-3 years, the return on invested capital is very acceptable.

If you’re buying and holding forever, you need very durable moats (American Express (AXP), Coca Cola (KO), Washington Post etc. (WPO). In that case you must have increasing intrinsic values over time. Regardless of your initial intrinsic value discount, eventually your return will mirror the annualized increase/decrease in intrinsic value.

At Pabrai Funds, I’ve focused on 50+% discounts to intrinsic value. If I can get this in an American Express type business, that is ideal and amazing. But even if I invest in businesses where the moat is not as durable (Tesoro Petroleum (TSO), Level 3, Universal Stainless (USAP)), the results are very acceptable. The key in these cases is large discounts to intrinsic value and not to think of them as buy and hold forever investments.

InvestorGuide: For that part of our readership which isn’t able to invest in Pabrai Funds due to the net worth and minimum investment requirements, to what extent could they utilize your investing strategy themselves? Your approach seems feasible for retail investors, which is why I have been recommending your book to friends, colleagues, and random people I pass on the street. For example, your research primarily relies on freely available information, you aren’t meeting with the company’s management, and you don’t have a team of analysts crunching numbers. To what extent do you think that a person with above-average intelligence who is willing to devote the necessary time would be able to use your approach to outperform the market long-term?

Pabrai: Investing is a peculiar business. The larger one gets, the worse one is likely to do. So this is a field where the individual investor has a huge leg up on the professionals and large investors. So, not only can The Dhandho Investor approach be applied by small investors, they are likely to get much better results from its application than I can get or multi-billion dollar funds can get. Temperament and passion are the key.

InvestorGuide: You founded, ran, and sold a very successful business prior to starting Pabrai Funds. Has that experience contributed to your investment success? Since that company was in the tech sector but you rarely buy tech stocks (apparently due to the rarity of moats in that sector), the benefits you may have derived seemingly aren’t related to an expansion of your circle of competence. But has learning what it takes to run one specific business helped you become a better investor in all kinds of businesses, and if so, how? And have you learned anything as an investor that would make you a better CEO if you ever decide to start another company?

Pabrai: Buffett has a quote that goes something like: “Can you really explain to a fish what it’s like to walk on land? One day on land is worth a thousand years of talking about it, and one day running a business has exactly the same kind of value.” And of course he’s said many times that he’s a better investor because he’s a businessman and he’s a better businessman because he is an investor. My experience as an entrepreneur has been very fundamental to being any good at investing.

My dad was a quintessential entrepreneur. Over a 40-year period, he had started, grown, sold and liquidated a number of diverse businesses – everything from making a motion picture, setting up a radio station, manufacturing high end speakers, jewelry manufacturing, interior design, handyman services, real estate brokerage, insurance agency, selling magic kits by mail – the list is endless. The common theme across all his ventures was that they were all started with virtually no capital. Some got up to over 100 employees. His downfall was that he was very aggressive with growth plans and the businesses were severely undercapitalized and over-leveraged.

After my brother and I became teenagers, we served as his de facto board of directors. I remember many a meeting with him where we’d try to figure out how to juggle the very tight cash to keep the business going. And once I was 16, I’d go on sales calls with him or we’d run the business while he was traveling. I feel like I got my Harvard MBA even before I finished high school. I did not realize it then, but the experience of watching these businesses with a front-row seat during my teen years was extremely educational. It gave me the confidence to start my first business. And if I have an ability to get to the essence of a subset of businesses today, it is because of that experience.

TransTech was an IT Services/System Integration business. We provided consulting services, but did not develop any products etc. So it wasn’t a tech-heavy business. While having a Computer Engineering degree and experience was useful, it wasn’t critical. TransTech taught me a lot about business and that experience is invaluable in running Pabrai Funds. Investing in technology is easy to pass on because it is a Buffett edict not to invest in rapidly changing industries. Change is the enemy of the investor.

Being an investor is vastly easier than being a CEO. I’ve made the no-brainer decision to take the easy road! I do run a business even today. There are operating business elements of running a fund that resemble running a small business. But if I were to go back to running a business with dozens of employees, I think I’d be better at it than I was before the investing experience. Both investing and running a business are two sides of the same coin. They are joined at the hip and having experience doing both is fundamental to being a good investor. There are many successful investors who have never run a business before. My hat’s off to them. – For me, without the business experiences as a teenager and the experience running TransTech, I think I’d have been a below average investor. I don’t fully understand how they do it.

InvestorGuide: Is your investment strategy the best one for you, or the best one for many/most/all investors? Who should or shouldn’t consider using your approach, and what does that decision depend on (time commitment, natural talent, analytical ability, business savvy, personality, etc)?

Pabrai: As I mentioned earlier, Charlie Munger says all intelligent investing is value investing. The term value investing is redundant. There is just one way to invest – buy assets for less than they are worth and sell them at full price. It is not “my approach.” I lifted it from Graham, Munger and Buffett. Beyond that, one should stick to one’s circle competence, read a lot and be very patient.

InvestorGuide: Some investment strategies stop working as soon as they become sufficiently popular. Do you think this would happen if everyone who reads The Dhandho Investor starts following your strategy? As I’ve monitored successful value investors I have noticed the same stocks appearing in their various portfolios surprisingly often. (As just one example, you beat Buffett to the convertible bonds of Level 3 Communications (LVLT)back in 2002, which I don’t think was merely a coincidence.) If thousands of people start following your approach (using the same types of screens to identify promising candidates and then using the same types of filters to whittle down the list), might they end up with just slightly different subsets of the same couple dozen stocks? If so, that could quickly drive up the prices of those companies (especially on small caps, which seem to be your sweet spot) and eliminate the opportunities almost as soon as they arise. Looked at another way, your portfolio typically has about ten companies, which presumably you consider the ten best investments; if you weren’t able to invest in those companies, are there another 10 (or 20, or 50) that you like almost as much?

Pabrai: As long as humans vacillate between fear and greed, there will be mispriced assets. Some will be priced too low and some will be priced too high. Mr. Buffett has been talking up the virtues of value investing for 50+ years and it has made very few folks adopt that approach. So if the #2 guy on the Forbes 400 has openly shared his secret sauce of how he got there for all these decades and his approach is still the exception in the industry, I don’t believe I’ll have any effect whatsoever.

Take the example of Petrochina. The stock went up some 8% after Buffett’s stake was disclosed. One could have easily bought boat loads of Petrochina stock at that 8% premium to Buffett’s last known buys. Well, since then Petrochina is up some eight-fold – excluding some very significant dividends. The entire planet could have done that trade. Yet very very few did. I read a study a few years back where some university professor had documented returns one would have made owning what Buffett did – buying and selling right after his trades were public knowledge. One would have trounced the S&P 500 just doing that. I don’t know of any investors who religiously follow that compelling approach.

So, I’m not too concerned about value investing suddenly becoming hard to practice because there is one more book on a subject where scores of excellent books have already been written.

InvestorGuide: You have said that investors in Pabrai Funds shouldn’t expect that your future performance will approach your past performance, and that it’s more likely that you’ll outperform the indices by a much smaller margin. Do you say this out of humility and a desire to underpromise and overdeliver, or is it based on market conditions (e.g. thinking that stocks in general are expensive now or that the market is more efficient now and there are fewer screaming bargains)? To argue the other side, I can think of at least two factors that might give your investors reason for optimism rather than pessimism: first, your growing circle of competence, which presumably is making you a better investor with each passing year; and second, your growing network of CEOs and entrepreneurs who can quickly give you firsthand information about the real state of a specific industry.

Pabrai: Future performance of Pabrai Funds is a function of future investments. I have no idea what these future investment ideas would be and thus one has to be cognizant of this reality. It would be foolhardy to set expectations based on the past. We do need to set some benchmarks and goals to be measured against. If a fund beats the Dow, S&P and Nasdaq by a small percentage over the long-haul they are likely to be in the very top echelons of money managers. So, while they may appear modest relative to the past, they are not easy goals for active managers to achieve.

The goals are independent of market conditions today versus the past. While circle of competence and knowledge does (hopefully) grow over time, it is hard to quantify that benefit in the context of our performance goals.

InvestorGuide: Finally, what advice do you have for anyone just getting started in investing, who dreams of replicating your performance? What should be on their “to do” list?

Pabrai: I started with studying Buffett. Then I added Munger, Templeton, Ruane, Whitman, Cates/Hawkins, Berkowitz etc. Best to study the philosophy of the various master value investors and their various specific investments. Then apply that approach with your own money and investment ideas and go from there.

ValuePlays contributor Joe Ponzio takes look into a business that Wall Street rates a “Hold” – American Eagle Outfitters (AEO).

“Shop ae.com for men’s and women’s clothes, shoes, and more.” That’s what their website says. Sounds like a pretty simple business to me – American Eagle Outfitters (AEO) sells clothes, and for roughly $25 a share, you could be in the clothing business as well.

Wall Street doesn’t want you selling clothes. The consensus on AEO is that you should not buy or sell, rather hold (and probably put the rest of your money into their mutual funds).

The Past Ten Years
Over the past ten years, AEO has grown its shareholder equity from $91 million to $1.4 billion – a median rate of 31.6% when you look at various time frames. In addition, it has grown its free cash flow at a median rate of 35.4%. If you look at it from a personal finances standpoint, that is like you doubling your net worth every 2 1/2 years and increasing your monthly savings by 35.4% a year for ten years.

Hey, you’d be rich too.

Management And Money
The company carries almost no long-term debt which is much better than if it were swimming in debt and being choked by interest payments. In addition, it has generated nearly $0.18 a year for every dollar it has invested in the company. Last I checked, business interest rates were not at 18% so AEO is doing a great job of using its (very little) debt to generate additional cash.

What You Are Buying
If you were to buy AEO today, you’d be buying your fair share of its net worth and the future cash it can generate. If the future is anything like the past, an investment in AEO makes a lot of sense…if it can be done at a “fair” or “bargain” price. Assuming it is business as usual at AEO, it is already trading at a bargain price. If AEO plugged along at the rate it has for the past ten years, then slowed to 5% growth for the next ten years, the company is worth about $149 a share. Even with a 50% Margin of Safety, AEO is anything but a “hold”.

What If It’s Not Business As Usual?
Ahhh, the quandary of analyzing a smaller, rapidly growing business. What if AEO can’t sustain its 35.4% growth in free cash flow? Should you be penalized and lose money if management or the company stumbles a bit? Besides, it is impractical to think that any company can grow its cash generation abilities at 35.4% forever.

Let’s say AEO does slow down a bit. In fact, let’s say the next ten years are only half as good as the past ten years. Let’s also say that years 11-20 slow to 5% again. Now what’s the value of AEO? To earn 15% or more on an average annual basis, today’s value of AEO would be about $52.61 a share. With a 50% Margin of Safety – a smart move when buying a smaller, rapidly growing company – AEO becomes attractive at $26.31 a share.

The Buffett-esque Result?
Simple business. Undervalued by more than 50%, assuming much slower growth. Generates a ton of cash without using a lot of capital to do so? What do you think?

So, Will Buffett Buy It?
That’s a different story. AEO only trades about 1.2 million shares a day. For Buffett to “sneak” in, he’d only be able to buy 1% of that, or roughly 12,000 shares every day. Over the course of sixty trading days – the amount of time he has to sneak into a position before he reports it to the SEC…and the rest of the world – he’d only be able to acquire about 720,000 shares, or $18 million worth. An $18 million investment is barely worth his time, considering the size of Berkshire Hathaway.

So no, I don’t expect to see AEO in Berkshire’s swelling portfolio any time soon.

Joe Ponzio blogs at F Wall Street. He owns a piece of AEO’s business, directly or indirectly.

Here is a post that was emailed to me about Buffett and Johnson & Johnson (JNJ). It is well worth the read. Here is the first paragraph:

“As of March 31, 2007, Warren Buffett’s company, Berkshire Hathaway (BRK.A), reportedly increased its holding in Johnson & Johnson (JNJ) to 48.7 million shares-an increase of 24 million shares in three months. And it’s no surprise. Forget Wall Street’s earnings, JNJ knows how to generate cash!

Buffett tells us we should look at 4- and 5-year histories to judge the performance of a company and that we should look primarily at the intrinsic value of a company and pay a fair or bargain price. Let’s follow the lead of this investing genius:”

You can read the wholepost here.

This is a great letter from Martin Whitman on avoiding investment risk. It is long and well worth the read.

AVOIDING INVESTMENT RISK

During the quarter, I read an interesting book, The Great Risk Shift, by Jacob S. Hacker, a Political Science Professor at Yale University. The gravamen of the book is that in recent years – the George Bush years – various risks, i.e., job risk, family stability risk, retirement risk and healthcare risk, have been shifted increasingly from corporations and governments onto the backs of individuals. The raison d’etre for The Great Risk Shift is to foster the creation of an ownership society where the beneficiaries of say, pension plans and health plans, take the risks that go with ownership by being responsible for investing funds with no guarantees of minimum returns.

What the proponents of this type of ownership risk fail to recognize is that the most successful owners do not take risks. They lay off the risks onto someone else. Professor Hacker’s thesis got me to thinking about investment risk in the financial community and in American business in general. Put simply, the vast majority of great individual fortunes built in this country, especially by Wall Streeters and corporate executives, were not built by people who took investment risks. Rather, the secret to building a great fortune is to avoid, as completely as possible, the taking of any investment risk. Investment risk consists of factors peculiar to a business itself, or the securities issued by that business. Investment risk is a risk separate and apart from market risk. Market risk involves fluctuations in the prices of securities and other readily tradable assets.

A directory of those in the financial community who build great fortunes by avoiding risk include the following:

• Corporate executives who receive stock options or restricted stock. If the common stock appreciates, the executive builds a substantial net worth. If the common stock does not appreciate, the executive loses nothing. Indeed, he may obtain new options at the lower strike price, or new restricted common stock.

• Members of the Plaintiffs’ Bar who bring class action lawsuits in order to earn contingency fees. The expenses involved in financing such lawsuits are minimal, and it is remote that Plaintiffs’ attorneys ever incur costs for sanctions or for paying defendant’s costs and fees. The fee awards obtained tend to be huge upon settlement of such lawsuits, or less frequently, obtaining a favorable verdict for the plaintiffs after trial.

• Initial Public Offering (“IPO”) underwriters and sales personnel. If you run a promising private company and desire to go public, you will find that many potential underwriters will compete for your business. However, as a general rule they will not compete on price. The price will be a 7% gross spread plus expenses. Thus, on a $10 IPO, the gross spread will be $0.70 per share. In contrast, to buy a $10 stock in a secondary market like the New York Stock Exchange, a customer can negotiate a commission rate of, say, $0.02 to $0.05 per share.

• Bankruptcy Professionals; Lawyers and Investment Bankers. Chapter 11 is now set up so that bankruptcy professionals have to be paid in cash, on a pay as you go basis (with only minor holdbacks), where such payments are given a super priority so that these professionals very rarely have any credit risk at all. Attorneys’ fees billed at up to $900 per hour, and investment banking fees of over $300,000 per month (plus success fees) are not uncommon.

• Money Managers, Mutual Fund Managers, Private Equity and Hedge Fund Managers. Normal fees might range from 1% of Assets Under Management (“AUM”) to 2% of AUM plus 20% of annual realized or unrealized capital gains (after a bogey, of say 6%, paid or accrued to limited partners). These fees are paid to entities which receive the cash fees without incurring any credit risk in business entities which have few physical assets and very little necessary overhead. Most hedge funds are Limited Partnerships (“LPs”) where the money manager is the General Partner (“GP”) and Outside Passive Minority Investors (“OPMIs”) are the LPs. An LP has been waggishly described as a business association where at the beginning the GP brings experience and the LPs bring money. At the end of the business association, the GP has the money and the LP has the experience.

• Venture Capitalists. These people finance a portfolio of start-ups, and then are able to realize astronomic prices on some of the portfolio companies when they occur, as they always seem to do from time to time, IPO speculative booms.

• Real Estate Entrepreneurs, especially investment builders. Two keys to making fortunes in large scale real estate projects are the availability of long-term, fixed interest rates, non-recourse financing, and income tax shelters. In terms of understanding corporate finance, economists have it all wrong when they say “there is no free lunch”. Rather, the more appropriate comment ought to be “somebody has to pay for lunch – and it isn’t going to be me.” Third Avenue is basically an OPMI. As such, it seems impossible to avoid investment risk. The methods by which TAVF attempts to alleviate investment risk are described in the remainder of this letter.

1. Buy Cheap. Warren Buffett, the Chairman of Berkshire Hathaway (BRK.A), describes his investment technique as trying to buy good companies at reasonable prices. Warren, however, is a control investor, and while a reasonable price standard has worked remarkably well for Berkshire Hathaway, that standard is not good enough for TAVF, an OPMI. The Fund has to try to buy at bargain prices, i.e., cheap. The definition of “cheap” for TAVF in acquiring common stocks in the vast majority of cases is acquiring issues at prices that reflect substantial discounts from readily ascertainable NAVs. Further, the Fund acquires such NAV common stocks only when Fund management believes that the prospects are reasonable that over the long term such NAVs will increase by not less than 10% per year compounded.

Common stock holdings which met these standards when acquired by the Fund include Toyota Industries (TM), Forest City Enterprises (FCE-A), Brookfield Asset Management (BAM), Cheung Kong Holdings, Posco and Wheelock. I doubt very much if those discount prices would have existed if any of those issues were likely to be subject to a change of control. That type of cheapness is one of the advantages of being an OPMI. Readily ascertainable NAVs means that the Third Avenue common stock portfolio is, to a large extent, concentrated in financial institutions and companies involved with income-producing real estate. Third Avenue’s portfolio contains almost no common stocks of companies engaged in old-line manufacturing.

Control investors can afford to pay up versus TAVF because control investors are in a position to undertake financial engineering, and to cause management changes. Third Avenue leaves companies as-is, and places particular efforts into buying into well-managed businesses with stable, but clearly superior, managements. This seems to have been achieved in establishing relatively large positions in the companies mentioned in the previous paragraph, as well as in acquiring large positions in Nabors Industries (NBR), Power Corp., St. Joe (JOE) and Mellon Financial. “In terms of understanding corporate finance, economists have it all wrong when they say ‘there is no free lunch’. Rather, the more appropriate comment ought to be ‘somebody has to pay for lunch – and it isn’t going to be me.’”

2. Buy Equity Interests Only in High Quality Businesses. The Fund does not knowingly acquire the common stock of any company unless that company enjoys a super strong financial position. TAVF tries to buy into reasonably well-managed companies. Fund management appreciates the fact that any relationship between al statements. OPMIs and corporate managements combine communities of interests and conflicts of interest; Third Avenue Management tries to restrict itself to situations where the communities of interest seem to outweigh the conflicts of interest. Third Avenue restricts its common stock investments to companies whose businesses are understandable to Fund management and where there exists full documentary disclosure, including audited financing

3. TAVF tries to operate on a low cost basis for its shareholders. The fiscal 2006 expense ratio was 1.08%. Third Avenue has no 12-b(1) charges, is a no-load fund and imposes no redemption fees on long-term shareholders. Since portfolio turnover is low, transaction, i.e., trading, costs, too, are low.

4. The Fund ignores market risk. Fluctuations in market prices are mostly a random walk with changes in market prices not in any way a measure of long-term investment risk, or investment potential. It is as Ben Graham used to say, “In the short run the market is a voting machine. In the long run the market is a weighing machine.” Most competent control investors, again like Warren Buffett, pretty much ignore market risk also in that little, or no, weight is given to daily, or even annual, marks to market for portfolio holdings.

5. Buy growth, but don’t pay for it. In the financial community, growth is a misused word. Most market participants don’t mean growth, but rather, mean generally recognized growth. In so far as growth receives general recognition, a market participant has to pay up. To my mind, Cheung Kong Holdings, Forest City Enterprises, Covanta and Toyota Industries are growth companies. When the common stocks were acquired, none of these issues enjoyed general recognition as having growth potential.

6. TAVF is a buy-and-hold investor. Although our entry point into a common stock is a bargain price, the Fund will continue to hold a security where Fund management believes that the business has reasonable prospects that it can, over the long run, increase annual NAV by a double digit number; and where Fund management does not
believe it made a mistake. Mistakes are measured by beliefs that there has occurred a permanent impairment in underlying value or financial position. The Fund will also sell if there is a belief that the security is grossly overpriced. Finally, the Fund will sell for portfolio considerations; i.e., where there are massive enough redemptions of Fund shares so that the liquidity of the Fund is threatened. As one can see by our sales activity during the quarter, most of our sales occur when a company is taken over.

7. The Fund does not borrow money and, thus, invests without financial leverage. Furthermore, the TAVF portfolio has a cash cushion. Usually 10% to 20% of Fund assets are in cash or credit instruments without credit risk. Obviously, an investment by you in TAVF does entail investment risk. Fund management, however, is doing the best it can to try to minimize investment risk. Toward this end, and as our business continues to grow, we thought it would be prudent to charge a senior member of our investment team with the responsibility of preserving the integrity of our research process. I am pleased to inform you that portfolio manager, Yang Lie, has been named Director of Research for Third Avenue Management. Yang has been with Third Avenue more than ten years, as both an analyst and portfolio manager, and is extremely well qualified to assist Curtis Jensen and me, as co-Chief Investment Officers, in leading the team. Research has always been at the core of what we do here at Third Avenue. Each of the 21 members of our research team is an analyst first and foremost, whether or not he or she also manages portfolios. In this new role, Yang will add structure to the organization, enabling us to manage the assets you have entrusted to us even more effectively.

I will write to you again when the report for the period to end July 31, 2007 is published.

Marin J. Whitman

Every since my Berkshire (BRK.A) post last month, I have been seeing posts pop up around the internet about it. Most are incredulous that I could possibly for a second doubt Mr. Buffett. To a person their replies recite his track record despite my saying in my opening “No one will will argue or dispute his past success and what he has done for shareholders. Nor will anyone attempt to belittle the atmosphere and honesty in which he runs the organization and the culture he created.” Yet all the replies documented a history I praised. Odd. Yet almost none addressed the actual substance of my post and when they did, they unknowingly reinforced my thesis.

After almost a month of begging those who commented and emailed to give me a rebuttal, only Andy Kern at Berkshire Ruminations took me up on my offer and I thought did an excellent job. I disagree with him, but he did an excellent job none the less. Most folks chose to hide behind a car and throw snowballs. OK.

Let’s address one of those today. I tried to do it on their site but it seems they do not allow comments (at least I could not see where to place one) so it seems to be a bit of a soapbox rather than a blog (at least as I know them). I will preprint the entire post here: Title: Fear vs. Greed in Berkshire Hathaway Their comments are italicized

Every few years someone has the myopic hubris to write an article bashing Buffett’s capital allocation ability and that’s usually a decent sign that there’s a good deal of irrationality in the air:

From ValuePlays: “In the past Buffett has said, “Wait for a fat pitch and then swing for the fences.” Why isn’t he doing that? Considering the investment possibilities Berkshire has, his recent investing record is one of bunts, not big swings. He has also said in the past “if you would not buy the whole company, why would you buy a single share”? Using his own logic, I have to ask, “Warren, if you are going to invest $160 million in Home Depot, why not $1 billion?” The theory still holds, if you would not buy 100 shares why buy one share and if you would buy one share, why not a hundred of them? An investment of less than 1% of his available cash is not “swinging for the fences.”

Why isn’t he swinging for the fences, Mr. Sullivan? Maybe…because he’s actually waiting for a fat pitch before swinging!

The full context of Mr. Buffett’s “fat pitch” analogy, excerpted from the November 1, 1974 Forbes interview is particularly interesting:

“I call investing the greatest business in the world,” he says, “because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”

But pity the pros at the investment institutions. They’re the victims of impossible “performance” measurements. Says Buffett, continuing his baseball imagery, “It’s like Babe Ruth at bat with 50,000 fans and the club owner yelling, ‘Swing, you bum!’ and some guy is trying to pitch him an intentional walk. They know if they don’t take a swing at the next pitch, the guy will say, ‘Turn in your uniform.'” Buffett claims he set up his partnership to avoid these pressures.

Mr. Sullivan, respectfully, it looks like you’re the owner Mr. Buffett predicted a few decades ago would be saying “Turn in your uniform.”

Posted by Shai Dardashti at 12:01 PM

Now, Mr. Dardashti unwittingly proved my very point. No, I would not be the owner saying “turn in your uniform”. I would be the owner saying “Warren, if you are going to swing, swing for the fences!”

Far from “bashing Mr. Buffett’s capital allocation” I instead begged him to return to the very style that he has trumpeted and made shareholders unbelievably wealthy.

Let’s take his “waiting for a fat pitch” comment. If this is so, then how do we explain his recent investments in Wal-Mart (WMT), Sanofi-Aventis (SNY), Johnson & Johnson (JNJ) and Anheuser Busch (BUD) and Target (TGT)? There are more but this will suffice as he buys and sell securities in Berkshire’s portfolio regularly now so is is not like he cannot “find value” out there. None of them made a dent in Berkshire’s cash position or were substantial investments in the numbers of shares outstanding in any of the companies. All these are recent purchases (last few years), yet none of them follow the tenants both Buffett and Mr. Dardashti espouse above.

I will reiterate Buffett, “If you would not buy the whole company, why would you buy a single share?” It is clear Buffett sees or saw value in these companies when he bought shares. As a value investor, that is the reason he acts. If that is so, then these had to have been “fat pitches” or he would not have bought them, correct? According to his own words, that is the only reason to “swing”, when you get a fat pitch. Now if they were fat pitches, why didn’t he “swing for the fences”? Why? It is not a function of the number of shares available to buy as these all trade millions of shares a day. It is not a function of him running up against company induced limits like he did with his huge purchases of Coke (KO) and American Express (AXP) which make up over 30% of Berkshire’s portfolio. It is just a function of him taking “half swings” at shares. This was my complaint in my original post. Why not buy 5% or 10% of WalMart? That would have been a move from the Buffet of old and he easily could have done it.

Maybe these were not “fat pitches”? Well then why would be buy them? That is the antithesis of everything he has ever said!!

Currently Berkshire holds almost 40 positions in publicly traded companies and it’s main holdings have essentially been that way for almost 2 decades now and most new positions, despite the ability to purchase far more almost always amount to less than a 3% of Berkshire’s portfolio, again, a BUNT. I am not saying to sell the core holdings, for tax reason alone that would be a unwise move, I am saying “if you are going to swing, swing for the fences”. He has the ability but chooses not to.

Both Munger and Buffett have said their favorite holding period “is forever” yet again, recent actions contradict that as positions are trimmed every quarter.

I will conclude by letting Warren make my point. In his own words:

“Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.” Warren Buffett, 1978 Berkshire Hathaway Letter to Shareholders

“…if you know how to value businesses, it’s crazy to own 50 stocks or 40 stocks or 30 stocks, probably because there aren’t that many wonderful businesses understandable to a single human being in all likelihood. To forego buying more of some super-wonderful business and instead put your money into #30 or #35 on your list of attractiveness just strikes Charlie and me as madness.” Warren Buffett’s comments at the 1996 Berkshire Hathaway Annual Meeting

“The strategy we’ve adopted precludes our following standard diversification dogma. Many pundits would therefore say the strategy must be riskier than that employed by more conventional investors. We disagree. We believe that a policy of portfolio concentration may well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying into it. In stating this opinion, we define risk, using dictionary terms, as ‘the possibility of loss or injury.” Warren Buffett, 1993 Berkshire Hathaway Letter to Shareholders

That is the Warren Buffett I invested in and made wonderful amounts of money with. Warren today is contradicting Warren, it is not me saying it, it is him.

Here we go. Is it just me or are the stories here getting better and better?

1- Sell Side Cliches– Market Prognosticator
2- Bestinver’s Paramus: Pitching Tips To Buffett Bloomburg

3- Spinoffs– Forbes

4- Lampert Buying More Sears Shares – ValuePlays

5- SAC Capital Accumulates 5.2% Stake in FreightCar America – Streetinsider style=”text-align: left;”>

You may view the whole list here:

I have receives some requests to not include articles from the MSM (main stream media) and only include those written by bloggers and the like. I go both ways on it as I am partial to bloggers but do recognize any information no matter where it comes from is valuable.

I am open to suggestions

A while back I had a post on my thought that Berkshire Hathaway’s Warren Buffett has not recently been investing like, well, Warren Buffett. There was a time when 40% of Berkshire’s assets were in 1 stock, American Express. Now before you freak I do fully realize that given Berkshire’s size today, that is not possible. My point was, given the bear market we had after 9/11 (bottoming in 2003), Buffett really has not made any meaningful investments given Berkshire’s size. Yes I know $3 billion is a lot of money, but when you have $40 billion to play with, it really isn’t. You would have though I called the Pope a sinner. Many folks replied and I have been begging for a rebuttal, actually an intelligent rebuttal I should say as I do not consider “you a moron” necessarily a rebuttal. Finally I got one:

Andy Kern, over at the aptly named Berkshire Ruminations has posted a two parter, you can read them here. Read them and decide what you think. Andy has a great blog and I am a regular reader of it, I just still disagree with him. I guess one of us will be right and the really nice thing about what we talk about, we will be able to get an answer eventually .

Recently I was interviewed by Geoff Gannon from one of my favorite sites, Gannon on Investing as part of his “20 questions” series. Please visit his site to see other “20 Questions” interviews.

Below is the transcript.

Todd Sullivan is a value investor who writes the ValuePlays blog. ValuePlays is a value investing site focusing on individual stock analysis, investing concepts, and market commentary.

Visit ValuePlays

1. Are you a value investor?

Yes.

2. What is value investing?

Purchasing a piece of a company at a price that is below a reasonable valuation.

3. What is your approach to investing?

Look for the current “red headed step children” and pick out the gems.

4. How do you evaluate a stock?

I look for industry leading companies who:

– Have a valuation that is equal to or at a small premium to other shares with a comparable earnings growth rate.

– Have a total return yield greater than the current corp. bond rates.

– Are buying back shares.

– Are increasing the dividend.

– And are increasing cash flow from operations.

All that takes about 20 minutes, if it passes those tests, I begin to dig deeper into SEC filings, annual reports, etc. Earnings call transcripts on Seeking Alpha recently have been providing me a ton of insight, not necessarily for the details, but the general “tone” of management.

5. Why do you buy a stock?

To own a piece of a company.

6. Why do you sell a stock?

The business deteriorates or its valuation becomes irrationally high.

7. What investment decision are you most proud of?

MO at the height of the litigation woes in 2003 and MCD during the “mad cow” scare of Jan 2003.

8. What investment decision do you most regret?

Selling USG in June of that year.

9. Why do you blog?

I love the market and love to write. It also makes me a better investor by forcing more detailed analysis and making me stick to my guns.

10. What’s your best post?

Did SBUX’s Donald Really say that?

Picked up in the WSJ Online

11. What’s your worst post?

SHLD: What Will Eddy Do? Just guess work. Of course if I turn out right, pure genius. 🙂

12. What financial publications do you read?

WSJ, Barons.

13. What investing blogs do you read?

Value Investing News, The Stockmasters, Seeking Alpha, Fat Pitch, Gannon, Peridot, Interactive Investor.

14. What’s the best investment book you’ve read?

“Buffett: The Making Of An American Capitalist”

15. What’s the last investment book you’ve read?

“The Intelligent Investor” – I try to read it at least once a year.

16. When did you start investing?

At 19. I’ve always loved the idea of being able to buy a piece of a company and “go along for the ride”.

17. How have you improved as an investor?

One word: Patience.

18. How do you need to improve as an investor?

Believe in my choices more, my biggest mistakes have not been picking the wrong companies but getting out too soon or not buying at all because I doubted my reasoning…. (see USG, CHD).

19. Where are the bargains in today’s market?

I am sky high on Owens Corning (OC)… SHLD: Eddie Lampert + $4 billion in the bank.

20. What’s the most interesting company we haven’t heard of?

Based on its small float and daily volume, Owens Corning. It is a leader in all its product categories, fresh off asbestos bankruptcy and just posted strong results despite the housing market and a benign hurricane season. When things turn around in those areas, they take off. Trades at about 6 times earnings.

Visit Gannon on Investing