Portfolio Update Dec 2011

Current Holdings

Ticker	Portfolio %
Bank of America Warrants (Exp 2019)	0.77%
WFC	10.69%
TAVIX	5.56%
PTP	3.37%
MSFT	3.96%
JEF	7.33%
IACIX	8.34%
HLDCY	3.82%
Cash	14.87%
BRK-B	11.54%
BP	4.70%
BK	14.18%
BAC	9.30%
ALR	1.56%

Returns

Ticker	Two Years	One Year	Six Months	Year To Date	Since Inception
My Portfolio	13.15%	2.05%	-1.48%	1.67%	13.60%
S&P 500	7.71%	1.06%	-3.00%	0.78%	-1.43%

Charlie Rose interviews Ray Dalio CEO of Bridgewater Associates

http://www.charlierose.com/view/interview/11957

Excerpts from Phil Fisher`s book

The book "Common Stocks and Uncommon Profits" was published in 1958. The following excerpt describes how the monetary system has been intentionally biased in US towards devaluing the currency after 1932.

Fisher

Revisiting buying PUT options on TLT

Over a year ago I thought about buying PUT options on TLT expiring on Jan 20,2012 for 2.6$/share.Basically this investment would have had a huge payout if we had a runaway inflation and interest rates went up significantly on government bonds.

http://stalking-value-stocks.blogspot.com/2010/08/thinking-about-buying-put-options-on.html

Looking back that investment would be worth 0.13$/share....a loss of 95%.

But I think betting against treasury bond yields is still a good idea. In my perfect world I would buy a TLT PUT expiring in 2022 but nobody is willing to sell that long dated PUT option.

So here is an investment which makes all the sense in the world ....but you just need someone willing to take on the opposite side of the bet.

CBO Budget and Economic Forecast

Charts from CBO's Budget and Economic Outlook: An Update

View more presentations from Congressional Budget Office

Michael Lewis on Daily Show

http://www.thedailyshow.com/watch/tue-october-4-2011/exclusive---michael-lewis-extended-interview-pt--1

http://www.thedailyshow.com/watch/tue-october-4-2011/exclusive---michael-lewis-extended-interview-pt--2

Bought Henderson Land(HLDCY) at US $4.38/share

About Henderson Land
Henderson Land(ticker HLDCY) owns a significant amount of land in Hong Kong (21 million square feet)and China (150 million square feet, primarily in secondary cities). In Hong Kong the government owns most of the land and sells it to the land management companies like Henderson in the auction market. The auction process can end up being a costly way to acquire the land. Instead of bidding on auctions Henderson Land acquires land by buying up old decaying buildings and tears them down to make skyscrapers. Hence the cost of land is the cheapest among their competitors.They have also acquired huge amounts of agriculture land over the past two decades at low costs and is working with the government to convert it into residential lots.I personally saw their AIA financial center building in the heart of downtown Kowloon during my visit to Hong Kong this summer.

Unlike US, as per HK accounting, land and property needs to be restated annually based on present market values on companies balance sheet. Hence the book value of the company accurately represents the present value of assets.

Valuation

BHKD = Billion Hong Kong Dollars

The latest stated book value of Henderson Land stock is about 190 BHKD. At my purchase price the company is selling for 80 BHKD. Henderson owns 40% stake in Hong Kong and China Gas which is also listed in stock market and is worth 54 BHKD. Hence at current price I bought Henderson`s real estate in Hong Kong and China with current market value of 190-54 = 136 BHKD for 80-54 = 26 BHKD. I know that Hong Kong real estate is currently a bubble and the governments is taking significant steps to reduce the property price appreciation but, at 80% discount to book value I feel I have a significant margin of safety for any losses. Even if Hong Kong real estate prices fall by 50%......the company will still be worth 122 BHKD vs my purchase price of 80 BHKD.

Insider Ownership

Companies having high insider ownership is a huge plus for shareholders since you can trust that they will take capital allocation decisions in best interest of the shareholders. Lee Shau-kee family(Chairman of Henderson Land), who already owns 56% of the companies stock, boosted their stake in April by investing 10 BHKD in Henderson stock and raising their ownership to 59%. I view this as a vote of confidence in the companies future as well as proof of its undervaluation. While Lee Shau-kee purchased the shares at $58 HKD/share my purchase was made at $31 HKD/share......a 47% discount to his purchase price.

This stock comprises 4% of my portfolio.

To read more
Lee Shau Kee Purchase
http://www.bloomberg.com/news/2011-04-13/lee-shau-kee-s-1-3-billion-investment-in-henderson-may-fund-home-projects.html

Page 11 and 12 of Third Avenue Shareholder Letter
http://www.thirdavenuefunds.com/ta/documents/reports/2Q2011ShareholderLetters.pdf

Mid Year Report
http://www.hld.com/en/pdf/investor/presentations/1011.pdf

Portfolio Update

Haven't updated my portfolio info on this blog in a while. During this volatile market I was able to acquire some stocks at very attractive prices.

Prem Watsa hedging for deflation

 

GuruFocus: Yeah, actually there's a question from our readers about the difference between the U.S. and Japan.


Watsa: Yes, there are many differences. But it's the psychological climate that is very interesting to me. I was there in 1988, ‘89 in Japan, and when we asked the Japanese business people, this thing can't last, the markets are so high, the land prices are so high, you know what they said? "We're not like the U.S. We believe in working together, we won't let stock prices come down because we have all our group members owning our stock, and we won't let land prices come down because we'll buy it if anyone wants to sell land." And when you heard that discussion many times, over a week or so, you might actually believe them. You might have thought yourself, my goodness, this can't happen, maybe these guys are different, maybe the market doesn't work here in Japan. And to think today, 10-year government rates have gone from 7-8% to 1%, short term rates to 0%, and the stock market down 75% from 40,000 in 1989 to less than 10,000 today, it's unbelievable to someone who was there in the ‘80s.

Another thing: In the late 1980s, Japanese women, housewives, were taking their grocery money and putting it into the stock market because markets were going up and everyone was excited. Stock prices came down, and for the last10-15 years, Japanese households are only making bank deposits or investing in Japanese Treasury bonds. So the psychology has changed dramatically. And the question is, is the culture different in America that their psychology won't change? That people will continue to spend? House prices are down 50%, stock prices are down, 401k's are down, will they still spend? And my worry is, the answer to that is no. They will start saving, there's already signs of that, and they will be careful about their spending, they will be careful about taking risk, and that is left to be seen. But that's my worry, that psychological change in the American consumer might be taking place right in front of us.

Read further here
http://www.gurufocus.com/news/146628/gurufocus-interview-with-fairfax-ceo-prem-watsa-ire-rimm-dell-brka-brkb

Insiders at BNY Mellon are buying

I am quite bullish on BNY Mellon stock (NYSE:BK) and the stock has fallen 33% since beginning of this year. Its always good to see when the insiders at a company put their own money to buy the stock....its another indication that the stock is a good value.

http://insiders.morningstar.com/trading/insider-activity.action?t=BK&region=USA&culture=en-us

Sequoia fund investor day transript 2011

Link

Financial Historian Niel Ferguson interview with Wealthtrack

Author of the book

Civilization: The West and the Rest

http://www.amazon.com/gp/product/1594203059/ref=as_li_tf_tl?ie=UTF8&tag=consuelomackw-20&link_code=as3&camp=211189&creative=373489&creativeASIN=1594203059

Video Link :Interview Video

My own rules of investing

1. Will the business be around in 10 years or so ? What are the odds that something unforeseen can occur which may change the landscape completely ? Am I smart enough to see events that can break this business in long term ?
2. Does the business have pricing power ? Can the business raise prices because of inflation or because it can ...and not loose customers ?
3. Does the business have MOAT i.e. a sustainable competitive advantage ? 
4. Is the management shareholder friendly ? Does it have the right incentives ?
5. Is it selling for a reasonable price taking into account the free cash flow it generates or will generate ? 
6. Is the business conservatively capitalized ? Is it highly leveraged ?
7. Does the management allocate capital prudently ....be it dividends,share buyback or smart acquisitions ?
8. If the business is cyclical I try to normalize the free cash flow it would generate over long term. 

Value Investing Congress 2011 Notes

http://www.scribd.com/doc/54958483/2011-Value-Investing-Congress-Notes

Charlier Munger : "Why be mad at the way the world is ? "

As usual the Mr Rational speaks in his unique way
http://www.youtube.com/watch?v=vBbd2dMGarM

Charlie: "Trump is stark raving mad"
http://www.youtube.com/watch?v=RGLMnTzQIh8

Argan, Inc. (AGX)

This company has three businesses: GPS,SMC and VLI.

GPS: Constructs gas fired power plants, Wind farms,etc. Contributes 95%  of revenue and earnings.
SMC: Telecom business for government. Contributes a small fraction to the business
VLI: They have disposed this business in Dec 2010. It has contributed to losses of 3,9 and 6 million dollars in year 2010,2009 and 2008 respectively.

So basically we need to focus on GPS portion of the business. This business earned net income of about 8M in 2009 and 10M in 2010. The income increased in 2010 even though revenue fell about 16% because the building of gas fired power plant is low margin business compared to wind turbine construction.

Company has 83M in cash on hand. Current Market cap is 123M.

Insiders own about 35% of the company (MSR Advisors is owned by Levinson).

		Shares				Beneficial
		Beneficially				Ownership
Name and Address		Owned (1)				Percentage (1)
Daniel A. Levinson (2)			1,386,270				10.15	%
William F. Griffin, Jr. (3)			1,256,839				9.24	%
Rainer H. Bosselmann (4)			420,660				3.06	%
Arthur F. Trudel (5)			139,124				1.01	%
James W. Quinn (6)			99,570				*
Daniel L. Martin (7)			50,000				*
W.G. Champion Mitchell (8)			20,000				*
William F. Leimkuhler (8)			20,000				*
Henry A. Crumpton (8)			20,000				*
Cynthia A. Flanders (8)			20,000				*
DeSoto S. Jordan (9)			5,000				*
Officers and Directors as a Group (11 Persons) (10)			3,437,463				24.37	%
NSB Advisors LLC (11)			4,643,098				34.14	%
Richard L. Scott (12)			1,673,000				12.30	%
MSR Advisors, Inc. (13)			1,363,270				9.99	%
Utility Service Holding Co., Inc. (14)			1,110,850				8.17	%
John W. Blackburn (15)			817,106				6.01	%

Valuation:
Enterprise Value = 50M
Normalized Annual FCF = 10
EV/FCF = 5x

That is a pretty cheap. Given that insiders own quite a bit of the stock.....the odds that they will make foolish decision when allocating the 85M in cash is somewhat mitigated. Basically they have skin in the game.

This is not a recommendation to buy or sell. Please do your own due diligence.

Sold half of my Moody`s holding at 39.14

I purchased Moody`s in June of 2010 at around $ 20/share. At that time it was trading at enterprise value of 10x free cash flow. Although there was a risk that the dodd-frank law will change the way the whole ratings system works, I estimated that the government will be slow to enforce any of the big regulations. Meanwhile we had a high moat business selling at such cheap valuation.

At present its priced at around 17x free cash flow. I would rather sell it at 20x FCF but I thought it would it be wise to sell at least half of the holdings. Also having the stock in my IRA allowed me to sell it without worrying about the tax consequences.

Bought Wells Fargo at 28.74

This transaction makes about 5% of my portfolio.

Here are the reasons for the purchase

1. One of the best managements in the banking industry.
2. Banking normally is a very good business with high returns on equity and high free cash flow payout rates(generally >50%)
3. Its also one of the riskiest businesses because of leverage involved and hence its very important that you bet on the right jockey.
4. Wells Fargo is trading at a reasonable 12x free cash flow and 1.2x book value.
5. Historically the bank has commanded a premium price compared to other banks. Historically it trades at around 15x earnings and 2.7x book value. 
6. Historically WFC has had Return on Equity around 19% while currently the return on equity is at 10%. This is because of two reasons .....1) Wells Fargo(like other banks) have solidified their balance sheet in past few years raising equity by withholding dividends and issuing stocks 2) The loan volume is quite anemic because of depressed US economy......and hence their earnings are depressed. I expect that someday the housing crisis will end and home loan issuance will return to the new normal level ( lower than the historical normal)
7. The loans Wells is underwriting at present are much more profitable and low risk
8. As interest rates go up Wells will be able to earn more on the excess cash on balance sheet(the one its not able/willing to lend currently)

 The above summary is all just guesswork based on historical data and from my gut feeling about Wells business. Financial companies are always too difficult to analyze and there is always a risk that you have missed something.But they are also very profitable and generally they benefit from inflation. So one way to invest in financial companies is to bet on the lowest risk and most well managed institution even though you may have to settle with lower returns. That's what a bet on Wells Fargo is in my opinion.

Bought JNJ @ 59.43

The position makes 2% of my total portfolio and depending on the price movements I will be willing to put 5-10% of my portfolio in it.

JNJ had a tough 2010 and will have a tough 2011. But prospects for the company and the stock look good in the long term.

At 59 $/share I paid around 10.5x free cash flow of 2010 which is not too expensive but not cheap either. But as Buffett says "rather buy good business at a fair price than a fair business at a good price".

Other shares that are currently competing for my money are PKX, MSFT,BK and WFC

I bought this in my IRA account to avoid taxes on the dividends.JNJ pays around 45% of its FCF as dividends and buybacks.

Excerpts from Seth Klarman's 2010 Letter

http://myinvestingnotebook.blogspot.com/2011/03/our-national-predicament-excerpts-from.html

Disaster hedging – always an important tool for investors – takes on heightened significance in today's unprecedentedly challenging environment. Yet, as this insight is not unique to us, the cost of insurance is high. There are no easy ways to navigate these turbulent waters. But because the greatest risks are of currency debasement and runaway inflation, protection against a currency collapse – such as exposure to gold – and against much higher interest rates seem like necessary hedges to maintain.

Berkowitz writes to St Joe Employees as the new Chairman

Exhibit 99.1

Associates of St. Joe:

These past months have not been easy — especially, for you and your families.

Your new Board understands this and our responsibilities to all stakeholders of Joe. We are already working hard for a better future.

Charlie Fernandez and I have traveled the globe twice in the past few months discussing all of the possibilities at Joe with top-class organizations.

We have asked leaders from all over the world to see the opportunities for themselves...and they’re coming.

St. Joe is a national treasure, capable of developing world-class communities for work and play. We will not waste these opportunities.

Today starts a new Board with fresh eyes and ears. Your new Board — with experience that will benefit Joe.

Governor Charlie Crist brings to Joe his fight for the people of Florida and, in particular, this very special part of our State.

Howard Frank, the Vice Chairman and Chief Operating Officer of Carnival Corp., brings to Joe decades of business success.

Charlie Fernandez and I bring Fairholme’s shareholders, clients and potential partners for win-win solutions.

We are moving fast to create a new vision, a meritocracy — where you are paid for performance, no matter your position. We will build a company with no ceilings.

However, I will not sugar coat the current situation. St. Joe is losing money, selling valuable assets to cover losses and is under attack.

We cannot continue on this course for long or there will be no Joe. Starting today, we will not continue down this road.

St. Joe will have the capital it needs, will build on what you have already done and will quickly move forward.

Joe will become a model of what can be.

My personal commitment to you is to take whatever steps are needed to make Joe successful.

I know change is painful, but the seeds of greatness are planted during tough times.

Hang in there!

Bruce

Buffett on inflation (as of March 3rd,2011)

http://www.cnbc.com/id/15840232/?video=3000008264&play=1

Howard Marks of Oaktree Capital at UCLA

Highly Recommend it

http://www.scribd.com/doc/49051525/Howard-Marks-Presentation-to-UCLA-Student-Investment-Fund#fullscreen:on

A quote of Buffett applies aptly to current stock market exuberance

" The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs "

Quotes from Charlie Munger

http://www.25iq.com/charlie-munger-quotations/

Ben Bernake explaining monitary policy

http://www.c-span.org/Events/Congress-Questions-Fed-Chairman-on-Inflation/10737419465-1/

I am sure many will not find anything new in this speech and answers. But it makes a difference to me when someone interprets what Bernake is trying to do vs Bernake explaining what he is trying to do.

Conclusion stays the same: We have a very powerful force....the Federal Reserve trying to prop up prices of any/every asset.....the only reason they are able to do so is because lenders are still willing to lend to US at a cheap interest rate and US still has a AAA credit rating. How long that will continue..... nobody knows.

I can't be an expert at economics but when such a powerful force is out there to create inflation then that is what will occur......and as Charlie says you can never just do one thing in financial markets..... there are always consequences...

New York Fed Macro data

http://data.newyorkfed.org/creditconditions/


Especially check out charts under Household Debt and Credit > " Consumer Debt" + "Delinquencies"


The data proves the fact that banks are holding back and not foreclosing on delinquent homeowners.

Also it shows an amazing growth in the amount of Home Equity debt and Student Loan taken on during the last 10 yrs. This might also explain the success of the online education universities plus the student loan delinquency rates.

I would recommend bookmarking this page as it has some excellent data.

Consuelo Mack Interviews Loews's James Tisch

http://www.gurufocus.com/news.php?id=99452

Buffett on stock market....way back in 1999

http://money.cnn.com/magazines/fortune/fortune_archive/1999/11/22/269071/index.htm

The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.

Revisiting St JOE Short Interest

As per the latest institutional holding from
http://investors.morningstar.com/ownership/shareholders-overview.html?t=JOE&region=USA&culture=en-US
and my guess of who will not sell the stock this is the
total number stocks not available in market for trading = 27.7+13.4+11.6+9.6+4.8+2.2+3.1 = 72.4

Float = 92.6 - 72.4 = 20.2

Sold Short = 25.6
http://shortsqueeze.com/?symbol=joe&submit=Short+Quote%99

If the shortsqueeze.com data is correct the number of shares sold short has actually increased from my last writeup. This can get really interesting since as of today the number of stocks sold short is much higher than the traded float even after not including another 10 million shares that are held by Franklin,Fidelity and Vanguard group.

Ron Baron talks to Steve Forbes

http://www.forbes.com/2010/10/01/baron-wynn-schwab-intelligent-investing-video.html