Thursday, June 28, 2007

We finally launched!

Sorry for the long gap since my last post. We've been working hard on the investment research management tool I've been hinting at, and it's finally ready for testing. We've decided to open the test to all comers, so if you are interested, you can create an account at

I'm posting my investment ideas on the site now, since it has a neat automated tool for publishing private ideas publicly. My latest idea is BTC+, warrants for Community Banker, a SPAC. Check it out and let me know here if you have any comments.

We are calling the product Panorama, and let me give you a quick description of how to use it. The main idea in Panorama is that you can create a list of stocks you've looked at, some in depth, some just for a few minutes. For the stocks you find worth researching in depth, Panorama will allow you to save your notes, spreadsheets, pdfs and other documents online, so they are always accessible anywhere in the world. You can mark which stocks you own and which you'd like to own, and Panorama will tell you when they reach full value or when they are very cheap, through an e-mail alerting service if you choose. And all of your proprietary data is password protected. Good luck and if you have any questions you can reach us at

Friday, May 11, 2007

Buffett and the Sudan

Much has been written about the recent shareholder vote at Berkshire Hathaway on a proposal for Berkshire to sell it's PetroChina holdings or not, with a stated intent to influence the Chinese government to sell it's oil interests in the Sudan. Warren Buffett did not have to allow this proposal to be voted on, but he did. He opposed it for the following reasons.

1) That Petrochina has no interests in the Sudan. PetroChina is a majority owned subsidary of CNPC, which essentially is an arm of the Chinese government, and CNPC owns and operates the oil interests in the Sudan. Even though they have overlapping boards of directors, CNPC controls PetroChina, not the other way around.

2) Selling PetroChina shares isn't likely to have any affect on the Chinese government. It's unlikely they care who their shareholder base is or what those shareholders say, CNPC controls PetroChina and will do what they want.

3) Even if the previous two arguments were wrong, having the CNPC leave the Sudan doesn't change anything, in fact it could potentially make things worse. Those oil assets aren't going anywhere, the CNPC will be forced to sell them at a fire sale price to another company (which will pay the same royalties to the government) or to the government of the Sudan, which will enrich those responsible for the genocide even more.

The vote was held, the two retired professors were given their say, and the proposal was voted down 98% to 2%. Obviously the Berkshire shareholder base agreed with Warren on this issue. How to solve the problems in Darfur is an issue that reasonable people can differ on, but I haven't encountered anyone who disagrees that something must be done. I believe that if we truly care about ending the genocide, we shouldn't advocate futile and wasteful symbolic acts. We have a duty to lobby for a truly effective policies that will absolutely end the genocide. Frankly, I think Clinton showed us the right approach in Bosnia.

I'm writing today because in all the coverage I've read on Buffett and the disvestiture vote, I found none to be balanced or complete. Specifically, I've never read any discussion or explanation of Buffett's key third point. But as a participant in the financial markets you come to expect this from new stories. They are written quickly by journalists under a deadline who might not have a deep understanding of business. But I do expect a little more from columnists who have the time to research and write well balanced columns.

Sadly, Marketwatch's David Weidner isn't one of them. In this column, he writes several things that are patently untrue, and links to a previous column filled with similar falsehoods.

Specifically one of his first paragraphs.

"Buffett and his followers believe it doesn't matter how you make your money, as long as you give it away when you're dead. Embrace businesses such as PetroChina Co. which arguably is aiding the genocide in Darfur by investing in the Sudanese government's oil explorations -- or risk that extra penny a share in profit."

As Buffett has pointed out, PetroChina has made no investment in the Sudan. And Buffett has never been quoted as saying it doesn't matter how you make your money. In fact, Buffett has been quoted many times as saying there are businesses he'd never invest in, no matter how profitable, because of moral reasons.

"The PetroChina subsidiary in Sudan pays the government for the right to produce oil there"

Once again, PetroChina makes no payments in the Sudan, has no business in the Sudan, well you get it. After a series of similar misrepresentations, David finishes by saying

"Hey, if you could make a few bucks dealing with someone you know is helping hide a serial killer, why say anything? It probably wouldn't help, right?"

This is what you call a straw man argument, and it's an over the top doozy. Buffett isn't making anything in the Sudan since PetroChina generates no revenues and has no business there. There is a more nuanced argument about Buffett's responsibilities, but not one that David is apparently able to make.

The fact that David could release this column says a great deal about MarketWatch's editorial control and fact checking. As a big fan of Herb Greenberg, it almost makes me wonder about his columns. But at least Herb references actual facts when he makes his arguments, I can't ever recall him spewing allegations without providing any support for them.

Dave Weidner apparently has been perturbed at Buffett's behavior for a while. His earlier column attacks Buffett, for of all things, the manner in which he's decided to give away his fortune to charity.

"The 75-year-old is giving away his wealth? Yes, but slowly, over time. He is not putting his or his family's welfare at risk and will not miss any meals, even if he chooses only to famously dine on his burgers and Cherry Coke."

Buffett doesn't own a ranch in Montana, a large yacht, and lives fairly frugally. That part is true. David is arguing that Buffett should have given it all away immediately (even though he's not spending it). Of course, had Warren given away all his wealth in 1970 during his "retirement", the world of philanthropy would be $20M better off. Instead he waited, and we should all be grateful he did. Not only is he nominally giving away nearly $40B, but the amount will grow as he continues to build wealth. It's not unreasonable to expect the final amount to approach $100B. All because he worked hard, and will continue working hard, at building a large estate, not for himself, but for the benefit of his charitable foundations.

After that David attacks Buffett for owning tobacco companies. "Long after the public turned on smoking and health, Buffett infamously explained his investment in the tobacco business: "It costs a penny to make. Sell it for a dollar. It's addictive. And there's fantastic brand loyalty.""

David's actually using a quote of Buffett taken out of context, where Buffett is quoting another person to make the ironic point that it's a great business, but is it one you want to own? Berkshire directly owns no tobacco stocks, and hasn't for a very long time. Buffett actually divested of his shares in RJR over 25 years ago!

More recently he was offered another opportunity to get back in the business.

"Warren Buffett, the chairman of Berkshire Hathaway, remarked to the shareholders in 1997 that he was offered the chance to buy a company that manufactures chewing tobacco. He and Charlie Munger, his vice chairman, knew that it was going to do very well and subsequently it has. They did not, however, go through with the purchase. As Buffett explained, "We sat in a hotel in Memphis in the lobby and talked about it and decided that we didn't want to do it."'

Since chewing tobacco is dramatically safer than cigarettes, I actually think he should have done the investment.

Berkshire's only tobacco holdings as of this writing is a small amount of shares owned by a subsidary insurance company, Gen Re. It's not a significant holding, and it's unlikely that Buffett even manages this portfolio, just as he does not manage GEICO's portfolio (Lou Simpson does).

In the rest of the column, David continues to make wild allegations about Buffett's "ruthlessness" without providing foundation (I.e. Buffett legally canceled a contract). Too many to rebut in this space, I'll just finish with his most egregious effort. Incredulously, David takes Buffett to task for not lying or stonewalling investigators during the AIG investigation. He paints it as Buffett "selling out" his "friend" Hank Greenburg, even though Hank is took the fifth and was fired for his actions. By this point, you just have to wonder what David Weidner 's definition of ethical behavior is. I guess, clearly, that even he doesn't know.

Tuesday, May 1, 2007

Quick Update On Kaiser

Reverse split price is $36 according to todays proxy. We'll see if any arbitrage affects things, the price hasn't moved.

Tuesday, April 10, 2007

Only the frontier is efficient?

I just got off the phone with the trust advisors running a trust that I'm an eventual beneficiary of. It's not a very large trust, but it's important, as my mother relies on it for much of her income. The advisers had just put together a super duper plan to manage the trust based on the concepts of the "efficient frontier". In case you don't know, the "efficient frontier" is a portfolio management concept that sprang from the efficient market theory. The idea is to allocate a portfolio across groups of uncorrelated investments to reduce volatility as much as possible without giving up much in the way of long term returns.

To do this in the trust, they overweighted large cap equities 3-1 over small caps and 2.5-1 over mid caps. They dabbled in international real estate as well as domestic, and even threw in a small (4%) proportion of commodities. The entire portfolio is is adorned with a big fat Sharpe ratio, telling you proudly how well it plans to reduce your volatility.

When I asked why the overweight in large caps, they rattled off about computer models, macro economic predictions, and recent small cap out performance. I asked why commodities then, since they are on a two year period of out performance, have no intrinsic value and are just a playground for speculators. Inflation they mumbled. Lastly I asked why almost all of the equity funds they recommended are actively managed. They responded that their bank does intensive work to vet mutual fund managers and choose only those who will beat the market.

So this is what it comes down to. The EMT, Modern Portfolio Theory and the efficient frontier have permeated large money management organizations. They've adopted the parts they like (putting together complex portfolio allocations) and ignored the parts they don't like (that you can't time the market, predict the future, and you can't pick out performing mutual funds), and cover it with a dollop of MPT jargon to dazzle the client.

I wanted to ask them how they could throw out the foundation of Modern Portfolio Theory and still use the remnants left literally hanging in space without support, but it would have been unfair. They weren't bad guys, just salesmen, selling what their company had given them to sell. I just smiled over the phone, thanked them for their time and asked again to increase the yield as much as they could. Mother isn't getting any younger.

Friday, March 30, 2007

Kaiser Group going private?

KGHI just released their 2006 10k. It contained the following interesting tidbit.

"Proceeding with a 1-for-20 reverse split requires that we amend the Company’s Certificate of Incorporation, which requires stockholder approval. The Board adopted resolutions at a special meeting held on March 19, 2007, which, among other things, set forth the proposed amendment, determined that the reverse split is advisable, and called for submission of the amendment for approval by the Company’s stockholders at the Annual Meeting to be held on May 30, 2007."

It's not surprising that KGHI wants to go private as they have only four employees and it should save a significant amount of administration costs. Is this a good thing for investors? I think so. Once the company officially announces the reverse split they'll affix a price to each fractional share. For example, if you own 23 shares, you'll get one new share plus cash for the extra three "fractional" shares. Current book value is about $36.92 per share, so it's reasonable to expect the price they'll set to buy back fractional shares to be near book value. This won't drive the price up to book value, but there will be some arbitrage occuring as small investors try to buy 19 shares in each of their accounts to take advantage of the discount knowing they'll be cashed out in full.

For example if the cash out price is $37, then I would expect KGHI to start trading over $30, possibly closer to $34. Of course this only benefits those who want to sell the stock pre-split, and there may not be enough volume to sell a large number of shares. After the split I still expect the new shares to trade, but with less information released by management and even less liquidity (if that's possible). Holding may be still be a good investment as I believe the controlling shareholders still see more value in KGHI, but I have no idea how long it will take to unearth it.

Good luck, which ever path you decide to take here.

Friday, March 2, 2007

Hurray For Naked Shorting!

After thinking more about the melt-down at Novastar, I realized the catastrophe had some obvious heroes. The shorts, and not just the "legal" shorts, but also the evil, illegal, conspiring naked shorts. According to "Bob O'Brien" and others, a conspiracy by naked shorts kept Novastar's stock price substantially lower than it should have been the last few years. That means those secretive "Sith Lords" (as OSTK CEO Patrick Byrne calls them) helped save Novastar's investors millions upon millions of dollars during the meltdown.

Think about it. One of the few events worse than having a $30 stock plummet to $8 is owning a $60 stock that plummets to $8. That lower purchase price is the difference between having 26% of your investment left, vs. only 13%. So NFI investors may have twice as much of their NFI invesment left in todays world, than they would in a world where illegitimate "bashers" didn't sniff out Novastars overstated financials and find any means possible to short it.

So repeat after me. Hip, hip hoorary for naked shorts and naked shorting!!!!

Friday, February 23, 2007

"Novastar" means it's collapsing and exploding

Herb Greenberg (not the MLB hall of famer Hank, whom I often confuse Herb with because they both hit so hard) wrote about the collapse of Novastar Thursday (trading at $27 in January, as high as $38 last spring, closed at $8.48 yesterday). The Bob O'Brien character is the same guy who supplied Patrick Byrne information about the "naked shorting" conspiracy.

" Much of the attempted deconstruction of criticism would spill over to a Web site run by an anonymous message board poster, who went by the name Bob O'Brien and who by then had also become pals with CEO Patrick Byrne - himself having gone on a "jihad" against critics of his own company. Both teamed up to also attack an illegal form of short-selling.

In spring 2005, O'Brien went so far as to post the address and names of the wife and son of one prominent short-seller of NovaStar in a message board post, with the tag line, "This is coming up on game over-time. Figure it out. Your playbook is known." In another post he wrote, "Anyone know Herb's wife's name, and his middle initial?"
The bravado was gone Tuesday in the wake of NovaStar's disclosures. "I have been body-slammed by this," wrote the anonymous poster, who has been identified by the New York Post as a former used-Cat Scan machine salesman named Phil Saunders. "Many of my friends are devastated by this. Some of my relatives, too. Personally, you bet. Very expensive lesson: Don't bet more than you can afford to lose. And don't bluff. I will not be buying anymore stocks in the U.S. markets, that's for sure. I'm quite done now. This casino has lost its allure."

I looked at Novastar back a couple years ago when some supposed "value" guys were trumpeting it as the next big thing. The yield was very juicy, at the time I think the dividend was $5 and the stock $30. But I could not understand it's financials, how it securitized loans and accounted for them, and essentially gave up. The critics said that the earnings were manufactured, that Novastar was using their REIT status and the tax code to front load earnings from the sale of their mortgages. As a REIT it was required to pay out 95% of these "earnings" as dividends. Since they hadn't recieved these "earnings" yet, Novastar had to borrow money to pay it's dividends and hope their front loaded earnings always turned out as estimated. Well today we know that they didn't.

Novastar illustrates two important principles. The first is, if something seems too good to be true, then be very, very, careful. Paying out illusionary dividends is a time tested marketing technique for attracting suckers to overpay for a stock. You can see it occasionally in the closed end fund business. Most close end funds trade at somewhere between a small and large discount to their net asset value (NAV). Some enterprising fund managers have learned they if they pay out very high large dividends their fund will begin to trade at a large premium to NAV. Where does the excess yield come from? By return of capital. Most investors don't understand why the fund is yielding 13%, they jump in thinking they've found a magic investment that will afford them high retirement income. As the NAV declines over time, they figure it out too late that it was their own savings they were spending.

The second principle is one of the bedrocks of value investing. If you can't understand it, don't invest in it. I couldn't understand Novastar, so I passed. It's clear now the "value investors" who were smitten by it's high yield never really understood how that yield was generated, and the risk Novastar took in writing those loans. At the time I figured I must just be too lazy to figure Novastar out. But because there is some virtue in focusing efforts on things that are easy to understand, my results were much better than I would have gained from Novastar even had it not collapsed. As Buffett says, figure out your circle of competence, and stick within that circle. You'll do much better there.