Fairholme Fund 2007 Semi-Annual Report

Bruce BerkowitzFairholme Fund released their 2007 Semi-Annual Report. I highlight some points below:

  • Top 10 Holdings
    • Berkshire Hathaway, Inc. 17.76%
    • Canadian Natural Resources Ltd. 16.53%
    • EchoStar Communications Corp. 8.04%
    • Penn West Energy Trust 5.49%
    • Mohawk Industries, Inc. 4.64%
    • Eastman Chemical Company 4.18%
    • Leucadia National Corp. 4.09%
    • Ensign Energy Services, Inc. 3.27%
    • USG Corp. 2.97%
    • Sears Holdings Corp. 2.53%
  • Portfolio Review
    • Berkshire Hathaway remains our largest single investment, and for good reason.
    • Canadian Natural Resources is our single largest energy investment – with outstanding management teams that have performed well in both high and low price environments.
    • Housing related industries continue to interest us as stress seems widespread but with little forced liquidation to date.
  • Commentary
    • If most are greedy, we prefer to be fearful.
    • When contemplating “hundred-year” floods, it’s worth remembering that predicting rain doesn’t count, but building arks does.
    • Although not immune, we understand that being prepared for unpredictable stock market storms is an integral part of the process of seeking above average long-term results.
    • While always prepared to snap at the right opportunity, we view the Fund’s meaningful cash and U.S. Treasury Bill holdings to be a strategic advantage, as are the strong balance sheets and stress tested managers of the Fund’s core companies.
Direct Link (PDF) - Fairholme Fund 2007 Semi-Annual Report

*You can also watch CNBC Interview with Burce Berkowitz on June. Bruce talks about value in oil & gas sector, good manager traits and his picks - Canadian Natural Resources (CNQ), Berkshire Hathaway (BRK.A).

Making Money the Warren Buffett Way

Warren BuffettU.S.News & World Report had a series of articles about "Making Money the Warren Buffett Way" :


Biweekly Reading List (7/15-7/28)

I recap some good pieces in the past two weeks :

Weitz Funds 2007 Q2 Letter to Shareholders

Wally WeitzWeitz Funds released their 2007 Q2 letter to shareholders. I highlight some points below:

  • Portfolio Review
    • We made only minor adjustments to our portfolios during the quarter. Generally, we added to positions in building materials and mortgage-related stocks which were weak and trimmed holdings of media and other stocks that were strong.
  • Credit Problems Continue to Dominate Financial News
    • One of the reasons that investors bought all these securities without really knowing what they were getting is that the bonds were rated by Moody’s and Standard and Poor’s.
    • It is very difficult to know how low the prices will go or who the ultimate owners of the problem mortgages and securities will turn out to be.
    • What we can know about our mortgage-related companies is that subprime lending was a relatively small part of their businesses; that they have historically been better than average underwriters of credit risk; that they are long-term players who would not "bet-the-ranch" for a quick profit; and most importantly, they have strong enough balance sheets to absorb losses and avoid any liquidity problems.
  • Corporate Buyout Financing
    • Another aspect of the credit markets that is beginning to tremble is financing for corporate buyouts.
    • Leveraged buyouts are not new, but the number and size of the transactions in recent years have been unprecedented.
    • Frenzied takeover activity provides an occasional small windfall for us, but it also leads to some measure of inflation in stock prices that makes it difficult for price-sensitive value investors like us to find attractively priced investments.
  • Outlook
    • Human nature would eventually carry some basically sensible idea to extremes and create financial mischief.
    • There are signs that serious credit problems exist and markets are reacting fearfully.
    • We believe that our companies are well-positioned to withstand the volatility and to come out of this period with larger market shares and higher earning power.
Article Direct Link - Weitz Funds 2007 Q2 Letter to Shareholders


Morningstart Interview with Mohnish Pabrai (Video)

Mohnish PabraiMorningstar chat with Dhandho Investor author Mohnish Pabrai on July 27 2007. Pabrai talks about his investing philosophy, risk vs. uncertainty, time arbitrage, Berkshire Hathaway and lunch with Buffett.

Here is video link or you can watch directly below.


Mauboussin on Strategy : What You See and What You Get

Michael MauboussinMichael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management, released his latest report "What You See and What You Get - Why Cash Flows Are More Important Than Earnings" on July 23, 2007.

Here is highlight of the report :

  • A company’s value equals the present value of future cash flows.
  • While convenient, earnings provide limited information about future cash flows.
  • Our analysis of the DJIA suggests cash flows remain very healthy.
  • The ongoing shift to an intangible-based economy renders earnings even less useful.
Direct Link (PDF) - What You See and What You Get : Why Cash Flows Are More Important Than Earnings.

And here is audio link or you can listen directly below.

GuruFocus's Q&A Sessions with Mohnish Pabrai (Transcript)

Mohnish PabraiGuruFocus had a great Q&A session with Mohnish Pabrai on July 13. Today we got some more answers from Mr. Pabrai.

I highlight some insightful ideas below:

  • Investment Philosophy
    • There are many different approaches that Buffett has applied over his long career. Even today, Buffett’s investing approach when investing for his own account differs significantly from his approach when allocating capital for Berkshire.
    • If you’re a buy and hold forever investor, then having a very durable moat becomes extremely critical.
    • Buffett the individual investor can buy a cheap stock and sell it at full price and pay mostly 15% long term gains. It is much smaller and does not have the incentives Berkshire has to just do buy and hold forever investing.
  • Valuation Techniques
    • There is no need for Excel
    • Depends on the situation. In some cases you can only hang your hat on liquidation value. In other cases there is enough of a moat to focus on future cash flows.
    • If a business has zero growth and consistent stable cash flow, that business is worth 10x FCF plus any excess capital. I then divide by two and see if it’s available at half off.
    • If there is growth, depending on how much and how consistent, I’d be willing to value it at 12-15x plus excess capital.
  • Investment Categories
    • Placeholders - like Berkshire Hathaway, are stocks with ultra-low downside and decent upside, but not at a 50% discount to intrinsic value. I’ll part money in these till a real/normal investment opportunity shows up.
    • Normal - those that are available at 50% off of intrinsic value. These can be distressed, misunderstood etc. type businesses.
  • Lessons Learned From Investing Mistakes
    • Not to be an innovator, but be a cloner.
    • Being a totally passive investor - Once you get even slightly active in a given business (taking a board seat, for example), scalability drops off very very quickly. You get sucked in.
    • The best investments are total no-brainers that can be explained in a short paragraph or two. The more words and spreadsheet cells it takes to layout the case for an investment, the worse it’s likely to do.
  • About Management
    • I don’t endeavor to visit companies or meet up with CEOs or senior management.
    • You’re better off getting to know them by looking at the track record.
Full Transcript - 10 Questions to Mohnish Pabrai–The Answers.
Full Transcript - 10 Questions to Mohnish Pabrai–Additional Answers.


Morningstar interview with John Rogers (Video)

John RogersMorningstar interview with John Rogers, founder & CIO of Ariel Capital Management, on July 18, 2007. John talks newspaper stocks, finding bargains in the mid-cap category, and some recent picks.

Here is video link or you can watch directly below.

Money Magazine Interview with John Rogers (Transcript)

John RogersMoney Magazine had an interview with John Rogers, manager of the Ariel Fund, on July 6, 2007. John talks about how he build outstanding record investing in a few "great ideas" and his recent ideas.

The most interesting part of the interview is that John don't an e-mail address. He explained :

I don't even have a computer in my office. If I had e-mail, I'd never take the time to read research or absorb information. I want to think about what I'm doing, and that takes time.

Full interview transcript - Buy. Hold. Profit. Give Back.


Morningstar Interview with Wally Weitz (Video)

Wally WeitzMorningstar interview with Wally Weitz, founder of The Weitz & Co on July 18, 2007. Wally talks how to invest like Buffett, subprime concerns, large-cap values, and more.

Here is video link or you can watch directly below.


Money Magazine Interview with Bill Miller (Transcript)

Bill MillerJason Zweig, Money Magazine senior writer, interviews with Bill Miller, manager of Legg Mason Value Trust. It's a great interview. I highlight some insightful points below :

  • Process vs. Outcome
    • A good process will ultimately lead to good results in the long run, so you can't be distracted by what happens in the short term.
    • What is a good process ?
      1. If the person's been around a long time, is there's some evidence that this manager actually adds value [either by outperforming or by getting attractive results with lower risk]?
      2. I would look for a long-term orientation, and the evidence for that would be a relatively low portfolio turnover. In a world of 110% to 115% turnover, something in the 50% range or less - ideally in the 20% to 30% range - is what would make sense.
      3. I would look for a value orientation. Doesn't mean that they would be necessarily a so-called value manager. I would look for somebody who actually thinks about the price that they're paying in relation to what this thing is worth, even if they're growth-oriented.
      4. I would look for evidence of what Warren Buffett calls emotional stability. And I also agree with him [that managers need to understand] how markets operate, how [managing money for other people can create] external behavior modifiers, and how our own internal behavioral tendencies can [lead to] sub-optimal decisions.
      5. If you can measure or try to evaluate them, then I think intellectual curiosity, adaptability and flexibility are also traits that I would look for.
      6. Someone who is too dogmatic, too firm in their views, too sure they were right (even when they were right!) - I would be wary of that.
  • Puggy Pearson
    • Puggy Pearson : "There ain't only three things to gambling. Knowing the 60/40 end of a proposition, money management, and knowing yourself."
    • Knowing the 60/40 end of a proposition - knowing when you have some competitive advantage over somebody else. And you don't bet, you don't gamble, you don't invest, unless you have some competitive advantage.
      • There's three sources of competitive advantage in investing: informational, analytical and behavioral.
    • Money Management - knowing the proper money-management strategy, the proper amount of money to invest is the second thing.
    • Knowing Yourself - knowing how you react to stress, how you react to adverse outcomes, how you react when things go well. Do you get giddy and overconfident when things are going well? Do you get morose and difficult when things go badly? Do you make bad decisions at both extremes? Just understanding your own psychology, what your weaknesses and strengths may be, as it comes down to evaluating decisions when the markets are at extremes.
  • Kelly Criterion
    • What it enabled you to do was to maximize the growth rate of anything, if you used this formula.
    • The rough formula, in a grossly oversimplified form just for the purposes of discussion, is : 2p - 1
      • p is the probability [converted from percentage to decimal form]
    • What the Kelly criterion does is it gets you to focus on the probability that you are correct in your assessment, and then to understand that the amount of money you should commit is directly related to the probability that you are correct. It also shows that if you have less than a 50/50 proposition, you shouldn't bet at all.
    • You have to be confident that you have an edge, that you have some positive probability of an expected positive gain, before you commit any amount of money.
    • And if you can't identify that edge, you probably don't have it. And if you can't identify it, you probably shouldn't commit the capital to it.
    • A) people are overconfident, and B) that therefore whatever probability you think you have of being right, it's probably less than you think. So if you think you have a small edge, you probably don't have any edge at all.
  • The guy with the lowest average cost wins.
    • Your profit is the difference between your average purchase price and your average selling price. And so it follows that the portfolio with the lowest average cost will win.
    • If you're not buying at the bottom and selling at the top, then that stock will go down after you bought it. And it will go up after you sold it.
    • So you need to understand that your stock will go down after you buy it, and it will go up after you sell it. On average over time.
  • Inversely Emotional
    • Rising stock prices mean lower future rates of return and falling stock prices mean higher rates of return.
    • They perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That's the psychological problem that most people have.
  • Misc.
    • Bill Ruane : "Well, if you read Ben Graham's Security Analysis and The Intelligent Investor you'll be well versed in it. And then if you read Warren Buffett's shareholder letters and understand them too, you'll know everything there is to know about investing. And you will become a successful investor."
    • The biggest problem that people have isn't selecting the right money managers. It's the way they change managers all the time in response to fluctuations of short-term performance.
    • You could earn the market rate of return by doing no work. But to earn an excess rate of return certainly does require some work!
    • Bill Miller on Buffett's successor : Tom Gayner, David Swensen and Chris Davis.
Full Transcript - Bill Miller: What's luck got to do with it?

Tweedy Browne 2007 Q2 Shareholder Letter

Tweedy Browne release their 2007 Q2 Shareholder Letter. I highlight some points below :

Tweedy, Browne Global Value Fund

  • Commentary
    • Bull markets do not go on indefinitely.
  • Portfolio Review
    • Eliminated Positions
      • Gurit Holding AG, PNC Financial and Takefuji.
    • New Positions - a smaller market capitalization Japanese company.
    • Add Positions
      • Lloyd’s TSB Group and HSBC Holdings.
Tweedy, Browne Value Fund
  • Portfolio Review
    • Performance Contributors :
      • Bausch & Lomb, ABN Amro, Heineken, Unilever, SK Telecom, Leucadia National, Transatlantic Holdings andConoco Phillips,
    • Performance Detractors :
      • Two new Italian media holdings - Mediaset and Mondadori.
    • Sell Positions
      • MBIA, Stepan, Tribune, Transatlantic Holdings, National Western Life, and American National Insurance.
    • New Positions
      • Mediaset, Mondadori and a U.S. distributor of aftermarket automotive products , whose name we are temporarily withholding as we build a position in this stock.
Disclosure : I don't have any of these equities listed above.

Direct Article Link (PDF).


Oak Value Fund 2007 Q2 Investment Adviser's Review

Oak Value Fund release their 2007 Q2 Investment Adviser's Review. I highlight some points below :

  • Investment Philosophy
    • Disciplined focus on buying higher quality, sustainably advantaged businesses where the risks we assume are more than appropriately reflected in the prices that we have paid.
    • Our task is not that of completely eliminating risk or uncertainty. Alternatively, we believe that our charge is to identify, understand and price risk and to take advantage of that mispricing when we believe the rewards are attractive.
  • Portfolio Review
    • Portfolio Performance Contributors :
      • Apollo Group, Fidelity National Information Services, 3M, Praxair and Constellation Brands.
    • Portfolio Performance Detractors :
      • eBay, Berkshire Hathaway, Omnicare, Medtronic and Viacom
    • New Positions
      • Medtronic, Omnicare, United Parcel Service
    • Eliminated Positions
      • Masco, Time Warner, Tyco International
    • Update on Largest Holdings…
      • Apollo Group, Berkshire Hathaway, Fidelity National Information Services, E. W. Scripps, Praxair
  • About Worry
    • It is human nature to worry about recent events or factors which are apparent with the benefit of hindsight.
    • An obvious example of this “worry” is the presumption that the shares of a company contain more “risk” after a decline that has been caused by some short-term disappointment or surprise.
    • The ultimate risk that we attempt to guard against is that of a permanent loss of capital.
    • We believe that it is more important to “worry” about that which may happen as opposed to that which has happened and to make sure that we have reflected such in our decisions.
    • It is most important that an investor “worry” about the things that are relevant to long-term business models and the valuations thereof.
Disclosure : I don't have any of these equities listed above.

Direct Article Link (PDF).


Piggyback Investing Column

Kevin Kelly starts his new weekly column - "Piggyback Investing" - on BloggingStocks. The purpose of his column is to breakdown one fund per week and introduce potentially interesting ideas. I think the column is pretty interesting and worth reading.

This week Kevin introduces Greenlight Capital - ran by value investing superstar David Einhorn. He also talks about Einhorn's recently ideas :

Article Direct Link - Piggyback investing: Greenlight Capital.

Disclosure : I have a long LEAPS of MDC Holdings.

Biweekly Reading List (7/1-7/14)

I recap some stories in the past two weeks :


Michael Mauboussin : Financial Wisdom in Unconventional Places (Video)

Michael MauboussinMichael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management and author, discusses More than You Know: Finding Financial Wisdom in Unconventional Places with Santa Fe Institute Profesor John Miller on May 10th, 2006.

The following is chapters of this talk :

  • 01: Santa Fe Institute Welcome
  • 02: Finding Financial Wisdom in Unconventional Places
  • 03: Idea Behind the Book
  • 04: "More Than You Know" about Multidisciplinary Approach
  • 05: Circumstances, Not Attributes
  • 06: Social Conformity
  • 07: Taking Advantage of Hardwiring
  • 08: Tupperware Parties
  • 09: Wisdom, Whims of the Collective
  • 10: Suboptimal Imitation
  • 11: Options to Optimize
  • 12: Final Thoughts
  • 13: Q & A
  • 14: Q1 - Gambling
  • 15: Q2 - Psychology and Economics
  • 16: Q3 - Information on Markets
  • 17: Q4 - Asset Bubble
  • 18: Q5 - Adoption Threshold
  • 19: Q6 - Social Temperature
  • 20: Q7 - Rational Decisions
  • 21: Q8 - Relationship to Others
  • 22: Q9 - Culture, Group Think
  • 23: Q10 - Working with Various Types
  • 24: Q11 - Concentration, Perception
Here is video link or you can watch directly below. (about 63 minutes)


Warren Buffett Talks to CNBC : I'm Here for the 'Freeloading' (Video)

Warren BuffettWarren Buffett jokingly told CNBC he came to the high-profile Allen & Co. media conference in Sun Valley, Idaho, for "the freeloading" on July 11.

Here is video link or you can watch directly below.


InvestorGuide Interview with Mohnish Pabrai (Transcript)

Mohnish PabraiInvestorGuide had a great interview with Mohnish Pabrai on July 11, 2007. They asked him questions that no one else had asked him in other interviews, and I thought Pabrai's answers were very valuable.

I highlight some insightful points below:

  • Investment Style Evolution
    • Buying a fair business at a cheap price.
    • Buying good businesses at a fair price.
    • Buy a good business at a cheap price.
  • Moats
    • Moats are critically important.
    • They are usually critical to the ability to generate future cash flows.
  • Buy and Hold Forever Approach
    • The key in these cases is large discounts to intrinsic value and not to think of them as buy and hold forever investments.
  • Running Businesses
    • Being an investor is vastly easier than being a CEO.
    • 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.
  • Wit and Wisdom
    • Temperament and passion are the key.
    • Change is the enemy of the investor.
    • Future performance is a function of future investments.
  • Advice To Investors
    • There is just one way to invest - buy assets for less than they are worth and sell them at full price.
    • One should stick to one's circle competence, read a lot and be very patient.
    • 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.
Full Interview Transcript.


FlashBack - The Bill & Warren Show (Video & Transcript)

Warren BuffettRecently I found a great site about Warren Buffett - Toughiee's The Warren Buffett Page. It contains a comprehensive information on Warren Buffett, his Berkshire empire & other aspects related to him. Toughiee, also the founder & editor of Value-Stock-Plus blog, really did a great job !

Looking into "Video & Audio Section" on The Warren Buffett Page, I found a video is really rare - The Bill & Warren Show : Warren Buffett & Bill Gates on Success. This video was their talk at University of Washington on July 20, 1998. Buffett and Gates muse about taking risks, motivating employees, confronting mistakes, and giving back. The result: something pretty darn close to wisdom.

It's so valuable that I "steal" it and put it on this site (Forgive me, Toughiee :P) . You can download here (use Save as ...) or watch directly below (about 55 minutes). I also find the transcript. (Html version and Pdf version). Enjoy it !


Book Summary: The Dhandho Investor

Mohnish PabraiI won the June Contest at Value Investing News. The prize is a copy of Mohnish Pabrai's new book - "The Dhandho InvestorThe Low-Risk Value Method to High Returns". I haven't received the book yet, but I can't wait to read it.

Björn Kijl posts his summary of The Dhandho Investor. It's a good summary. You can read it on GuruFocus or get a pdf version.

I highlight 9 core principles of Dhandho framework

  • Principle # 1: Focus on buying an existing business
  • Principle # 2: Invest in simple businesses
  • Principle # 3: Invest in distressed businesses
  • Principle # 4: Invest in business with durable moats
  • Principle # 5: Few bets, big bets, and infrequent bets
  • Principle # 6: Fixate on arbitrage
  • Principle # 7: Margin of safety – always
  • Principle # 8: Invest in low-risk, high-uncertainty businesses
  • Principle # 9: Invest in the copycats rather than the innovators


Mohnish Pabrai Talks Buffett Lunch Bid at CNBC

Mohnish PabraiCNBC had a short interview with the winner of this year's Buffett charity lunch auction on eBay, with Mohnish Pabrai, Pabrai Funds managing partner on July 3.

Pabrai considers his winning bid a way to "repay the tuition bill". He thinks money spend on this auction is the "greatest allocation of capital". He also talks about charity : The Dakshana Foundation.

Here is video link (after watching an ad video) or you can watch directly below.


Warren Buffett Talks at Hillary Clinton's Campaign (Video)

Warren BuffettWarren Buffett was at Hillary Clinton’s presidential campaign fund raising on June 26. Buffett talked about U.S. as a "net debtor nation", private equity, Congress and U.S. tax disparities etc.

Here is video link or you can watch directly below (about 25 minutes).

Value Quest Reviewed by Value Blog Review

I'm glad that this blog was reviewed by Value Blog Review on June 29.

Value Blog Review is written by Steven Rosales. It is a blog devoted to helping new investors determine what blogs, websites, and other resources are essential to stock market success. This blog is also on Gannon On Investing's "The Eight Best Investing Blogs" list.

"Value Quest is worth a visit as it may save you time by finding and highlighting relevant information you may not have been aware of or did not have the time to track down yourself." said by Value Blog Review.

I'm really honored if this blog could do anything help investors to their stock market success.


Get Mohnish Pabrai's Disappear 2001 Shareholder Meeting Transcripts

I found Mohnish Pabrai's Pabrai Funds 2001 shareholder meeting transcripts posted at GuruFocus.com on June 28. I think it's a great stuff, so I post the link on Value Investing News. But it was removed after a few days. Some friends ask me to send them this transcript.

The following steps show you how to get this transcript (just a little trick) :

  1. Use Google to search "Pabrai Funds shareholder meeting 2001 transcripts"
  2. Find the article link from GuruFocus.com and click the "Cached" item to get it. (Or just simple click this Cached link)