Monday, 9 March 2009

Insight into Decision Making

A group of children were playing near two railway tracks, one still in use while the other disused. Only one child played on the disused track, the rest on the operational track.

The train is coming, and you are just beside the track interchange. You can make the train change its course to the disused track and save most of the kids. However, that would also mean the lone child playing by the disused track would be sacrificed. Or would you rather let the train go its way?

Let's take a pause to think what kind of decision we could make........ ........

Most people might choose to divert the course of the train, and sacrifice only one child. You might think the same way, I guess. Exactly, to save most of the children at the expense of only one child was rational decision most people would make, morally and emotionally. But, have you ever thought that the child choosing to play on the disused track had in fact made the right decision to play at a safe place?

Nevertheless, he had to be sacrificed because of his ignorant friends who chose to play where the danger was. This kind of dilemma happens around us everyday. In the office, community, in politics and especially in a democratic society, the minority is often sacrificed for the interest of the majority, no matter how foolish or ignorant the majority are, and how farsighted and knowledgeable the minority are. The child who chose not to play with the rest on the operational track was sidelined. And in the case he was sacrificed, no one would shed a tear for him.

The great critic Leo Velski Julian who told the story said he would not try to change the course of the train because he believed that the kids playing on the operational track should have known very well that track was still in use, and that they should have run away if they heard the train's sirens.. If the train was diverted, that lone child would definitely die because he never thought the train could come over to that track! Moreover, that track was not in use probably because it was not safe. If the train was diverted to the track, we could put the lives of all passengers on board at stake! And in your attempt to save a few kids by sacrificing one child, you might end up sacrificing hundreds of people to save these few kids.

While we are all aware that life is full of tough decisions that need to be made, we may not realize that hasty decisions may not always be the right one.

'Remember that what's right isn't always popular...
and what's popular isn't always right.'

Everybody makes mistakes; that's why they put erasers on pencils.

Friday, 6 March 2009

Berkshire Hathaway: A Wonderful Investment At A Wonderful Price

At $2,3000 per B share, Berkshire Hathaway is trading at least 30% below intrinsic value.

If you are interested in reading my brief 2-page write-up on Berkshire Hathaway, please shoot me an email.

Happy bargain hunting,
David

Tuesday, 24 February 2009

Dell: A Fallen Angel

At the current share price of $7.99, Dell is trading at 5X after-tax operating income!

If you are interested in reading my 2-page write-up on Dell, please send me an email.

Happy bargain hunting,
David

Friday, 26 September 2008

WaMu's Collapse: Lessons Learned

From AP News:

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

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So, what can we learn from WaMu's ordeal?
  • Among WaMu investors are Bill Nygren of Oakmark Funds, David Dreman of Dreman Value Management and Charles Brandes of Brandes Investment Partners. These are respectable, proven value managers with years of experience. So, the most important lesson here is that we have to do our own work. Even professionals can be very wrong.
  • WaMu was Bill Nygren’s largest position, accounting over 15% of portfolio. The significant value destruction of WaMu caused Oakmark Select I Fund to drop 14.6% in 2007 and a further 9% drop this year.
  • So, don’t make financial company the largest position, unless it has a very strong balance sheet and no liquidity issue with superior management like Berkshire Hathaway.
Happy learning,
David

Wednesday, 24 September 2008

Buffett's Goldman Steal: Lessons Learned

Warren Buffett has secured another great deal during this great financial turbulence by investing $5 billion in Goldman preferred shares, which has 10% dividend yield. On top of that, Berkshire also will get warrants granting it the right to buy $5 billion of Goldman common stock at $115 a share, which is 8% below the 4 p.m. closing share price Tuesday of $125.05. At Goldman's roughly $50 billion market value, based on that closing price, exercising those warrants would give Berkshire about a 10% stake in Goldman.

So, what are the important lessons that we could learn from Buffett:
  1. WSJ summarized Buffett's technique accurately, "Characteristically, Mr. Buffett's investment gives him an attractive income stream, downside protection and the strong chance of big gains."
  2. Avoid excessive leverage. If you have significant leverage like Goldman Sachs, Morgan Stanley, Lehman Brothers and other financial institutions, when liquidity disappears either you go bankrupt like Lehman, or you might need to pay extremely high interest on loans to stay in the game.
Happy Learning!

Sunday, 21 September 2008

A.H. Belo: Sell Out

Dear readers,

On 21st July 2008, I posted my write-up on A.H. Belo, stating why I find A.H. Belo mispriced. The share was trading at $5.83 at that time. Now, two months later, the price has reached $7.07, which is an increase of 21.3%, or an annualized rate of 127.6%.

Although I still believe that A.H. Belo is mispriced and has more upside than downside, I have sold off my stake in A.H. Belo. My primary reason is because A.H. Belo is in a very difficult business and the situation might get worse over time. With current volatility in the market, a lot of significantly better companies with strong cash flow have become very attractively priced. It would be prudent for me to "upgrade" to better quality companies.

To quote Mr. Buffett, "Both our operating and investment experience cause us to conclude that "turnarounds" seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price." [Extracted from Berkshire Annual Report: 1979]

I will stop covering A.H. Belo from now.

Happy investing,
David

Disclosure: No position in A.H. Belo

Friday, 19 September 2008

Constellation Energy: Stars Align for Buffett

Warren Buffett’s ability to act swiftly in buying Constellation Energy Group for $4.7 billion is truly amazing. At the beginning of the year, Constellation traded over $100 and its share has slumped below $25 prior to Buffett’s acquisition announcement. For $26.50 take-over, Buffett is paying about $11.5 billion price tag for Constellation, including net debt and retirement obligation. LTM EBITDA: $1,925 million, which means Buffett paid less than 6 X EBITDA for Constellation. BTW, property, plant and equipment (PPE) are worth $10.4 billion.

The great lessons from Buffett and Munger are:

• Cash is King (in the right hands): In 1987 annual report, Buffett said, “Our basic principle is that if you want to shoot rare, fast-moving elephants, you should always carry a loaded gun.” Although holding cash isn’t exciting, it is a potent instrument for “offensive” during crisis or panic time.

• Be Prepared: From OID Aug 2008 Edition, Charlie Munger said, “What is interesting is how brief many of these opportunities to take advantage of dislocations are…. The dislocation was very brief, but very extreme. And if you can’t think fast and act resolutely, it does you no good. So you’re like a man standing by a stream trying to spear a fish. And if the fish just comes by once a week or once a month or once every ten years, you’ve got to be there to throw that spear fast before the fish swims on. It’s a pretty demanding activity if done right.”

Leverage Kills. Even good companies can be killed by excessive leverage. Unlike Lehman, which is loaded with “toxic” investments, Constellation Energy has real, valuable assets. The only reason it is pushed to the brink of desperation is because of the leverage. If it has strong balance sheet at the first place, Buffett would not have the opportunity to get these prized assets.

• Buy from Desperate Sellers: True bargains only come along when there are desperate sellers. Just one week before, Constellation traded above $55 per share and now it is trading at half of that.


Disclosure: LONG BRK.A, BRK.B