Warren's Way - By James Surowiecki

Warren Buffett’s tastes haven’t changed much over the years. “I like today what I liked fifty years ago,” he told me the other day. “I like reading 10-Ks. I like playing bridge. I haven’t acquired a lot of new habits. I was happy when I was in my twenties, and I don’t see a reason to change things.” We were having lunch with Carol Loomis, one of his closest friends, who is the editor of “Tap-Dancing to Work,” a new anthology of Fortune writings by and about Buffett. As if to illustrate his point, lunch was the same lunch he’s probably been eating since he was a kid: a hamburger and fries, followed by vanilla ice cream, “strong on the chocolate syrup.” It isn’t just his tastes, though: as the new book shows, Buffett’s philosophy of investing has stayed remarkably consistent.

…………….

Related book: Tap Dancing to Work

ROB Magazine’s CEO of the Year: Bill Ackman

It is a grey, blustery New York morning, days before Hurricane Sandy will unleash its fury on the city, and Bill Ackman is tearing his way through a day that started just after dawn.

He is running on just a few hours of sleep, his private jet having returned him home the night before after a whirlwind four-day trip through Korea and Singapore. His first stop was dropping the youngest of his three daughters at a small, private grade school on Manhattan’s Upper East Side. By 8 o’clock, he is sitting next to me at Sarabeth’s, a popular eatery on Madison Avenue, inspecting an egg-white and spinach omelette.

Dressed in a close-fitting navy blue suit, he leans over the table, head bowed, as he fires off pointed responses to my questions—sometimes even before I’ve finished asking them.

Here on the Upper East Side, Ackman is just another silver-haired billionaire eating a $20 breakfast. In Canada, however, he is the boardroom barbarian who toppled four-star corporate generals at one of the country’s most historic companies. It has been 20 years since the 46-year-old Ackman launched his first hedge fund and began building a reputation as the most active activist on Wall Street, betting against overhyped companies and arm-twisting directors into fixing broken businesses. He has had some flops, but today he waves them off. He can afford to. His hedge fund, Pershing Square Capital Management, now ranks as one of the world’s biggest and most feared activist forces, with $11-billion in assets under administration.

Howard Marks’ Presentation at the Goldman Sachs Financial Services Conference (slides)

Link to: Howard Marks’ Presentation: Perception and Reality

………………

Related previous post: Broyhill Asset Management: Solid as an OAK

The Absolute Return Letter - December 2012

Absolute Return Partners turned 10 years old only last week. We celebrate this milestone with a major overhaul of our brand. Unless you are a first time reader of this letter, you will notice the new look. Likewise, our new website will be launched in the next few days. At the same time our URL will change to arpinvestments.com.  For reasons that we shall not waste your time with, we have to keep the old website alive until this letter has been posted but we expect to launch the new website next week.

This month's letter focuses on the short to medium term factors that drive our asset allocation and portfolio construction. All research suggests that financial markets are not driven by economic fundamentals in the short to medium term, so why should the investment process be?

Ukraine Crushed in $1.1bn Fake Gas Deal

Certainly the folks at Gazprom are having a good snicker, reveling in the mockery that has been made of what should have been a landmark Ukraine-Spain gas deal that would have loosened Russia’s gas grip on Kiev.

Everyone wondered how Russia would respond to Ukraine’s attempt at gas independence. But this is what happens when you mess with Gazprom.

It was a horrible moment for Ukraine on Monday—all the more horrible because the whole event was televised—when the historical $1.1 billion deal it was about to sign with Spain’s Gas Natural Fenosa turned out to be fake.

Why was the deal historical? It would have secured $1.1 billion in investment for the construction of Ukraine’s first liquid natural gas (LNG) terminal on the Black Sea and a pipeline connecting the country’s vast gas network to the terminal.  

More to the point, this would enable Ukraine to import by tanker up to 10 billion cubic meters of European gas at a price 20% cheaper than Gazprom. Even more to the point, it would be a major first step toward reducing Ukraine’s dependence on Russia.

The deal was that investors had apparently signed agreements through a newly formed consortium for the construction of the $1.1 billion LNG terminal.

Here’s how the ill-fated signing ceremony went down:

Sheila Bair on Capital Account

Link

.................

Related book: Bull by the Horns

Bill Gross – December 2012 Investment Outlook: Strawberry Fields – Forever?

While there are growth potions that undoubtedly can reduce the fever, there may be no miracle policy drugs this time around to provide the inevitable cures of prior decades. These structural headwinds cannot just be wished away as we move “forward” whether it be to the right, the left or dead center. Last month in a major policy speech at the New York Economic Club, Fed Chairman Ben Bernanke concurred that the U.S. economy’s growth potential had been reduced “at least for a time.” He in effect confirmed PIMCO’s New Normal which has been in place for three years now, laying the blame in part on the financial crisis, diminished productivity gains, and investment uncertainty due to the near-term fiscal cliff. We do not disagree. However, there are numerous other structural headwinds that may reduce real growth even below the New Normal 2% rate that Bernanke has just confirmed, not only in the U.S. but in developed economies everywhere.

For Buffett, the Long Run Still Trumps the Quick Return

Thanks to Will for passing this along. I thought both the Klarman mention and the comments about shorting were especially interesting.

Mr. Buffett was in a reminiscing mood about a bygone era, in part because he was in New York to make the rounds on television to discuss a new book chronicling his 61-year career, which began in 1951 at Buffett-Falk & Company in Omaha. (After lunch, he was going to visit “The Daily Show With Jon Stewart.”)

The book, “Tap Dancing to Work,” by a longtime journalist and good friend of his, Carol Loomis of Fortune magazine, is a compendium of articles that she and others wrote in Fortune that creates a series of narratives spanning the arc of his career.

Ms. Loomis, who first met Mr. Buffett in 1967 — and whose long career is a story unto itself — also came to our lunch. Ms. Loomis may know more about Mr. Buffett than he knows about himself. (“There’s nothing here you’re going to like,” she said, after surveying the various pies when the dessert cart came around. She was right: he took a quick look and asked if they served ice cream. They did.)

As we talked about the “good old days” — he spoke of some of his early friends who were successful hedge fund investors, like Julian Robertson, who founded Tiger Management — it became clear that he was less enamored of the investor class of the next generation.

When I asked, for example, if there were any private equity investors that he admired, he flatly replied: “No.”

When I asked if he followed any hedge fund managers, he struggled to name any, before saying that he liked Seth Klarman, a low-key value investor who runs the Baupost Group, based in Boston.

…..

Today, Mr. Buffett is particularly circumspect about the investment strategies that hedge funds employ, like shorting, or betting against, a company’s stock. He used to short companies as part of a hedging strategy when he ran his partnership, but now he says that he and Charlie Munger, his longtime friend and vice chairman of Berkshire, see it as too hard.

“Charlie and I both have talked about it, we probably had a hundred ideas of things that would be good short sales. Probably 95 percent of them at least turned out to be, and I don’t think we would have made a dime out of it if we had been engaged in the activity. It’s too difficult,” he explained, suggesting that the timing of short investments is crucial. “The whole thing about ‘longs’ is, if you know you’re right, you can just keep buying, and the lower it goes, the better you like it, and you can’t do that with shorts.”

………………

Related book: Tap Dancing to Work

Howard Marks quote

“If you buy a cheap stock when the market is high, it is a challenge because, if the market being high is followed by a general decline in prices, then for you to make money in your cheap stock, you have to swim against the tide. If you buy when the market is low, and that lowness is going to be corrected by a general inflation, and you buy your cheap stock, then you have the tailwind in your favor….I think it is unrealistic and maybe hubristic to say, “I don’t care about what is going on in the world. I know a cheap stock when I see one.” If you don’t follow the pendulum and understand the cycle, then that implies that you always invest as much money as aggressively. That doesn’t make any sense to me. I have been around too long to think that a good investment is always equally good all the time regardless of the climate.” –Howard Marks

Crestmont Market Valuation Update

Via Doug Short:

The Crestmont P/E of 19.9 is 45% above its average (arithmetic mean) of 13.7. This valuation level is similar to the 44% we see in the latest S&P Composite regression to trend update and higher than the 26% above mean for the Cyclical P/E10 (more here).

The Crestmont P/E of 19.9 puts the current valuation at the 90th percentile of this 141-year series.