Street Capitalist: Event Driven Value Investments

This is my new favorite site:

We post articles, past and present, that we think are too long and too interesting to be read on a web browser.

We started this site to bring together our enthusiasm for both great longform reads and the excellent Instapaper reader.

longform.org is edited by Aaron Lammer & Max Linsky.

Longform

I just love long non-fiction articles from magazines and newspapers. Some say that blogging has really killed this form of journalism off, but I happen to think that people are willing to read longer pieces as long as the content is interesting and well-written. In a world littered with microblogging via twitter and shortened attention spans, this service is really refreshing.

Longform is definitely going to become a daily visit for me. Here are some interesting picks from the site:

THINKING IN THE RAIN
SUSAN ORLEAN / NEW YORKER / FEB 2008

An artist takes on “the umbrella problem,” which runs so deep the U.S. Patent Office has four full-time examiners dedicated solely to assessing ideas for umbrella improvement.

THE PROFESSOR OF WAR
MARK BOWDEN / VANITY FAIR / MAY 2010

David Petraeus, father of the surge and the uncontested “most competitive” man in the military.

WE’RE LUCKY WE WEREN’T WIPED OUT
SIMON WINCHESTER / THE GUARDIAN / APR 2010

The volcanic ash cloud from Eyjafjallajokull has caused travel chaos and misery. But we were lucky. An eruption in the future could wipe out the human race.

IPAD VS. KINDLE VS. THE FUTURE OF BOOKS
KEN AULETTA / NEW YORKER / APR 2010

“Amazon has done a great job,” Jobs said. “We’re going to stand on their shoulders and go a little bit farther.” Or they were planning to stand on Amazon’s neck and press down hard.

My friend Miguel Barbosa recently interviewed me (click for the interview). He’s interviewed plenty of people who are far superior than me, but feel free to check it out if you were wondering more about me.

Yesterday I posted, asking for any input on what to ask Michael Lewis at his talk that was given to my school today. Nobody had suggestions, so I just asked something I was genuinely curious about as a blogger. Below are answers to questions regarding football, finance, and his next book.

The talk focused mainly on his book The Blind Side because it is required reading for one of the freshmen introductory courses here — so really, the talk mainly focused on that. I would have liked it if some of the people asking questions ventured more towards finance, since that is what he has written about recently, but they didn’t. Since I was only the second person asking a question I lacked that hindsight.

Here are some interesting questions though, a mix of sports and finance that I think readers may be interested in. All of the below is paraphrased by me, so don’t take these as exact quotations.

Q: Who will Michael Oher play for? (Michael Oher is the subject of The Blind Side)

A: If I had to bet, the San Francisco 49ers.

Q: What do you think could be improved upon in financial journalism? (My Question)

A: In the scheme of things, financial journalism is not really a big of a problem or some kind of machine that hurts the republic. Print journalism is largely fine. There is this backlash right now that’s asking where the journalists were during this crisis. The fact is, they were there, they were commenting on some of these issues — but people refused to listen (My guess is that this is a hint towards his book Panic, which if I understand correctly features articles that were written from the crisis’ inception and through out it).

I think that CNBC though, is bad. It breeds a kind of hysteria which is not healthy, especially for investors. But this problem really is not limited to CNBC, you saw it with political reporting on TV as well. That’s how TV is. It should be viewed as entertainment. So no, no real need for any big improvement in financial journalism.

Q: What do you think of moral hazard and its role in the crisis and finance?

A: Moral Hazard is important,its a really subtle force. I don’t think that a trader at Merrill Lynch was thinking that if he won big he would make a lot of money on a trade and if he loses the government will have to step in and bail them out. This problem though was not limited to banks her, it was every where — global. I think that the ideal risk taking environment is with partnerships. With partnership, the senior partners have much more of a stake in the livelihood of the business and as a result, they would not lever up 30-to-1 and take these exhorbant risks, or really be able to borrow so much.

I think that “too big to fail” is a recipe for failure and these big banks will have to be dismantled in the future. Most of the future big risk taking will probably be moved to partnerships. I think that the current steps the government is taking will lead to some unintended and bad consequences because the problem is likely to be much worse than everyone thinks at the moment. Things may change but everyone will probably forget about this crisis 15 years from now and relax standards, creating yet another problem.

Q: Finding inefficiencies in sports, will it spread?

A: It is really existing everywhere. I’ve spoken to cricket and rugby teams about it. One of the things I think is that the reason it is spreading and taking hold more is the fact that players salaries have skyrocketed. A mistake with a player that costed $50,000 is much less than what’s now — a mistake that would cost the team $50M.

As a result, it becomes much cheaper and more intelligent to hire a couple PhDs from MIT than it is to chance it and stay with the same old broken system. What’s going to happen is a Darwinian process where the teams that don’t take this up will lose games and be forced to move towards it.

Q: Future book on the Houston Rockets?

A: There will be no book on the Houston Rockets. I’m working on a book right now about the financial crisis and a manager who was able to see it and profit from it. Basically it is an extension of the Portfolio article, that was the book pitch. Little work done on the book so far, I probably need another year or so for it.

If you want to know more about what he said regarding The Blind Side, feel free to ask. Like I said, most of the talk was dedicated to this subject, I’ve limited this post mainly to the select questions and answers. He spoke a bit about his writing process and literature, so I can go more in depth into those subjects if any of you wish to know more.

I’ll be attending a talk given by Michael Lewis of Liar’s Poker, Money Ball, and The Blind Side fame tomorrow. These things usually have a decently long Q&A period at the end, so feel free to use the comments section or e-mail me to suggest questions for him.

A few days ago, one of the best financial bloggers passed away: Doris Dungey, better known by her nom de guerre “Tanta”.

Take a moment to visit this post at Calculated Risk.

One of the greatest contributions of Tanta to the financial blogosphere can be found here, at her list of Compleat UberNerd posts, these made the esoteric world of mortgages and mortgage backed securities understandable for everyone – as the financial system started to unravel.

And personally, I always liked her posts where she pointed out the flaws in Gretchen Morgenson’s reporting at the New York Times. It’s a great service to everyone when a journalist is kept on their toes, so that we can make sure the truth is being properly disseminated to the public.

What a difference just under a year makes. If you remember, back in December of 2007 Andrew Bary at Barron’s felt that Berkshire Hathaway (NYSE:BRK.A) was overvalued as it traded around $144,000 per share. Bary cited that Berkshire would face difficulties in finding appropriate investment situations for its cash horde and that there were other undervalued securities in the market:

As noted, Berkshire looks pricey relative to many financial companies. Take AIG, the world’s largest property and casualty insurer. Depressed by its exposure to subprime mortgages, AIG has seen its shares fall 21% this year, to 57. It’s now valued at eight times projected 2008 profits. AIG has two-thirds of Berkshire’s market value and 50% more earnings. It may be a better bet than Berkshire in coming years, as could Wells Fargo, American Express and Allstate.

One alternative to Berkshire is Loews (LTR), the conglomerate run by the Tisch family that also combines insurance and investments. Loews has had a great record in recent years and now trades at 47, 12 times projected 2007 profits and a discount to its net asset value of about $62 a share. Loews is sitting on $3 billion in excess cash. It’s easier for the Tisches to move the needle than Buffett because Loews has 1/10th of Berkshire’s market value.

Buffett’s investment genius is undeniable, but his talents seem well reflected in Berkshire’s rich price. Looking out a few years, Berkshire stock probably will be higher. But our bet is that financial companies like AIG, and even the S&P 500, will do even better, especially if Buffett’s glorious tenure ends. And, remember, Buffett didn’t build the Berkshire powerhouse by paying much more for acquisitions than they were worth. That’s a lesson worth pondering by anyone considering buying his stock.

Sorry, Warren, Your Stock’s Too Pricey (Barron’s)

Out of curiosity, I decided to check Bary’s suggestions versus Berkshire’s performance over the same period:

With the exception of Wells Fargo (NYSE:WFC), Berkshire Hathaway has steadily outperformed the rest of the picks offered by Barron’s back in December.

Today though, Barron’s is actually recommending that you invest in Berkshire Hathaway:

THE FINANCIAL CRISIS HAS GOTTEN SO BAD, some investors are even questioning Berkshire Hathaway ‘s strength. But the worries seem overblown…

Barron’s took heat from Berkshire boosters with our bearish cover story on Berkshire last December, when the stock traded around $144,000. Berkshire has been hurt by declining profits in the auto-insurance and reinsurance markets, both of which might be bottoming. But now is probably a good time to buy. Looking out to 2009, Berkshire’s earnings could get a lift from improving conditions in the insurance market, and from some new high-yielding investments, including $8 billion of 10% preferred stock of Goldman Sachs (GS) and General Electric (GE).

If the stock market rallies in 2009, Berkshire probably will see record profits. Its operating profits this year could be about $5,400 per Class A share, excluding losses on equity and junk-bond derivatives that may cause a fourth-quarter loss. One big investor says earnings could hit $7,000 a share by 2010, a modest 13 times the current stock price.

Historically, Berkshire’s stock price is linked to its book value. We estimate that Berkshire’s book value now is around $66,000 a share, down $11,000, or 14%, since Sept. 30. Our calculation factors in Berkshire’s recent statement that its book value fell about $9 billion, or $6,000 a share, in October, on market declines. November has been about as bad for stocks, with the S&P off 17%.

True, Buffett does have less financial firepower to make investments because Berkshire’s cash probably has been halved, to about $15 billion, since Sept. 30 — in part because of its investments in GE, Goldman and Wrigley. It’ll be interesting to see if the 78-year-old Buffett is willing to issue equity or debt for a major deal, should he want to make one in the coming months.

Berkshire now trades below 1.4 times estimated book value, versus an average of around 1.5 in the past decade — and current book is depressed. If the stock market rallies 25% in the next year, the stock could hit $110,000, or 1.4 times potential year-end ’09 book value of $80,000 a share.

Finally, Berkshire Looks Undervalued (Barron’s)

Bary makes a pretty good case for investing in Berkshire right now. It seems to have taken them a while to acknowledge the benefit of investing in Berkshire and its “Fort Knox”-like balance sheet, but they’ve finally come around. It makes you wonder though — did they willingly ignore the balance sheets of those other companies that they recommended back in December? Almost all of them have been absolutely obliterated by the credit crisis and represented a highly speculative investment at the time as the credit crisis took hold of the markets.

I think that in times of crisis, that’s one thing to keep in mind. Any investment you make has to be compared to the universe of opportunities around you. At the time, Berkshire may have been overvalued, but with that cash horde, AAA rating, and lack of sub-prime/CDS exposure it represented a much safer proposition than most other financials.

The WSJ seems to be a fan of repetition when describing the pain at Lehman Brothers (NYSE:LEH)

A group of three men, wearing Lehman badges and walking back into headquarters, discussed the fallout for other firms on Wall Street. “At some point, where does it stop?” one said.

The Lehman Stock Slide Hits Home: Employees Face $10 Billion in Losses (WSJ)

At a fast-food vendor across the street, people waiting to order food discussed the dive in Lehman’s share price this week, and the latest headlines from CNBC. Outside, a group of three men, wearing Lehman badges and walking back into headquarters, discussed the fallout for other firms on Wall Street. “At some point, where does it stop?” one said, as he headed back to the office.

Lehman Races to Find a Buyer (WSJ)

Most readers will recognize Jason Zweig as the guy who revised The Intelligent Investor by Benjamin Graham. In the 2003 annual letter (PDF) to Berkshire Hathaway shareholders, Warren Buffett Remarked that The Intelligent Investor is his “favorite book on investing” and that Zweig did a “first-class job in revising” it.

This was actually one of the first investing books that I read. What I liked most was Zweig’s own remarks after every chapter. Zweig was able to take a book written a long time ago and make it easy to digest and show how Benjamin Graham’s concepts parallel what is going on in modern financial markets. The commentary he added was helpful because even if some of the material was hard to understand, I was able to come back to it after reading the commentary.

So today I was pleased to see that Zweig would be penning a new column at the WSJ. Zweig says:

In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods — and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.

This new column takes its name from the classic book by Benjamin Graham, who wrote that “the investor’s chief problem — and even his worst enemy — is likely to be himself.” I hope to help you understand the chaotic markets around you, and the even more treacherous enemy within. For, as Mr. Buffett has also pointed out, investing is much like dieting: It is simple, but not easy. Everyone knows what it takes to lose weight. (Eat less, exercise more.) Nothing could be simpler, but few things are harder in a world full of chocolate cake and Cheetos.

Stop Worrying, and Learn to Love the Bear (WSJ)

With many investors hurting right now, a Graham themed column might be just what they need. It would prevent them from pulling out of the markets all together and instead expose them to concepts like Mr. Market and the need for a margin of safety when you invest in companies. Those two ideas will be essential for surviving and thriving in the negative market we seem to be in.

It looks like the WSJ has not set up an RSS feed yet for Zweig’s column, but since I’m really looking forward to them I’ll be linking and posting excerpts whenever I see them.