Fairholme Fund Conference Call

Fairholme Fund Conference Call Replay from November 25th.

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Martin Capital Management - Fireside Chat No. 3

Fireside Chat No. 3 - Nov 17, 2008 - Length: 21:58

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MP3 file - Transcript (PDF)

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Related book: Speculative Contagion: An Antidote for Speculative Epidemics

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Montier Has ‘Never Been More Bullish’ on Stocks

“This is a value investor’s version of heaven,” wrote Montier, SocGen’s global equity strategist. “From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.”

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Corporate bonds are pricing in the highest default rate since the Great Depression and some senior secured debt is trading for as little as 50 percent what investors would recover in a bankruptcy, Montier wrote. The drop in bonds may amount to “the investment opportunity of a lifetime,” he said.

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Looking for more potential stock ideas? Check out: The Stock Screen - Third Quarter 2008

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Jeremy Grantham on WealthTrack

Jeremy Grantham was a guest on this week's Consuelo Mack WealthTrack for an exclusive interview and his television debut: Video - 11/21/08
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The complete interview is available HERE.

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Related previous posts:
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GMO: Quarterly Letter – Jeremy Grantham
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GMO - Jeremy Grantham: Q2 Letter
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Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries - by Whitney Tilson

I’ve seen a lot of crazy things in my investment career, but I struggle to think of anything that tops this: Berkshire Hathaway’s (BRK.A) five-year credit-default swap spreads have more than tripled in the past two months and now stand at 475 basis points (all quotes in this article are as of the end of day 11/19/08), as this chart indicates (click charts to enlarge):

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To get some perspective on what this means, the median CDS spread for companies with the lowest investment grade bond rating (BBB-) is 348 basis points, according to Moody’s, so the CDS market is indicating that AAA-rated Berkshire is junk! Or consider this chart, which shows that Berkshire’s CDSs are higher than a wide range of other financial companies [more than 4x Travelers (TRV), 3x JP Morgan Chase (JPM) and well above Citigroup (C), even after Thursday’s stock collapse – the world has truly gone mad!]:

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In this environment, it’s not surprising to us that the stocks of companies with shaky balance sheets, poor business models and/or weak competitive positions are getting clobbered, but Berkshire’s freefall in the past few weeks is certifiably crazy – and a buying opportunity that will long be remembered.
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Fairfax Removes Hedges on Equity Portfolio Investments

Fairfax Financial Holdings Limited announces that it has removed the hedge on its equity portfolio investments by covering its S&P and S&P/TSX60 equity index total return swaps.

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"During our third quarter conference call on October 31, 2008, I disclosed that we had reduced our equity portfolio hedging from 100% to 65% of our equity investment portfolio and of course that at some point we may remove the hedge on our equity portfolio. That day has come," said Prem Watsa, Chairman and Chief Executive Officer. "Given the unprecedented decline of the equity markets during the past several months, we felt it was prudent to promptly inform our shareholders that we closed out our equity index total return swaps this week and effectively eliminated our equity portfolio hedge. While we believe the recession may be long and deep, we also believe that stock prices may have already discounted the worst of the economic decline. As value investors, we are finding an incredible number of investment opportunities across the world. That said, in the short term we recognize that stock markets can continue to fall significantly."

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Related previous posts:

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Wall Street winner's tough predictions

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Prem Watsa's 2007 Shareholder Letter - Fairfax Financial

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David Winters on WealthTrack

David Winters was a guest on last week's Consuelo Mack WealthTrack: Video - 11/14/08

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This week's show is going to feature Jeremy Grantham.

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The Other Reason for Warren Buffett's Success - by Jason Zweig

Whether he buys stocks in what he calls the "auction market" or private businesses in the "negotiated market," Mr. Buffett tries to secure a margin of safety. That term, defined by his mentor Benjamin Graham, means that the price is so far below a business's underlying value that severe loss is improbable.

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"We do try to buy our businesses like we buy our stocks," Mr. Buffett told me, "and buy our stocks like we buy our businesses." By that he means, among other things, that he wants to understand how the enterprise generates cash, how well-managed it is and whether its customers would stay loyal even if it raised the prices of its goods or services. Note carefully: None of these factors are contingent on the current price of the stock.

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"Being a businessman makes me a better investor and being an investor makes me a better businessman," Mr. Buffett explained. "Most businessmen limit themselves to their own field, and most investors don't really think about businesses. And many businessmen are semi-oblivious to the yardsticks other people use outside that field. I'm always comparing everything to everything else. The question I want to answer is. 'Where do we get the most for our money in something we can understand?'"

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"I prefer, and [Berkshire Vice Chairman] Charlie [Munger] prefers, the permanent ownership of [private] businesses," Mr. Buffett added. "That's been my focus for well over 20 years. But it's just that sometimes, marketable securities are so much more compelling." Mr. Buffett didn't say whether he thinks now is one of those times, but he did state publicly earlier this month that "I've been buying American stocks."

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The Stock Screen – Q3 2008

The Stock Screen - Third Quarter 2008

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The End - by Michael Lewis

To this day, the willingness of a Wall Street investment bank to pay me hundreds of thousands of dollars to dispense investment advice to grownups remains a mystery to me. I was 24 years old, with no experience of, or particular interest in, guessing which stocks and bonds would rise and which would fall. The essential function of Wall Street is to allocate capital—to decide who should get it and who should not. Believe me when I tell you that I hadn’t the first clue.

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I’d never taken an accounting course, never run a business, never even had savings of my own to manage. I stumbled into a job at Salomon Brothers in 1985 and stumbled out much richer three years later, and even though I wrote a book about the experience, the whole thing still strikes me as preposterous—which is one of the reasons the money was so easy to walk away from. I figured the situation was unsustainable. Sooner rather than later, someone was going to identify me, along with a lot of people more or less like me, as a fraud. Sooner rather than later, there would come a Great Reckoning when Wall Street would wake up and hundreds if not thousands of young people like me, who had no business making huge bets with other people’s money, would be expelled from finance.

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When I sat down to write my account of the experience in 1989—Liar’s Poker, it was called—it was in the spirit of a young man who thought he was getting out while the getting was good. I was merely scribbling down a message on my way out and stuffing it into a bottle for those who would pass through these parts in the far distant future.

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Unless some insider got all of this down on paper, I figured, no future human would believe that it happened.

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I thought I was writing a period piece about the 1980s in America. Not for a moment did I suspect that the financial 1980s would last two full decades longer or that the difference in degree between Wall Street and ordinary life would swell into a difference in kind. I expected readers of the future to be outraged that back in 1986, the C.E.O. of Salomon Brothers, John Gutfreund, was paid $3.1 million; I expected them to gape in horror when I reported that one of our traders, Howie Rubin, had moved to Merrill Lynch, where he lost $250 million; I assumed they’d be shocked to learn that a Wall Street C.E.O. had only the vaguest idea of the risks his traders were running. What I didn’t expect was that any future reader would look on my experience and say, “How quaint.”

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Learning from Documentaries

If you are a fan of documentaries and looking to learn something new, check out Kevin Kelly's TRUE FILMS 3.0.
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Bruce Greenwald on Value Investing

What's the current environment like for a value guy?

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I'll tell you the one really nice reason to be a value investor: When things like this happen, you cannot help but go nuts at the opportunity. What this looks like is the end of 1974, where good stocks are selling at three times sustainable earnings and stocks that normally wouldn't have sold at less than 20 times earnings are selling at 10 times earnings. These are exciting times. The short-term issue is that in the near term there will be a painful macroeconomic environment and we don't know how long it will last.

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What should investors eyeing cheap stocks watch out for?

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The craziest thing to do is take recent earnings and add a multiple to it. There are a lot of stocks, like steel companies, that have very high recent earnings and trade at only four to five times earnings. They look like a 20 percent return stock, but those earnings won't be sustainable. If you look at steel companies five years ago before this huge capacity run-up, their earnings were about a third to a quarter of what they are now. You have to stay away from those kinds of enthusiasms--things that look cheap on the basis of peak earnings. You're looking for [stocks] that are protected by assets.

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How should you approach earnings predictions?

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What you don't want to do is use unmoderated price-to-earnings. Never look at current or even recent earning, especially in areas like oil companies where we know they are inflated and coming down. Typically, what a value investor will do first is get a sustainable earnings number, an average PE over a business cycle. You really have to go back 10-12 years to get a feel for what average margins typically look like in these businesses. That's what you use for earnings. The second thing, when you look at a PE, you're always assuming it's sustainable. You always want to make sure it's protected either by assets or the kind of moat that Buffet talks about. Otherwise, even if it's been making lots of money, it's a business that will be competitively vulnerable.

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Does the weak credit environment change the value investing proposition?

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The first thing is that for value investors, you are not going to try to forecast the future. Most value investors would say if it's anything like credit crunches we've seen in the past, it will be gone in a year. That's what the betting has to be. It's a short-term problem and not something you focus on. It has, however created opportunities in debt markets. Banks are dumping senior secured debt, selling it on the market for 50-60-70 cents on the dollar. The implied returns are north of 15 percent, and because you're senior to everybody else in the event of bankruptcy, you're likely to get paid. That's where opportunities have been created by the credit crunch. If you listen to Buffet, it's where he's been investing up until now. Those opportunities are still there, but my guess is they're going to go a way.

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Related Books:

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Security Analysis Sixth Edition

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Value Investing: From Graham to Buffett and Beyond

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Competition Demystified : A Radically Simplified Approach to Business Strategy

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Robert Shiller: 'More tough times ahead for the US'

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Related Books:

The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It

Irrational Exuberance

Credit Analysis: Sanjay Bakshi - Lecture 12

Link to Professor Bakshi's 12th Lecture. He goes over an important lesson and filter from Ben Graham:
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Graham’s Version of Debt-equity ratio:

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Market Value of Enterprise/Debt

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Why not use the conventional Debt/Equity ratio?

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“The market value of stock is generally recognized as a
better index of the fair going concern value of a

business rather than balance sheet figures.”

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The Graham Standard:

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“Minimum stock equity at market prices for industrial bonds

should be at least 75% of total debt. This test must be passed

both currently and over the average of last five years.”

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Mauboussin on Strategy: Where from Here?

This short essay covers three topics. First is a little perspective on recent events. Second are some thoughts on where we might go from here. And finally, a comment on the behavioral finance issues around what we are going through, with an emphasis on why it’s so hard to act in this type of an environment.

It’s important to open with a disclaimer that you should be circumspect about what we, or anyone else, have to say about the past, present or future. We humans tend to suffer from hindsight bias—we think we had more foresight than we did—and our predictions are frequently off the mark. So the goal here is not to make any predictions, but rather to point out salient features of what is going on and what those features might mean for the market.

To summarize, we believe this will prove to be a good time—and maybe even a great time—to invest for people with time horizons beyond a year or two. While there’s no way to know where the market will be in the short term, many conditions are in place for better performance. More directly, we believe the market at these levels represents substantial value for long-term investors.