– Advice from a 105-year old Banker: From one of the original Graham disciple.
– Talk by Prem Watsa: Great talk on fundamental investing
– Discovering how humans think: Great read
– Buffett talking his idea on tax increases: Always fun to watch him and always learn something new
– The Shape of the Global Economy: Great read from Mohamed El-Erian
– Grandpa at the Casino: Wonderful perspective on the current market
– S&P’s report for the downgrade: S&P’s rationale for the downgrade
– Prem Watsa sees Dirty Thirties pain ahead: Watsa believes we have turned Japanesa
– Longleaf Partners Semi Annual Report: Always a good read and place to screen for ideas
I haven’t been able to provide a detailed update on my holdings. Here is a quick update:
Q2 performance was bad for my portfolio. Almost all my holdings were hit and with a concentrated fund it can get ugly quick. Although I believe no one quarter is an indication of my analysis being right or wrong. For most of the companies that were hit hard, I was buying more in Q2. This further worsed the results in the short-run but I’m convinced in the long-run I will come out ahead.
I was adding position in HNR, HALL and HEK. I also sold out of BTC and GGP in the quarter. BTC is a turnaround play that is working out as planned, albeit I sold it to raise cash for other purchases. GGP has been an amazing return in a short period. It has been more than a 10-bagger (including HHC) in less than 2 years.
The last 2 weeks have been very interesting for the market and my holdings. The downgrade of US debt rating is a mind-boggling error from S&P. As Buffett said it “makes no sense”. The market’s reaction to this downgrade seems to makes even less sense. In no way does the downgrade of the US debt justify companies losing 10-20% of their market value in a few days. In most cases, the business prospects for companies does not change that dramatically in days.
I took the sell-off as an opportunity to buy companies that I know were selling cheap. The problem with the dramatic market decline is it didn’t provide much time to research new ideas. I had a cash balance of over 20% before the market decline. I used the sell-out to put half of the cash to work, buying companies like Berkshire and Goldman Sachs.
The market craziness today has created some amazing buying opportunities. Here is one that Mr. Market is providing that is absurd.
Over this weekend Berkshire came out and made an offer to buy Transatlantic Holdings for $52 a share, an all-cash deal. Transatlantic Holdings is in the reinsurance business. Although this investment opportunity doesn’t require any knowledge about the insurance business or Transatlantic Holdings’ financials. Berkshire’s offer to buy the company for $52 a share is one of the most certain things in the investment world, second only to promises by US Government to pay its debt. Berkshire has never, best of my knowledge, made an offer to buy a company and then run into problems getting cash to finish the transaction. So, for all purspose I look at this offer as something that doesn’t hold any financing risk.
I think the big uncertaintly (not risk) here is Transatlantic Holdings’ board rejects this offer. Typically a board would reject an acquisition offer only if they believe the company is worth more than the offer price. There are other reasons as well, like the board believing the transaction can’t be completed due to financing or regulatory hurdles to complete the transaction. In this case, I think the biggest uncertaintly is board believing the offer price is a low-ball offer. In that case, the board would have to convince the shareholders the company, as a standalone, is worth lots more than $52 a share. If the company is worth less than the offer price, the board would be best served to accept the offer.
We know the type of companies Berkshire likes to acquire. We know the management qualities that Berkshire looks for in potential matches. So we can rule out any risk that the management and board of Transatlantic is using the company as a vehicle for personal enrichment at the expense of shareholders.
At close of day on Monday, the company’s shares were trading for $48.31 a share. The is a difference of $3.69 a share, to the offer price. So you are getting a 7.64% return on an investment if the offer closes. If the offer doesn’t close, the board has to show how the company is worth more than $52/share. There is potential upside if someone else comes and out-bids Berkshire.
The biggest downside on this investment is that the deal doesn’t close. Since we know the quality of management, based on Berkshire’s screening, you have got to believe management is top quality. So management rejecting this offer means you have a good quality management that believes the company is worth lots more than the offer price.
We thought this week was bad. Monday will be even interesting. On Friday, S&P downgraded US debt rating.
– Fairholme Fund’s Annual Report: Always a great read
– Kings of the Wild Frontier: Bill Gross chimes in on the debt limit increase
– Bank of New York Mellon charging for parking cash: A huge reversal of what has happened due to investors avoiding all investment options
– The coming debt crisis: The real debt crisis is still to come