Owner-operator Gert Boyle interview:
Category Archives: People
“Crisis Investing: Q&A With Wilbur Ross” on TheSteet.com
“Wilbur Ross, Coal Alchemist” on Dealbook.nytimes.com
“On Value Traps” on Distressed Debt Investing
“King of Bankruptcy – Wilbur Ross” on Outlook India
Invesco Institutional – WL Ross & Co homepage
Wilbur Ross on Wikipedia
Wilbur Ross on Charlie Rose, august 2010
The Chou Associates Management Inc. Investment Philosophy:
The investment process followed in selecting equity investments for the Funds is a value-oriented approach to investing. This involves a detailed analysis of the strengths of individual companies, with much less emphasis on short-term market factors. Far greater importance is placed upon an assessment of a company’s balance sheet, cash flow characteristics, profitability, industry position, special strengths, future growth potential and management ability.
The level of investments in the company’s securities is generally commensurate with the current price of the company’s securities in relation to its intrinsic value as determined by the above factors. That approach is designed to provide an extra margin of safety, which in turn serves to reduce overall portfolio risk.
I probably don’t enjoy anything as much as reading Charles Munger, but this is my absolute favorite piece of Munger-material (link to the whole speech):
“The model I like—to sort of simplify the notion of what goes on in a market for common stocks—is the pari-mutuel system at the racetrack. If you stop to think about it, a pari-mutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it’s very hard to beat the system.
And then the track is taking 17% off the top. So not only do you have to outwit all the other betters, but you’ve got to outwit them by such a big margin that on average, you can afford to take 17% of your gross bets off the top and give it to the house before the rest of your money can be put to work.
Given those mathematics, is it possible to beat the horses only using one’s intelligence? Intelligence should give some edge, because lots of people who don’t know anything go out and bet lucky numbers and so forth. Therefore, somebody who really thinks about nothing but horse performance and is shrewd and mathematical could have a very considerable edge, in the absence of the frictional cost caused by the house take.
Unfortunately, what a shrewd horseplayer’s edge does in most cases is to reduce his average loss over a season of betting from the 17% that he would lose if he got the average result to maybe 10%. However, there are actually a few people who can beat the game after paying the full 17%.
I used to play poker when I was young with a guy who made a substantial living doing nothing but bet harness races…. Now, harness racing is a relatively inefficient market. You don’t have the depth of intelligence betting on harness races that you do on regular races. What my poker pal would do was to think about harness races as his main profession. And he would bet only occasionally when he saw some mispriced bet available. And by doing that, after paying the full handle to the house—which I presume was around 17%—he made a substantial living.
You have to say that’s rare. However, the market was not perfectly efficient. And if it weren’t for that big 17% handle, lots of people would regularly be beating lots of other people at the horse races. It’s efficient, yes. But it’s not perfectly efficient. And with enough shrewdness and fanaticism, some people will get better results than others.
The stock market is the same way—except that the house handle is so much lower. If you take transaction costs—the spread between the bid and the ask plus the commissions—and if you don’t trade too actively, you’re talking about fairly low transaction costs. So that with enough fanaticism and enough discipline, some of the shrewd people are going to get way better results than average in the nature of things.
It is not a bit easy. And, of course, 50% will end up in the bottom half and 70% will end up in the bottom 70%. But some people will have an advantage. And in a fairly low transaction cost operation, they will get better than average results in stock picking.
How do you get to be one of those who is a winner—in a relative sense—instead of a loser?
Here again, look at the pari-mutuel system. I had dinner last night by absolute accident with the president of Santa Anita. He says that there are two or three betters who have a credit arrangement with them, now that they have off-track betting, who are actually beating the house. They’re sending money out net after the full handle—a lot of it to Las Vegas, by the way—to people who are actually winning slightly, net, after paying the full handle. They’re that shrewd about something with as much unpredictability as horse racing.
And the one thing that all those winning betters in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom.
It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it—who look and sift the world for a mispriced be—that they can occasionally find one.
And the wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.
That is a very simple concept. And to me it’s obviously right—based on experience not only from the pari-mutuel system, but everywhere else.”
Other material from various sources
A brief Munger bio at Buffetsecrets.com (link)
Wesco Financial Corporation, letters to shareholders by Charles Munger (link)
“Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs”, Herb Kay Undergraduate Lecture by Charles Munger (link)
“The Physcology of Human Misjudgment”, speech at Harvard University by Charles Munger (1995) (link)
Excerpt from Damn Right! (link)
A collection of Munger material (link)
Ben Graham´s the Intelligent Investor (link)
“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizeable declines nor become excited by sizeable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell because it has gone down. He would not be far wrong if this motto read more simply: ‘Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.’ “
… Special Situations (link)
… A Collection of Benjamin Graham’s Papers: Common Sense Investing (link)
“By the way, you may not know, but the Michael Jordan of stock buybacks was Henry Singleton at Teledyne. Henry began Teledyne in 1961 with approximately seven million shares outstanding and grew the company through acquisitions while shares outstanding peaked in 1972 at 88 million. From 1972 to 1987, long before stock buybacks became popular, Henry reduced the shares outstanding by 87% to 12 million. Book value per share and stock prices compounded in excess of 22% per year during Henry’s 27 year watch at Teledyne B one of the best track records in the business. We will always consider investing in our stock first (i.e. stock buyback) before making any acquisitions.”
Prem Watsa in his 1997 letter to shareholders of Fairfax Financial Holdings
“Our attitude toward cash generation and asset managment came out of our own thought process” says Singelton. “It is not copied. After we acquired a number of businesses we reflected on aspects of business. Our own conclusion was that the key was cash flow.”
Source: Manual of Ideas
Articles on Henry Singleton and Teledyne
John Malone is a legendary financial engineer. He’s value oriented, specialized in the entertainment and media industry (most notably cable) and known for being exceptionally shrewd when it comes to special situations.
An awesome lecture by Dr. John Malone:
John Malone talks of his past and future: Part One
This is a great interview published in the Denver Business Journal in 2009 (found at manualofideas.com).
“Malone: The concept that cable television looked more like real estate than it did manufacturing was always obvious, … to me, anyway. And I think the financial markets really didn’t have a model for cable, because the industry was a small, startup industry with no real following. Coming out of that period of the ’70s, the industry needed some model, some metric how the market could value us.
We decided out here in Colorado — not just us, but the other companies out here — to go on a cash flow metric very much like real estate. Levered cash flow growth became the mantra out here. A number of our eastern competitors early on were still large industrial companies — Westinghouse, GE, — and they were on an earnings metric.
It became obvious to us that if you were going to be measured on earnings, it would be real tough to stay in the cable industry and grow. We needed to be measured much more like real estate as an industry.”
“I used to go to shareholder meetings and someone would ask about earnings, and I’d say, “I think you’re in the wrong meeting.” That’s the wrong metric. In fact, in the cable industry, if you start generating earnings that means you’ve stopped growing and the government is now participating in what otherwise should be your growth metric.”
A brief history on John Malone by Howard Edward Haller, Ph.D
Dr. John Malone, coverage/interview from 1999 found on youtube.com
“John Malone of Liberty Media” by Tariq Ali at Streetcapitalist.com
“John C. Malone” on Wikipedia.org
“Infobahn Warrior” on wired.com (1994)
“John Malone” interview with Tryg Myhren on TheCableCenter.org (2001)
MYHREN: Let me… while we’re on that subject, let me ask you something, and before we get to issues on how you took this colossus and began to figure out how to rationalize it in the future, there’s this issue when you’re talking about regulation, talking about the relationship with Congress, of sort of the John Malone that a lot of people will talk about, which is a fellow who’s got enormous vision, financial and structuring capabilities, better technology understanding than any of the other chief executives across the media businesses in the telecommunications business, and I think that it’s generally agreed that you have all of those things, plus you’ve created great relationships with a lot of critical people. You’ve got really good entrepreneurial drive, really outstanding. You put all of that together, from the vision to all the skills and the drive, they’re all the positives, but there are those who have said, “Gee, John has a blind spot and the blind spot might have something to do with public policy, regulation, and public process.”
MALONE: I hate those guys!
MYHREN: There’s a certain impatience that people have noticed.
MALONE: Well, they’re irrational. The problem is that I’m a planner and I like predictable processes and when you get into the law and you get into politics, you can’t predict it. It becomes just a wild card and it’s been very hard over the years to deal with that. I mean, as you know, because you ran a cable company, the local franchising process was brain damaging alone.
“John Malone” on AngelFire.com (2001). A reveiw of the book The Cowboy:
“Dr. John Malone is considered by the industry players and his critics as a conservative (Colman1998) and “a legendary taxophobe” (Sloan 1999, 44). The media titan has the reputation of being “one of the most brilliant and ruthless operators in the television business” (Hofmeister 1999, C1). His assets and business ties through TCI include Time Warner, USA Networks, Discovery, TV Guide and more recently News Corp. (Hofmeister 1999). Liberty Media, a part of TCI, adds assets and investments in cable television programing, high-tech and international media (Fillion 1999).
Malone has instigated several successful mergers over the past few years. Some call the 1998 merger between TCI and AT&T “the biggest deal in world media history” (Horrie 1999). Following the 1994 failed merger of TCI and Bell Atlantic, Malone was wary of merging with another phone company for fear of another regulatory setback. Malone also tread softly into the merger for fear of being out of debt. When he took control of TCI years earlier, it was $130 million in debt (Horrie 1999). Through some creative financial engineering, Malone used the debt as a tax benefit, using liquidity to boost return on equity (Estrella 1999). Following the TCI/AT&T merger, Malone was left debt-free with $9 billion in cash to invest as he pleased (Colman 1998). Mergers reshape the telecommunications industry, allying potential competitors for mutual gain. Malone wanted to get bargaining material and control of Liberty Media out of the deal, and “AT&T, the nation’s biggest long-distance company, wants to use TCI’s cable wires to bypass local phone companies (and the fees they charge) and offer customers telephone and Internet services directly” (Sloan 1999, 44).
Another more recent merger took place in April 1999 between TCI and Rupert Murdoch’s News Corp. Besides its role as a major player in global satellite television, News Corp. also controls the Fox network, the 20th Century Fox studio, the L.A. Dodgers, and several newspapers around the world (Fillion 1999). Murdoch asked Malone to sit on the News Corp. board, which secures international distribution of Liberty’s interactive channels (Hofmeister 1999). The TCI/News Corp. merger also puts Malone in a nice position in the expected struggle for control after Murdoch’s death (Horrie11999).
Mergers result in synergistic relationships, on which Malone seems to thrive. “Malone is concentrating his portfolio on companies with interlocking agendas that can be allied strategically to their mutual benefit” (Hofmeister 1999, 44). With interests in all areas of telecommunications, Malone is in the position to control strategic alliances in cable, online and interactive realms. Synergies verging on monopolies attract government regulatory attention.“
“John Malone Finally May Get His Wish” on TechBastard.com (2001)
“It appears that the main reason Liberty belongs to AT&T at all is so that Malone and company can avoid having heavy taxes levied on their investment income. But in return for the tax shelter, AT&T has stipulated that Malone can borrow only up to 25 percent of Liberty’s stock market capitalization, so as not to unduly drag down AT&T’s credit rating. Unfortunately, Liberty has lost more than half its value from the company’s year’s high, trading currently around $14, which cramps its ability to raise capital.
Clearly, Liberty Media would like to be free to raise more working capital for itself. If Liberty and AT&T can get a favorable ruling from the IRS that will afford Liberty a tax shield similar to the one it currently enjoys, Malone and company hope to sail off, free and unfettered, from AT&T to rampage across the telecommunications and media industry and to turn obscene profits.
The IRS’ favor also would free Malone, AT&T’s largest single shareholder, from his duties on the AT&T board, which has not been a productive engagement for him. His stake in the company has shrunk immensely since he came aboard, as AT&T shares have dropped from a high of around $60 to about $22 on Friday. He has been among the most vocal proponents of complex financial and structural changes aimed at increasing the value of his AT&T shares, and now that AT&T has split itself into four separate companies, there’s seemingly little else for a financial engineer like himself to do. “
I also recommend reading the part about the Liberty Media spin-off in Joel Greenblatt´s “You can be a stock market genious“.
Articles on Liberty Media with referance to Malone
“Liberty Media Speaks To Reverse Morris Trust Issues Regarding Sirius XM” by Spencer Osbourne
“A Donald Rumsfeld Lesson Regarding Liberty And Sirius XM” by Spencer Osbourne