Portfolio Update September,2010

September was yet another boring month. Only activity in my portfolio was to sell BBEP at beginning of the month. I have been very busy at work and have hardly got time to look into more investment ideas. As you can see with over 50% of portfolio in cash I need to find good investments. But having a lot of cash is a good problem so long as you have the perseverance to wait for the right opportunity.

I wrote my opinion on BBEP`s valuation before here. The DCF value of the stock is between 16 and 21. But DCF does not take into account the leverage required to achieve the cash flows. At EV/FCF of 10 it certainly wasn't cheap. The positives that might drive the stock higher is relatively low inflation and demand for high dividend paying investments. The negatives that might tank the stock maybe high interest rates(has $552M of floating rate debt) without natural gas prices shooting up because of excess supply. Also there is an overhang of california increasing taxes on the oil production which would screw low margin producers like BBEP. BBEP has 10% of its production from california. Also the CEO sold 30k shares at 17.2 on August 23.I sold my entire position at 17.39. I might have sold too early but I was happy with the price I got for my shares. Here is my history of buys and sells with BBEP stock.

Value Investing in India

http://www.morningstar.com/cover/videocenter.aspx?id=336034
"India has the second largest number of listed companies in the world. There are lots of small companies that probably should not have been listed, that are listed. That gives an opportunity for people to find things when others aren't looking there."

SimoleonSense.com interviews Chetan Parikh
http://www.simoleonsense.com/wp-content/uploads/2009/11/miguel-barbosa-of-simoleonsense-interviews-prominent-indian-value-investor-chetan-parikh.pdf

I particularly like Chetan Parikhs comment on investor bias

" 1) self-serving bias (i.e. an overly positive view of their own abilities and an overly over-optimistic view of the future) 2) self-deception and denial for they seem to have indulged in collective wishful thinking 3) bias from consistency tendency (they must have looked for evidence that confirmed their optimistic beliefs and kept on being consistent to their original ideas even when problems surfaced) leading to 4) status quo bias or the do-nothing syndrome 5) impatience in valuing the present more highly than the future again caused by incentives that made them so myopic 6) bias from envy from managers who were making large returns with apparently no extra risk which led to 7) distortion by contrast comparison because the steady escalation of commitments must have seemed incrementally small
caused by 8) anchoring to what seemed like small relative numbers 9) social proof which
led to imitating the behavior of their peers 10) bias from over-influence by authority in
that the CEOs of the banks that have suffered the most seem to have been run by people
who did not have a ‘trading’ or ‘market’ background and they were swayed by the
‘experts’ they were overseeing which led them to 11) sensemaking in that they were too
quick to draw conclusions and may have become 12) reason-respecting in that they
complied with requests from their subordinates merely because they had been given some
reason leading to 13) a do-something syndrome all caused by 14) mental confusion from
stress. "

David Tepper Interview

“In 1898, the first international urban-planning conference convened in New York,” he said. “It was abandoned after three days because none of the delegates could see any solution to the growing crisis caused by urban horses and their output. In the Times of London, one reporter estimated that in 50 years, every street in London would be buried under nine feet of manure.”


" Don’t listen to all the crap out there.”


http://nymag.com/news/features/establishments/68513/

Charlie Munger speech at Univ of Michigan

This post comes a little too late. I never miss a chance to hear Charlie Munger speak. So like a enthusiastic kid I heard the entire two hour talk which was available here
http://rossmedia.bus.umich.edu/rossmedia/SilverlightPlayer/Default.aspx?peid=4d215177cbe44b1e8e94d0dd68f5058f

But now the link seems to be dead. But if you missed it you can get a summary here

http://finance.yahoo.com/news/Charlie-Munger-on-Communism-fool-1939650256.html

Pabrai Interview

This is pretty old but still worth a read if you haven't already

http://www.dnaindia.com/money/interview_we-will-never-see-another-warren-buffett_1301088-all

Income disparity in US

WSJ has a interesting article .....read here
http://s.wsj.net/public/resources/documents/US-Income-and-Poverty-in-2009.html

Obama should show this chart to people who oppose the expiration of bush era tax cuts for the top 2% earners.

Third Avenue Quarterly Letter

http://www.thirdavenuefunds.com/ta/documents/sl/TAF%203Q%20Shareholder%20Letters.pdf

Third Avenue`s fund managers quarterly and annual letters are always fun to read. Unlike other MF letters they do not talk about portfolio average performance vs benchmarks or what is their view of the stock market. They talk about individual stocks they purchased during the quarter and give a detailed overview of their investment methodology. I particularly liked the overview of  POSCO by Ian Lapey and I believe this stock is worth further investigation.I think Warren Buffett also owned/bought POSCO few years ago but I maybe wrong. Since cash makes up around 55% of my portfolio I am excited to see how Michael Winer is using his cash hoard.He is selling out of the money PUT options on stocks he is willing to buy. In volatile times like these selling PUT options can be a good source for generating incremental earnings.

Sequoia fund investor day Q&A transript

I know this is a long read but in my opinion its the best article on business insight I have read this year. Highly recommend it.
http://www.sequoiafund.com/reports/transcript10.htm

Question:

I'd like to know your thoughts on gold and energy. I'm looking at the portfolio of some other value managers out in L.A. here and I see that their allocation to energy is about 38 percent and yours is pretty much zero. I'm curious to know what you guys think.

Chase Sheridan:

Generally speaking I would agree with Buffett's comments about gold. You take the yellow metal out of the ground and then you put it to industrial uses or jewelry and then often you put it back into the ground. So it becomes a sentiment bet. You are making a macro bet on the level of worldwide confidence in fiat currency.

To me it just doesn't make any sense. You don't get a yield. If you are really worried about inflation risk, there are ways to hedge inflation risk where you still get a reasonable yield. You might look at timber, you might look at oil companies. But one very good way I think to hedge inflation risk is to invest in excellent companies that have pricing power. You get yield from that; so I don't really see a reason to buy gold when you can invest in a business that leverages the creativity of people and gives you an earnings yield at the same time.

Bob Goldfarb:

I'd add that I think the people who are buying the gold are making a macro bet and they may well be right. But we haven't done that well making macro bets; so we probably are going to stay away from it.

Greg Alexander:

On energy I'd give the same answer I gave a few years ago. Which is it's a good business; we spend time on it. At least three or four people here have written internal reports on energy companies within the last six months. There are some wonderful companies. We own a few shares of Canadian National Resources, which is a very smart company run out of Canada by Murray Edwards. But in general we don't know what the price is going to be of oil and gas. So sort of like with gold, we just don't know what the price will be, we don't really know how to forecast it. So there tend to be people who have firmer opinions than we do about what the price of oil and gas will be. Therefore, they end up being willing to pay more for the shares than we are.

There is a good saying in the oil and gas business that the cure for high prices is high prices, and the cure for low prices is low prices. So for example at the moment no one is interested in gas because the price is so low. But the fact is the gas supply goes down 25 percent in one year in the United States if there is no drilling. So if people would just stop drilling, any supply and demand problem that you could think of would be quickly corrected.

Bob Goldfarb:

One thing I'd add is that some of the oil price is driven by speculators rather than by natural demand of energy users. I'm just more comfortable with a price of a commodity that is set by market forces and doesn't have that speculative component that both oil and gold have.