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September 2008

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    « January 2008 | Main | March 2008 »

    February 29, 2008

    Buffett on Insurance: "The Party is Over"

    Berkshire Hathaway released its fourth quarter results earlier today, and with it Warren Buffett's annual letter to shareholders. You can get the letter, and previous Buffett letters dating back to 1977 here.

    Bloomberg provides a nice report:

    Berkshire has been scaling back coverage of coastal property as rates drop from their highs following Hurricane Katrina in 2005. Operating earnings, which exclude a gain from selling PetroChina Co. shares and other one-time items, declined 18 percent to $1,518 a share, lagging the $1,613 average estimate of three analysts compiled by Bloomberg.

    "The party is over,'' Buffett said in his annual letter to shareholders. "It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down.''

    I stated the insurance cycle was headed into a less favorable phase when I bought Millea Holdings (MLEAY/OTC) in late 2007. But I'll settle for shorter term pain in exchange for longer term gains (which is a recurring theme with value investing, as well all know).

    February 28, 2008

    The man with $400 million in Pakistan

    Eric Martin of Bloomberg has the following interesting bits in this report:

    Pakistan's election heightened the risks for stock investors as opposition parties try to create a new government and force President Pervez Musharraf to step down, said Templeton Asset Management Ltd.'s Mark Mobius.

    "There are going to be a lot of disputes surrounding the situation there,'' said Mobius, who oversees $40 billion in emerging-market assets, including about $400 million in Pakistan, for Templeton in Singapore. "There's a great deal of risk in Pakistan. People will be very cautious.''

    And this:

    Mobius said he is maintaining his holdings of Pakistani banks, consumer and energy companies and also doesn't plan to buy more. "I wouldn't say it's going to be a very stable environment,'' Mobius said. "I think it will take time.''

    If Pakistan remains an emerging market, things will probably be fine. If it sinks into what are known as a "Frontier" market, that's a step backwards and maybe bad for investors. Of course, since it has The Bomb, that would be the least of the world's worries.

    "Lost Decade" approaching in the US?

    That's the speculation of Tim Collins of Ripplewood Holdings, who says the Fed is "running out of policy alternatives" in its attempt to prevent a long recession in the America:

    The US could be facing a "lost decade" like that suffered by Japan in the 1990s as the markets fail to respond to interest rate cuts and the US Federal Reserve runs out of options, the head of one of the leading private equity firms said today.

    Mr Collins, whose firm has significant expertise in Japan after leading the buyout and turnaround of Japan Telecom, said he believed a "sharp repricing of assets" was the most likely outcome.

    But he said: "My fear is that we will prolong it and suffer a death of a thousand cuts after we have exhausted all the options."

    February 27, 2008

    W.F.B. R.I.P.

    The death of William F. Buckley Jr. today brought to mind many, many things. Prominently among them was the class and dignity and good manners displayed weekly on his "Firing Line" show on PBS.

    Louis Rukeyser's "Wall Street Week" shared those same qualities. And, just as Rukeyser's passing reminded me of the relatively lacking quality in most financial programming these days, Buckley's death underlines the awful state of political discussion available on TV.

    Rest in peace, Mr. Buckley.

    ArmorGroup in takeover talks

    ArmorGroup International (ARG/LN or AMGPF/OTC) was purchased for the portfolio when it was trading at a bit under net asset value. It went on to become winner, then loser and remains well below my purchase price.

    Regular readers know I've long speculated ArmorGroup may be a takeover target -- and today the company stated it is in talks with several different parties about possible offers. The Financial Times has the best report I've seen:

    Likely suitors include Control Risks Group in the UK and Aegis, the privately owned security and risk-management company. Industry sources also said any of the other big security companies that provide manned guarding elsewhere in the world other than Iraq, such as Group 4 Securicor, could be in the frame. In the US, Armor's rivals include DynCorp and Triple Canopy.

    Any suitor would need to get the backing from Granville, a private equity group and Armor's largest shareholder, which holds a stake of about 32 per cent.

    In spite of recent setbacks, Armor is seen as an attractive target thanks to its global operating base - it has more than 8,000 employees operating in 38 countries - and a good client list. At the time of its profit warning, Sir Malcolm Rifkind, chairman, said the group continued to be "very strong operationally and reputationally and remains profitable and cash-generative".

    Would I like to see the company get bought? Sure, at the right price. The problem is that even with the run-up in the last session, the stock is still below my purchase price.

    It will be interesting to see where the shares trade over the next several days. ArmorGroup doesn't have a large share float, and price swings can be drastic.

    I would love for ArmorGroup to end up having been a profitable investment. But if I wind up getting my original capital back, I'll be content.

    Walter Schloss Video Q&A

    You can watch the videoconference the Ben Graham Centre for Value Investing conducted with Walter Schloss on February 12. To see it, go here and scroll down to the bottom. Schloss begins with a couple of minutes of opening remarks, then starts taking questions.

    I've tried watching it twice, and several minutes in start having "buffering" issues with the Windows Media player. Hopefully that's just a temporary thing, and I'll try again later.

    Be sure to check it out yourself. Because -- assuming you can watch it all -- it's sure to prove one heck of a treat.

    February 26, 2008

    "Alice in Moneyland"

    Tom Stevenson writes a column in The Daily Telegraph for "Alice" -- a family friend who is now 20 years old. He writes about telling her "10 things she should know about money while she's young but almost certainly won't give another thought to until she's not."

    The first on the list is:

    Time really is money. Forgive me if I start with compounding again, the miraculous way in which £100 in an account earning 10pc gives you £10 in year one but £62 in year 20. Earning interest on the interest on the interest is how £100 invested in the stock market in 1945 became £131,639 in 2007. You would jump at a 62pc rate of interest if someone offered it to you, but you're happy to forgo it by waiting a year before you start saving. Just do it, Alice.

    The remaining nine can be found here.

    February 25, 2008

    Four Top Performing Newsletters

    Via Maoxian, I found this Kiplinger's piece on four top performing newsletters, as ranked by Mark Hulbert. Most stock market letters are hype and worthless -- I even know of one direct marketing guy who claims to have written promotions for so-called "gurus" who were just fronts for the publications using their names. They never followed their own advice.

    But any newsletter getting favorable marks from Hulbert is almost certainly worthwhile. The four in the linked article all have top-notch reputations. And some that aren't mentioned, such as Richard Russell's Dow Theory Letters, have excellent reputations established over many, many years.

    February 23, 2008

    Raymond Chandler on Oscar Night

    Because the Oscars are happening this week, The Atlantic Monthly is re-running the classic essay by crime writer and screenwriter Raymond Chandler from its March 1948 issue:

    "Not only is the motion picture an art, but it is the one entirely new art that has been evolved on this planet for hundreds of years. It is the only art at which we of this generation have any possible chance to greatly excel."

    If this type of things strikes a chord in you, you'll want to print this out and read when you can take the time to savor the words and sentences like a good drink.

    This was written by a master, and in the days before television and video games gave so many of us the attention spans of gnats.

    On a side note, my favorite all-time detective novel is Chandler's The Long Goodbye, written in the 1950s. Many critics prefer Chandler's first four novels, which were penned in the late 1930s and early 1940s. I love those, too. But The Long Goodbye is one that I still pick up off the shelf and re-reads passages of.

    Yet another Watsa story

    The Prem Watsa mini media mania continues. The next thing you know, journalists will start calling him "the Warren Buffett of Canada" again.

    Here's another writeup in the Globe and Mail:

    To some investors, Fairfax Financial Holdings Ltd. is a property and casualty insurer. To most, though, the insurance business is nothing but a dull sideshow to the main attraction: Prem Watsa, the company's chairman and chief executive officer, and one of Canada's most revered investors.

    Sound familiar? That's because Berkshire Hathaway Inc. has attracted a similar base of investors: Some are there for the snooze-inducing insurance, most are there to bask beneath the investing prowess of Warren Buffett, Berkshire's chairman and CEO - and the world's No. 1 investment guru.

    In a way, both companies resemble mutual funds, with top-ranked managers at their respective helms. But does this make Fairfax a buy?

    Is it? For me, no.

    In fact, regular readers of Controlled Greed will recall that I sold half my Fairfax position last October. Meaning I've gotten my original capital out and the position is now a free ride. The company may ride higher -- I hope it does -- but it was a better buy some time back.


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