Seth Klarman - Shareholder Letters

Came accross a link to Seth Klarman's letters to shareholders from 1995-2001. Particularly interesting, is the breakdown of his portfolio allocation and returns. Also, he talks in great detail about the frothy market environment of the late 1990's. It's always interesting to see what strategies these experienced veterans are employing and how they turn out in different types of markets. Sadly there is no letter in this compilation from a year where there was a bear market. Anyways, here is the link:

Klarman Shareholder's letters 1995-2001

Thanks to distressed debt investing for this compilation.

SG

Neose Technologies (NASDAQ:NTEC) Liquidation

I took a position earlier this year in Neose Technologies after they had announced their intention liquidate. They were a development stage biotech company that had not been profitable since inception. I took the position after they announced that they had been able to find buyers for their 2 patents. I essentially thought this situation was a low-risk scenario, ie. heads I win a lot, tails I don't lose much. In their filing for the asset sale they described their intention to distribute proceeds of the sales to shareholders of record. Their was a table showing management's estimates of what the payoff would be. Essentially, the payoffs ranged from $0.36 a share to $0.52 a share. The stock was trading at $0.35.

An analysis of the estimated distribution table showed that the only thing the amount of the final payoff depended on was the company's ability to either renegotiate their office lease, or sublet the lease. I thought either of these situations were highly likely, and therefore the expected payoff could be closer to $0.52 rather then $0.36.

On March 24th NTEC announced their initial distribution of $0.33 a share. Shareholder's on the last date of record will have received this amount plus the remainder when all liability claims are settled. Management's estimate is still between $0.36 and $0.52 a share. Even if the payout comes in at the lower end of the range my position will still be profitable.

UPDATE

I sold my shares after the stock transfer books closed on the OTC market for .12 a share. I received in total .33 + .12 = .45 on a .35 investment. My return was 29%.

These opportunities are great because they have no correlation to market activity and can help lift a portfolio in a bear market.

SG

Forgent Networks (ASUR) - Arbitrage Opportunity

Forgent networks (NASDQ: ASUR) will be undergoing a going-private transaction. All holders of less then 750 shares will be cashed out at $0.34 per share, approx. 126% premium to today's price of $0.14. The transaction is still in it's preliminary stages and a definitive vote date has not yet been set. Probability of success is quite high as the stock will be forced to de-list, due to NASDAQ requirements, if the company is not voluntarily taken private. If the company is forced to de-list it will still have to incur expenses associated with regulatory reporting, whereas if the transaction is approved it will no longer have to file the required regulatory materials. Since the going private transaction is the more favourable of the alternatives, it can be expected to be approved.


SG
Disclosure: I own ASUR

Dr. Pepper Snapple (DPS)

“DPS was spun off from U.K.-based Cadbury PLC in May 2008. The Partnerships established their position at an average price of $23.84, which represents 12x estimated 2008 earnings. DPS exhibited many of the characteristics we have seen in successful spin-off investments, including favorable management incentives (which were struck while market participants were still wondering how bad the company’s initial outlook might be in the difficult industry environment), systematic selling by U.K. shareholders more interested in the global confectionary business and less so in the U.S. beverage business, and a conservative management posture. DPS is the third largest liquid refreshment beverage company in the Americas, with a portfolio of 50 brands including Dr. Pepper, Canada Dry, 7-Up and Snapple. The company is a combination of a high-margin concentrate business (like Coke and Pepsi, which trade at 17x earnings) and a lower-margin and more capital-intensive bottling and distribution operations (like Coca Cola Enterprises and Pepsi Bottling Group, which trade at 12x earnings). While the market seems to apply a discount for its bottling ownership, we believe that an integrated model affords DPS the opportunity to expand distribution of its underrepresented and newly-launched brands. Over time, DPS has the potential to generate meaningful earnings growth through new product extensions, increased use of its distribution capacity, further cost reduction, and increased exposure to single serve channels, where it is currently underrepresented. DPS shares ended the quarter at $26.48.”

David Einhorn (Greenlight Capital)

Seth Klarman - Margin of Safety

One of the all time best books on value investing! It is no longer in print. A quick search on amazon.com shows remaining copies are selling at close to $1000 USD. Not the typical price someone looking for value might pay! There are only a few remaining copies in existence. The New York City library has a copy in the rare books section (I believe in a protective casing).

I stumbled across a PDF copy of the book online, while looking up information on Klarman.

Margin of Safety by Seth Klarman

SG

Greenlight Capital - 2008 Annual Letter to Shareholders

David Einhorn, manager of Greenlight Capital, has been earning 26% average annual returns for his hedge fund over the past 10 years. He uses a long and short strategy, based on extensive research. I find it interesting to read some of the better managers' letters to shareholders. Here is a link to Greenlight Capital Annual 2008 letter to shareholders.

Greenlight Capital - 2008 Annual Report

SG

Cheung Kong Holdings LTD - Value Opportunity

Market environments like the current environment often create opportunities that are so obvious that in-depth analysis proves pointless. Take for instance Cheung Kong Holdings LTD, a company that trades on the Hong Kong stock exchange and on the American OTC market as depository receipts (OTC: CHEUY).

Cheung Kong is a real-estate conglomerate, mostly focusing on property development and property management. However, they also retain a controlling interest in CK Life Sciences which is a pharmaceutical company. They currently have operations in 56 countries around the world, with a large focus in Asia.

This investment hypothesis is based on several quite basic, and quite obvious concepts:

1. The company has seen growth averaging around 25% for the past 15 years.
2. The company has about 20 projects currently in development set to be finished in the next year, so the growth rate is sustainable in the short-term.
3. China’s GDP has grown about 7-9% over the past 10 years and this growth will translate into a long-term prosperity for Cheung Kong.
4. Real estate is a stable industry. While it is interest rate sensitive, the future economics of the industry will look similar to how they have in the past under normal circumstances.
5. The current low-interest rate environment should allow for improved financing position. Strong financial position should ensure Cheung Kong’s ability to secure financing.
6. This investment can double as a play on currently depressed real estate prices.
7. Li Ka-Shing and Li Tzar Kuoi (chairman and managing director) own in aggregate about 77% of outstanding shares in the company. This will act as an incentive to shareholders’ interests.
8. Trading at only 7 times last years earnings. Even if the company was not growing at 25% per annum this would be a bargain. With 25% growth the market is effectively putting a negative value on growth.
9. If the company is able to earn $13 HKD a share in the coming years, an extremely conservative estimate, the company is trading for only about 4.5 times earnings.
10. The company is trading at $62.8 HKD which is about 66% of book value per share $98.9 HKD, using fair value accounting for investment properties. Once again, the market is applying a negative value to the operating business and future growth effectively offering them for free.

At the current price of $62.8 HKD per share (about $8 USD) this company investment is a bargain. Typically investors will have to pay out the nose for growth. The recent financial turmoil has created situations such as this one, where the investor is effectively paying nothing for 20+ % growth.

SG

Disclosure: I do not own shares of Cheung Kong.

Check out Buffett on CNBC

Check out Buffett on CNBC this morning!

3 hr interview with Buffett

His comment about the economy going "off a cliff", has been all over the news today. The media has a delightful way of spreading pessimism. He also says that he sees the economic "machine" functioning well within 5 years, and that we have put systems into effect that should help us recover before then. Another interesting point is that he thinks the worst is over. He stated that he could not get the 10% preferred yields today that he got from Goldman Sachs and GE a few months ago.

SG

Prescient?

“Owners of Capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits until the debt becomes unbearable. The unpaid debt will lead to the bankruptcy of banks which will have to be nationalized, and the State will have to take the road which will eventually lead to Communism.”

-Karl Marx, 1867

This is truly an incredible quote, and to think that it was said about 140 years is quite striking. Reading this quote, you almost think that it was something that could have been written today; an exact description of what we are currently facing!

SG

Warren Buffett's 2008 Letter to Shareholders

Here's a well written overview of Buffett's 2008 Berkshire Hathaway letter to shareholders. Written by fatpitchfinancials.com.
Warren Buffett's 2008 Letter to Shareholders



One of the most interesting parts in the letter is the debunking of the black-scholes formula for valuing long-term contracts. I agree with Buffett. In the short-term volatility is an accurate representation of risk, because the mark is unpredictable. And therefore, the Black-Scholes formula is about as good an indication of option value as possible.
However, in the long-term the economy will grow and the stock market will follow it. Therefore, volatility is no longer an accurate representation of investment risk. Investment risk in the long-term should be redefined as the probability of investment loss, and in the long term this risk, on average, will be next to 0%.

Of course, the definition of "long-term" depends on market valuation at the time of purchase. Purchases made 2-years ago, at the market peak, will not see break even levels for possibly 5-10 years. But Buffett's recently booked contracts were booked at depressed market levels and the contracts are set to expire in 10-25 years. Therefore, the probability of the market being at a level less then where it was recently, in 10-25 years is far less then 1%. These contracts can the be estimated at having a 99% probability of being profitable.


Disclosure: I do not own BRK shares.

SG