Seven Traits of Great Investors

Mark Sellers lists seven traits for great investors in this speech (which I found on beearly.com).

1. ability to buy stocks while others are panicking and sell stocks while others are euphoric
2. obsessive about playing the game and wanting to win
3. willingness to learn from past mistakes
4. sense of risk based on common sense
5. have confidence in their own convictions and stick with them, even when facing criticism
6. have both sides of your brain working, not just the left side (the side that’s good at math and organization)
7. ability to live through volatility without changing your investment thought process.

The full article is posted below.

So You Want To Be The Next Warren Buffett? How’s Your Writing?

By Mark Sellers

First of all, I want to thank Daniel Goldberg for asking me to be here today and all of you for actually showing up. I haven’t been to Boston in a while but I did live here for a short time in 1991 & 1992 when I attended Berklee School of Music. I was studying to be a jazz piano player but dropped out after a couple semesters to move to Los Angeles and join a band. I was so broke when I lived here that I didn’t take advantage of all the things there are to do in Boston, and I didn’t have a car to explore New England. I mostly spent 10-12 hours a day holed up in a practice room playing the piano. So whenever I come back to visit Boston, it’s like a new city to me.

One thing I will tell you right off the bat: I’m not here to teach you how to be a great investor. On the contrary, I’m here to tell you why very few of you can ever hope to achieve this status.

If you spend enough time studying investors like Charlie Munger, Warren Buffett, Bruce Berkowitz, Bill Miller, Eddie Lampert, Bill Ackman, and people who have been similarly successful in the investment world, you will understand what I mean.

I know that everyone in this room is exceedingly intelligent and you’ve all worked hard to get where you are. You are the brightest of the bright. And yet, there’s one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor. You have a really, really low probability, like 2% or less. And I’m adjusting for the fact that you all have high IQs and are hard workers and will have an MBA from one of the top business schools in the country soon. If this audience was just a random sample of the population at large, the likelihood of anyone here becoming a great investor later on would be even less, like 1150th of 1% or something. You all have a lot of advantages over Joe Investor, and yet you have almost no chance of standing out from the crowd over a long period of time.

And the reason is that it doesn’t much matter what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that many people have and yet almost none of them end up compounding at 20% or 25% over their careers.

I know this is a controversial thing to say and I don’t want to offend anyone in the audience. I’m not pointing out anyone specifically and saying “You have almost no chance to be great.” There are probably one or two people in this room who will end up compounding money at 20% for their career, but it’s hard to tell in advance who those will be without knowing each of you personally.

On the bright side, although most of you will not be able to compound money at 20% for your entire career, a lot of you will turn out to be good, above average investors because you are a skewed sample, the Harvard IVIBAs. A person can learn to be an above-average investor. You can learn to do well enough, if you’re smart and hard working and educated, to keep a good, high-paying job in the investment business for your entire career. You can make millions without being a great investor. You can learn to outperform the averages by a couple points a year through hard work and an above- average IQ and a lot of study. So there is no reason to be discouraged by what I’m saying today. You can have a really successful, lucrative career even if you’re not the next Warren Buffett.

But you can’t compound money at 20% forever unless you have that hard-wired into your brain from the age of 10 or 11 or 12. I’m not sure if it’s nature or nurture, but by the time you’re a teenager, if you don’t already have it, you can’t get it. By the time your brain is developed, you either have the ability to run circles around other investors or you don’t. Going to Harvard won’t change that and reading every book ever written on investing won’t either. Neither will years of experience. All of these things are necessary if you want to become a great investor, but in and of themselves aren’t enough because all of them can be duplicated by competitors.

As an analogy, think about competitive strategy in the corporate world. I’m sure all of you have had, or will have, a strategy course while you’re here. Maybe you’ll study Michael Porter’s research and his books, which is what I did on my own before I entered business school. I learned a lot from reading his books and still use it all the time when analyzing companies.

Now, as a CEO of a company, what are the types of advantages that help protect you from the competition? How do you get to the point where you have a wide “economic moat”, as Buffett calls it?

Well one thing that isn’t a source of a moat is technology because that can be duplicated and always will be, eventually, if that’s the only advantage you have. Your best hope in a situation like this is to be acquired or go public and sell all your shares before investors realize you don’t have a sustainable advantage. Technology is one type of advantage that’s short-lived. There are others, such as a good management team or a catchy advertising campaign or a hot fashion trend. These things produce temporary advantages but they change over time, or can be duplicated by competitors.

An economic moat is a structural thing. It’s like Southwest Airlines in the 1 990s — it was so deeply ingrained in the company culture, in every employee, that no one could copy it, even though everyone kind of knew how Southwest was doing it. If your competitors know your secret and yet still can’t copy it, that’s a structural advantage. That’s a moat.

The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowe’s. Another source is the network affect, ala eBay or Mastercard or Visa or American Express. A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here. A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs.

These are the only four types of competitive advantages that are durable, because they are very difficult for competitors to duplicate. And just like a company needs to develop a moat or suffer from mediocrity, an investor needs some sort of edge over the competition or he’ll suffer from mediocrity.

There are 8,000 hedge funds and 10,000 mutual funds and millions of individuals trying to play the stock market every day. How can you get an advantage over all these people? What are the sources of the moat?

Well, one thing that is not a source is reading a lot of books and magazines and newspapers. Anyone can read a book. Reading is incredibly important, but it won’t give you a big advantage over others. It will just allow you to keep up. Everyone reads a lot in this business. Some read more than others, but I don’t necessarily think there’s a correlation between investment performance and number of books read. Once you reach a certain point in your knowledge base, there are diminishing returns to reading more. And in fact, reading too much news can actually be detrimental to performance because you start to believe all the crap the journalists pump out to sell more papers.

Another thing that won’t make you a great investor is an MBA from a top school or a CFA or PhD or CPA or MS or any of the other dozens of possible degrees and designations you can obtain. Harvard can’t teach you to be a great investor. Neither can my alma mater, Northwestern University, or Chicago, or Wharton, or Stanford. I like to say that an I\’IBA is the best way to learn how to exactly, precisely, equal the market return. You can reduce your tracking error dramatically by getting an MBA. This often results in a big paycheck even though it’s the antithesis of what a great investor does. You can’t buy or study your way to being a great investor. These things won’t give you a moat. They are simply things that make it easier to get invited into the poker game.

Experience is another over-rated thing. I mean, it’s incredibly important, but it’s not a source of competitive advantage. It’s another thing that is just required for admission. At some point the value of experience reaches the point of diminishing returns. If that wasn’t true, all the great money managers would have their best years in their 60s and 70s and 80s, and we know that’s not true. So some level of experience is necessary to play the game, but at some point, it doesn’t help any more and in any event, it’s not a source of an economic moat for an investor. Charlie Munger talks about this when he says you can recognize when someone “gets it” right away, and sometimes it’s someone who has almost no investing experience.

So what are the sources of competitive advantage for an investor? Just as with a company or an industry, the moats for investors are structural. They have to do with psychology, and psychology is hard wired into your brain. It’s a part of you. You can’t do much to change it even if you read a lot of books on the subject.

The way I see it, there are at least seven traits great investors share that are true sources of advantage because they can’t be learned once a person reaches adulthood. In fact, some of them can’t be learned at all; you’re either born with them or you aren’t.

Trait #1 is the ability to buy stocks while others are panicking and sell stocks while others are euphoric. Everyone thinks they can do this, but then when October 19, 1987 comes around and the market is crashing all around you, almost no one has the stomach to buy. When the year 1999 comes around and the market is going up almost every day, you can’t bring yourself to sell because if you do, you may fall behind your peers. The vast majority of the people who manage money have IVIBAs and high IQs and have read a lot of books. By late 1999, all these people knew with great certainty that stocks were overvalued, and yet they couldn’t bring themselves to take money off the table because of the “institutional imperative,” as Buffett calls it.

The second character trait of a great investor is that he is obsessive about playing the game and wanting to win. These people don’t just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they’re still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they’re going to neutralize that risk. They often have a hard time with personal relationships because, though they may truly enjoy other people, they don’t always give them much time. Their head is always in the clouds, dreaming about stocks. Unfortunately, you can’t learn to be obsessive about something. You either are, or you aren’t. And if you aren’t, you can’t be the next Bruce Berkowitz.

A third trait is the willingness to learn from past mistakes. The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would much rather just move on and ignore the dumb things they’ve done in the past. I believe the term for this is “repression.” But if you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you do analyze them it’s tough to avoid repeating the same mistakes.

A fourth trait is an inherent sense of risk based on common sense. Most people know the story of Long Term Capital Management, where a team of 60 or 70 PhDs with sophisticated risk models failed to realize what, in retrospect, seemed obvious: they were dramatically overleveraged. They never stepped back and said to themselves, “Hey, even though the computer says this is ok, does it really make sense in real life?” The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should. They ignore common sense, a mistake I see repeated over and over in the investment world.

Trait #5: Great investors have confidence in their own convictions and stick with them, even when facing criticism. Buffett never get into the dot-com mania thought he was being criticized publicly for ignoring technology stocks. He stuck to his guns where everyone else was abandoning the value investing ship and Barron’s was publishing a picture of him on the cover with the headline “What’s Wrong, Warren?” Of course, it worked out brilliantly for him and made Barron’s look like a perfect contrary indicator. Personally, I’m amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they’ll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? It’s insane.

Sixth, it’s important to have both sides of your brain working, not just the left side (the side that’s good at math and organization.) In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldn’t write worth a damn and had a hard time coming up with inventive ways to look at a problem. I was a little shocked at this. I later learned that some really smart people have only one side of their brains working, and that is enough to do very well in the world but not enough to be an entrepreneurial investor who thinks differently from the masses. On the other hand, if the right side of your brain is dominant, you probably loath math and therefore you don’t often find these people in the world of finance to begin with. So finance people tend to be very left-brain oriented and I think that’s a problem. I believe a great investor needs to have both sides turned on. As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer. Look at Buffett; he’s one of the best writers ever in the business world. It’s not a coincidence that he’s also one of the best investors of all time. If you can’t write clearly, it is my opinion that you don’t think very clearly. And if you don’t think clearly, you’re in trouble. There are a lot of people who have genius IQs who can’t think clearly, though they can figure out bond or option pricing in their heads.

And finally the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people to do; when the chips are down they have a terrible time not selling their stocks at a loss. They have a really hard time getting themselves to average down or to put any money into stocks at all when the market is going down. People don’t like short- term pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk. This is irrational; risk means that if you are wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not risk, unless you are prone to panicking at the bottom and locking in the loss. But most people just can’t see it that way; their brains won’t let them. Their panic instinct steps in and shuts down the normal brain function.

I would argue that none of these traits can be learned once a person reaches adulthood. By that time, your potential to be an outstanding investor later in life has already been determined. It can be honed, but not developed from scratch because it mostly has to do with the way your brain is wired and experiences you have as a child. That doesn’t mean financial education and reading and investing experience aren’t important. Those are critical just to get into the game and keep playing. But those things can be copied by anyone. The seven traits above can’t be.

Ok, I know that’s a lot of information and I want to leave time for questions so I’ll stop there.

Investing Wisdom from Seth Klarman

Noisefree investing has posted some letters to investors from Seth Klarman’s Baupost Group. The letters are dated from 1995 to 1998. Some (of the many) great quotes are below.

… we prefer investments, when we can find them at attractive prices, that involve a catalyst for the realization of underlying value

Our policy is to continue to protect ourselves from serious market declines through the purchase of out-of-the-money put options.

We firmly believe that one of Baupost’s biggest risks, and, needless to say, that of other investors, is that we will buy too soon on the way down. Sometimes cheap stocks become a whole lot cheaper; it simply hasnt happened lately. (And when that happens, expensive stocks will fare far worse.)

We will not stray from our rigid value investment discipline. We buy absolute bargains when they become available, and sell when they are no longer bargains. We hold cash when there is nothing better to do, and we hedge against the risk of a dramatic and sustained downturn in the market.

Risk is also mitigated by both our constant emphasis on investment fundamentals and on knowing why each investment we make is available at a seeming bargain price. We regard investing as an arrogant act; an investor who buys is effectively saying that he or she knows more than the seller and the same or more than other prospective buyers. We counter this necessary arrogance (for indeed, a good investor must pull confidently on the trigger) with an offsetting dose of humility, always asking whether we have an apparent advantage over other market participants in any potential investment. If the answer is negative, we do not invest.

Rather than own a little bit of everything, we have always tended to place our eggs in a few dozen baskets and watch them closely. These bargain-priced opportunities are selected one at a time, bottom up, which provides a margin of safety in case of error, bad luck or disappointing business results.

Cash provides protection in a storm and ammunition to take advantage of newly created opportunities, but holding cash involves the considerable opportunity cost of foregoing presently attractive investments.

It is only in a bear market that the value investing discipline becomes especially important because value investing, virtually alone among strategies, gives you exposure to the upside with limited downside risk.

In a stormy market, the value investing discipline becomes crucial, because it helps you find your bearings when reassuring landmarks are no longer visible.

But the value investing discipline tells you exactly what to analyze, price versus value, and then what to do, buy at a considerable discount and sell near full value. And, because you cannot tell what the market is going to do, a value investment discipline is important because it is the only approach that produces consistently good investment results over a complete market cycle.

If an undervalued stock drops after you buy it and you are confident in your analysis, you simply buy more.

The payoff to fundamental analysis rises proportionately with the difficulty of performing it. [talking about investing in emerging market or areas where information is less readily available]

In investing, nothing is certain. The best investments we have ever made, that in retrospect seem like free money, seemed not at all that way when we made them.

We continue to be willing to give up a portion of our upside to protect against serious downside exposure.

MCF worth US$71 a share

An old presentation (dated 2007) from Seller’s Capital, which presents the investment case for Contango Oil & Gas.

View this document on Scribd

Echostar worth US$46 – US$55

Another pick from Tilson is Echostar, a spin off from Dish Networks. Which is trading at a discount to liquidation value.

At the beginning of 2008, satellite TV company EchoStar Communications split into two: Dish Network (DISH) and EchoStar Corp. (SATS), which is a collection of satellites, set-top box businesses and a number of investments, cash and marketable securities, all managed by legendary founder Charles Ergen. Our slides on this company are in Appendix F.

Subscribers to the Dish Network install a dish, pay a monthly fee of approximately $30 and receive lots of television channels. In 2006 there was a strong expectation that Dish Network was going to merge with one of the telcos so, in preparation for that, EchoStar Corp. was formed and received all of the assets that a telco would not want to buy, thereby making Dish Network a more attractive acquisition.

SATS has the typical spin-off dynamics: it’s smaller than the original company, had a relatively unnatural initial shareholder base that sold the stock, and management has tended to sandbag the expectations for the company so that their options are struck at a low price.

At today’s stock price, the company is being valued at its cash and investment securities, meaning an investor is paying nothing for the company’s businesses, technology and investments. This includes eight satellites (six owned and two leased, with an original cost of $1.6 billion), a high value, hard-toreplace asset.

It also includes a set-top box manufacturing business – these are the boxes that Dish Network buys – with $1.7 billion in trailing 12-month revenue. In a normal income statement environment, that revenue stream would probably be worth $2-3 billion, but the boxes are sold on a cost-plus basis to DISH, so until DISH is acquired or SATS starts selling these boxes to other customers, that business is not worth a lot today – but it has a tremendous amount of potential value.

At today’s stock price, the company is being valued at its cash and investment securities, meaning an investor is paying nothing for the company’s businesses, technology and investments. This includes eight satellites (six owned and two leased, with an original cost of $1.6 billion), a high value, hard-toreplace asset.

It also includes a set-top box manufacturing business – these are the boxes that Dish Network buys – with $1.7 billion in trailing 12-month revenue. In a normal income statement environment, that revenue stream would probably be worth $2-3 billion, but the boxes are sold on a cost-plus basis to DISH, so until DISH is acquired or SATS starts selling these boxes to other customers, that business is not worth a lot today – but it has a tremendous amount of potential value.

We think SATS will start selling to other customers because it has other technologies to make better boxes. When SATS was a wholly owned subsidiary of Dish Network, no one other than Dish would buy the boxes because Dish was as competitor. Now that SATS is an independent company, we expect it will have eventually have success selling boxes to other companies.

Finally, SATS has some other interesting technologies such as Sling Media.

In summary, we think SATS is hugely undervalued, but there are no natural buyers. As a spin-off, it was likely heavily owned by hedge funds and, given that the stock was down 54% in 2008, many were likely dumping it. There’s a big margin of safety since the company can be liquidated for more than it’s trading for.

Link to the full letter with slides about Echostar at the end.

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Winn Dixie – undervalued?

Whitney Tilson appears to be a fan of Winn Dixie, the supermarket operator. His hedge fund T2 Partners owns 494,170 shares (see recent SEC 13-F filing) in the company, making it his fifth largest position.

Below is a excert from his letter to investors which outlines his investment thesis

Winn-Dixie operates 521 supermarkets, 70% in Florida and the rest in Alabama, Louisiana, Georgia and Mississippi. Thanks to poor management, run-down stores and fierce competition, the company, which had 1,000 stores at the time, filed for bankruptcy in early 2005. Having shed all of its debt and approximately half of its stores, Winn-Dixie emerged from bankruptcy in late 2006 under the leadership of Peter Lynch, who for the previous three years had been the President and COO of Albertsons, where he’d been in charge of operations, merchandising and marketing for the company’s 2,500 stores. While there, he had led a 200-store asset rationalization and $500 million expense reduction program.

During bankruptcy, Winn-Dixie shed its worst stores and is now investing in the remaining ones (it plans to remodel 75 annually until all of its stores have been remodeled), with good results so far: in the most recently reported quarter, gross margins rose, same-store comps at newly remodeled supermarkets were +11.6% and overall same store sales were +3.0%.

Winn-Dixie’s stock is remarkably cheap in our view. It has a market capitalization of around $860 million, but an enterprise value of $700 million after netting out cash of $162 million (the company has no debt, though it does have lease-related liabilities). That’s cheap for a company with more than $7.3 billion in revenues and projected EBITDA this year of $110-$125 million, even before factoring the value of the company’s $550 million net operating loss carryforward from the bankruptcy.

Even if one counts lease liabilities as debt, Winn-Dixie’s enterprise value is a mere 12% of sales, which is far below its peers.

Winn-Dixie has a much stronger balance sheet than these companies (all but these have 6 – 36x more debt than cash), but Winn-Dixie trades at a far lower EV/S multiple due to its lower margins.

If we thought Winn-Dixie’s margins had no room for improvement, then we wouldn’t own the stock at today’s price. However, we see no reason why, over the next couple of years, as Winn-Dixie continues to remodel stores and grow sales, its EBITDA margin won’t double (at which point, it would still be well below normal industry levels), which we believe will result in at least a doubling of the stock.

Eventually, we think Winn-Dixie will show sales and income growth to a point where it will be a nice acquisition for a company seeking to expand in the rapidly growing southeast region. There are probably three natural suitors.

Here is a link to the full letter:

View this document on Scribd

And a link to his article on Seeking Alpha

Sonae Capital worth €4 – €6 a share

Todd Sullivan at Valueplays posted about Sonae Capital in October last year.

Sonae Capital is a spin off of tourism assets and various other related businesses from Sonae Group, a large company based in Portugal.

The company now trades at €0.70 a share, up from a low of €0.42 in March 2009 and a high of €1.80 in Feburary 2008.

Talked about Joel Greenblatt and his assertion that spinoff’s:

• Outperform market by 10% a year for 1st three years
• Largest gain is in second year

Used Marriott (MAR) / Host Marriott International (HST) as a Case Study

• Abandoned by institutions
• Too small
• Made 4x money on deal

Sonae Group (SON.LS)

• Portugal’s largest employer
• Head, Belmiro (country’s second richest person)is very highly regarded.
• Spun out Sonae Capital (SONC.LS)
• Belmiro moved from larger company to the spin company.

Sonae Capital

• 250m share outstanding
• Belmiro owns 55%
• Pabrai own 7%
• 100+ real estate portfolio. Includes fitness centers, wind farms, marina, apartments etc.

Bought Troia Resort in 1997 in bankruptcy from government for nothing but the promise to develop.

• Has 1110 acres, Top 100 in World golf course, 18km beach, Roman Ruins, nature reserve and cleanest swimming water in Portugal.
• 170m Euros invested in it and now worth 500m to 1b Euros.
• One of a kind asset

Palacia Hotel

• 35m Euro investment
• Member if “Leading Hotels in the World”
• Valued at 100m Euros

Aqulaz Hotal

• 4 Star hotel
• Worth 50m Euros

Other Real Estate worth 412m Euros
Other businesses worth 250m Euros.

Total value of 1.2 to 1.8b Euros.  Intrinsic value after debt subtracted equals 955m to 1.5b Euros.

Per share equals 3.82 to 6.20 value vs .69 markets price (all in Euros). In other words, you can buy a dollar bill here for 12-20 cents.

GGP worth US$10 – US$30

The Manual of Ideas blog has posted Bill Ackman’s (Pershing Square Capital) presentation on General Growth Properties.

GGP owns of over 200 malls, operates a management and leasing businss (that services other mall owners) and is a land developer.

GGP voluntarily entered bankrupty on the 16th of April. This was due to the disruption in the credit markets which meant GGP could not refinance its debt.

The presentation lays out a case for the company being worth between US$10 and US$30, on the basis its assets are worth more than they liabilities and it just needs reorganise its debt.

GGP currently trades at around US$2.

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Sometimes the riskiest thing to do is not take any risks

Quote from 37signals blog, about why underdogs should take more risks.

Sometimes the riskiest thing to do is not take any risks. If you’re outmatched by the competition, isn’t it silly not to take a chance? If you’re an underdog in your niche or industry, playing it safe and imitating the established players will probably doom you to failure.

Seth Klarman – Outstanding Investor Digest

Outstanding Investor Digest has a free excerpt (pdf) from their March 2009 news letter that features Seth Klarman’s annual letter to investors. Some of the best quotes are below:

Sometimes being too early becomes indistinguishable from being wrong.

So I just think it’s incredibly important to note that when you don’t allow failure, you get more failure. When you take away the price of personal risk in your decisions, you get much more risk taking.

.. value investors own bargains — securities trading at a discount to underlying value which confer a margin of safety. This doesn’t mean those holdings can’t or won’t drop in price; it means that when they decline, they’ll be an even better bargain to which you are likely to seek to add.

Value investing is at its core the marriage of a contrarian streak and a calculator.

The way to maximize outcome is to concentrate on the process.

Value Investing Congress

Here are a summary of the notes from Value Investing Congress by Manual of Ideas. It shows a wide variety of possible investments, most interesting ones for me are Move and Raffles Education.

T2 Partners

Wells Fargo

• US$4.00/share in earnings power.
• Implies a US$40 – US$50 stock price at 10-12x earnings.
• Wachovia portfolio already significantly marked down. Buffett recently touted the stock and said he would have been willing to put 100% of his net worth in WFC when it was trading at lower levels earlier in the year.

M3 Funds

First of Long Island

• US$1.25 billion asset bank headquartered in Glen Head, NY.
• 140% of tangible book value and 11x LTM earnings. Hidden value in branch ownership would increase TBV by 15%.
• Excess capital: 8.5% common tangible equity/assets.
• 68.5% loan to deposit ratio—very disciplined underwriter. US$1 billion of high quality deposits with a 1% cost. Pristine credit quality: very low non-performing assets at March 2009.
• Near term catalyst: Russell 2000 addition requires 400,000 shares.

Kirkwood Capital

Lancashire Holdings

• Four year old Bermuda based insurance company (specialty insurer) trading at book value.
• LRE is not “part hedge fund” 85% of investment book is “risk-free.” LRE has a very conservatively run investment portfolio.
• CEO Richard Brindle has a very successful track record. The CEO cares more about underwriting, maintaining a strong balance sheet, managing capital through the cycle, and staying nimble. They’re not trying to rule the insurance world.
• Management ROE goal = 13% plus risk free rate.
• Valuation: Believes it could trade between 1.5x – 2x book value (profits made in the mean time are being returned to shareholders).
• Bases this multiple on:

1. Reserve additions being highly unlikely
2. Investment book is not at risk
3. Bermuda taxation
4. Conservative management

Aquamarine Capital

Estacio De SA

• Largest player in the private post-secondary education sector in Brazil.
• GP Investments is involved with Estacio.
• The founding family acquired many “mom and pop” education companies.
• Trades at a single digit to EBITDA, has low EBITDA margins (room for improvement), management is intent on creating a lot of value.
• Thesis relies on: Developing duopoly in Brazil for post secondary education, low penetration, no community colleges, undeveloped consumer finance sector, natural resource based economy. This is an investment that Guy plans on holding for the next 20 years.

Raffles Education

• Headquartered in Singapore.
• They are different than other education companies in China in that they turn out English-speaking graduates.
• The company is cheap and has a dividend yield of 5-6%. Company is trading at a single digit multiple to EBITDA.

Passport Capital

• Current Passport Capital holdings — fertilizers: Mosaic, Potash. Crude oil: Petrobank and EFG Hermes.

Springhouse Capital

ModusLink Global Solutions

• Company is a supply chain management provider.
• Main products are consumer electronics (Sandisk, AMD, and HP are largest customers).
• Company does not take ownership of customer inventory.
• Largest player in outsourced space. The industry still has a large number of players who want to outsource for either strategic or legacy reasons. Several competitors are distressed, versus a strong balance sheet at MLNK.
• Largest risks here are management acquisition risk (company has a huge NOL), operational cash burn, and complete unwind of global growth and consumer electronics business.
• Company has been good at managing costs, running positive EBITDA (US$9+mil EBITDA last quarter).
• Valuation: Low = US$4.00/share (downside protection: there’s US$4.70/share of liquid net working capital), Base $7.00/share, Homerun is $20/share. He only gives the NOL value in the “homerun” scenario.

Market Leader

• They have a site called justlisted.com.
• Stock price is US$1.90, cash/share is US$2.40, cash burn = breakeven, views the business as a legacy in wind-down and small upcoming spend on option.
• Made US$20 million in EBITDA when the market was good. Thinks it could do US$5 million – US$7 million in EBITDA and could be worth more than US$5.00/share.

zipRealty

• Brokerage agency, operates mainly online.
• Gives you a 20% kickback if you buy through ZIPR.
• Stock price is US$2.80, cash/share is US$2.32, losing US$10 million – US$12 million (US$0.50 cents per share).
• A high risk/high reward opportunity.

International Value Advisers

Nestle

• If you strip out stake in L’Oreal and other stakes, you pay 9x EBIT for food business.
• Good balance sheet.
• Accused of overpaying for acquisitions.
• The company appears cheap and safe.

Centaur Capital

Alleghany

• Holding company that operates primarily in the specialty and property & causualty insurance industry.
• Long term track record of value creation by building, acquiring, and selling businesses particular expertise in the insurance, investment management, and natural resource areas.
• Investment results are in high teens. Alleghany uses a “total return” approach to investing its float and has a good investment track record. Over the past five years, the company has produced a 10.6% annualized return vs. a -2.2% annualized return for the S&P 500 Index.
• The company has a $4.1 billion investment portfolio and has a portfolio of valuable assets.
• Valuation: Sum of Parts: RSUI (insurance with 80% combined ration in 2008) 1.5x book = US$1.65 billion, Capitol Transamerica – 1.2x book = US$360 million, EDC 0.75x book = US$125 million, cash and investments at parent = US$800 million.

Odyssey Re

• Globally diversified insurance and reinsurance company, one of the top 20 reinsurance companies in the world.
• 71% owned by FFH, investment portfolio managed by Prem Watsa.
• Grown BV/share by more than 20% annually since going public in 2001.
• Buying back a ton of stock below book value. ORH spent US$351 million on share buybacks in 2008, ~13% of shares outstanding in 2008.
• Bottom Line: ORH is classified as a medium risk stock. Current book value is about US$43.80/share (as of Mar. 31), thinks BV/share should increase to $47-$48. At 1.3x book, company would be worth upwards of US$55+/share.

D3 Family of Funds

Move

• Leading online network of websites for residential real estate search, with the most comprehensive and up to date database of existing homes for sale on the web. Largest shareholder of the company.
• Main asset is relator.com.
• Serves three primary constituents:

1. Consumers, 8.1 million average users/month
2. Real estate agents and brokers
3. General advertisers

• Online ad penetration has not penetrated the real estate brokerage industry compared to other industries. D3 believes that this trend is not likely to last. Dollar advertising by US real estate agents in newspapers is down 71% over the past few years. Believes this represents a great opportunity for web based advertising and will benefit MOVE. Revenues have remained stable from 2006-2009, the most visited website for real estate brokerage advertising.
• Recent Changes: Company has closed underperforming businesses, took $20 million out of annualized operating costs, New CEO Steve Berkowitz named CEO in JAN 2009, currently searching for a new CEO.
• D3 has a “punch list” for MOVE

1. Continue to improve product and grow site traffic
2. Hire new CFO
3. Continue expense reduction
4. Monetize ARS
5. Establish relationship with “The Street”
6. Eliminate 100 million shares to drive EPS, EPS growth and ROE.

• Bottom Line: MOVE basically has no leverage, ~US$1.00/share in net cash. Believes that 2013 EPS could grow to US$0.58/share. Thinks it could appreciate 5x based on a 17.5x to 20x multiple.