Thursday, December 31, 2009

The minimum wage finally falls in a state.

In CO, the minimum wage, indexed to the cost of living, fell for the first time in history.

Read it, here.

Thursday, December 24, 2009

'Old Man Potter' the theaving value investor.

In honor of this Christmas, I have been watching 'It's A Wonderful Life'. Having not watched the movie in it's entirety since I was a little kid, I never really remembered the specifics of the run on the bank, where 'Old Man Potter' offers to buy all the shares of the local building & loan for 50 cents on the dollar... and is actually in a position to do so!

The townspeople and George make him out to be a theif and cheat in light of this (which is understandable given the man's implied history)... Certainly, in regard to the building and loan buyout, one could see him as a shrewd businessman, who is no different than the activist investors in Kingsway Financial that bought back the company's debt for significantly less than par.

Later, in a true display of moral ineptness, which seems to be otherwise normal for Potter; he pulls a Bernie Madoff, and quite literally steals from the building and loan. Ah, the true evil of man is caught on film!

Merry Christmas to all (except Mr. Madoff).

Tuesday, December 22, 2009

Rand and Trey... an update.

The newest poll has Rand Paul edging out a win over Trey Grayson by a mere 19 points... WOW. This looks really good. Heck, even one of my staunchly anti-republican friends has registered as a Republican so that he can vote for Rand in the primary.

Meanwhile, Paul continues to go on shows and campaign like crazy; in the linked example, quite literally, on the other end of the state, in a super small town. He is also accepting any debate that is thrown his way. Meanwhile Trey Grayson is sending out family Christmas cards that celebrate horses and tweets about Coach Cal and UK's basketball team getting 2000 wins...

It will be interesting to see what Mitch McConnell does after seeing this poll.

Disclosure: Long Rand Paul for US Senate. :)

Monday, December 21, 2009

Steak 'n Shake: Attempting to enter the insurance industry.

Here are some quick thoughts:

Sardar Biglari and Steak 'n Shake just announced that they are attempting to buy all remaining shares of Fremont Michigan Insuracorp. To sum this up, with some estimates that I have quite literally jotted down on he back of an envelope and have thought about for only a few minutes... this is a good deal for share holders of BOTH companies.

If the buyout goes through, SNS will be spending UNDER $13 million in cash; they already own about 10% of the company, are only paying 1/2 the remaining $38.59 million in cash (or $19.3 million), AND will get the $6.75 million in cash that Fremont has on the books... Leaving the cash out of pocket expense for ~$12.5 million.

In the past 4 quarters, FMMH earned about 2.56 million, so SNS would be getting a great deal on the company at ~5x earnings (if ONLY the cash of the deal is taken into account). Add back in the company's depreciation of $1.489 million and the multiple gets even better. Add in the dilution of SNS shares and the deal still seems to make a great deal of sense.

Keep in mind, that there will be cost cutting, as there will be synergies of the 2 companies. Who knows- if franchising picks up with SNS stores, maybe Fremont will underwrite some of the P&C on the locations? Fremont will also lose it's CEO in the deal, so, there would be addition savings of about $.25 million in addition, contracts and pay may come down with the other executives; though, it wouldn't be a surprise if they actually get a slight raise.

Fremont shareholders will be getting precious liquidity, cash, and part ownership in a great/growing/profitable company.

Ultimately, I feel quite comfortable with the deal; and will be interested to see what Fremont does. Certainly, the market, which is presently valuing the stock at $.15 cents ABOVE the offer, seems to think that SNS will beef up it's offer.

This deal will leave SNS with just under $40 million in cash and a credit line to deploy into other companies or assets. Again, this is good for everyone, especially the shareholders of FMMH, as the growth prospects of SNS are incredible.

Disclosure: Long SNS. This is not advice. DO YOUR OWN RESEARCH!

BTW: For all of you last minute Christmas shoppers (or people that need that 'little something extra'), SNS is giving out a $5 dollar gift card, with the purchase of $20 dollars in gift cards; which is what I am getting for quite a few of the people on my shopping list... I certainly suggest that you do the same! :D

Saturday, December 19, 2009

When Legislation Becomes Vote Buying

In regard to the recent developments in the soon to be law medical insurance debate, it has become apparent that our legislators are not so much about passing reforms, but rather, selling their votes. It is somewhat ironic that what is generally considered to be something limited to back door whiskey deals in Appalachia is now up front, center, and above water in our capital.

As this is the case, Nebraska Senator Ben Nelson has used his filibuster busting vote to 'reform' the insurance industry in exchange for a concession on abortion and the federal government picking up the tab for some medicare costs in his state.

"Officials said the federal government would pick up Nebraska's entire cost of a Medicaid expansion in the bill. Other states will have to begin picking up a portion of the added expanse beginning in 2017."

It is good to know that the feds are letting Warren Buffett's state not pick up the tab for services, at the expense of the rest of us (well, they are paying a little bit, through their federal taxes, but, certainly, less as a proportion). I will also wonder if the deficit reduction spoke of, is due to the federal government passing on a lot of costs to the states... It does seem like a good way to ponzi-scheme our way out of deficits.


EDIT:
This, just bolsters my argument.

Sunday, December 13, 2009

VIC: SNS


Not being a member of the VIC, I don't have access to their database. I had sent in my long case for SNS a few months back, in late June when it was trading at ~9 bucks a share... despite making what I thought was a valid case, I was rejected. :(

I now see that there is a short case on the page, which I am assume revolves around the company's high P/E, exposure to commodity prices (since they don't hedge), and what I like to refer to as the company's 'phantom debt' of over $110 million; debt that is made up of future lease payments (per GAAP), which isn't what I would consider to be interest bearing. Regardless, I would love nothing more than to read the write up, as I would love to hear another short case made (especially if it is of VIC quality)!

Anyway, I was curious if someone would be willing to send me a copy of the SNS short thesis?

Disclosure: Long SNS

EDIT: Wow, in light of the comment I got, I feel dumb, as I realized that I had already read the thesis at the very link that was given to me- when the thread on the Corner of Berkshire and Fairfax was started! Furthermore, simply typing in "sns short vic" would have given me the link I wanted... This is a good lesson for me to keep in mind for next time. :)

To put it simply, I disagree with most of the points made in the article. While the value of the company's real estate has deteriorated and probably doesn't have great upside in the near future, due to the high potential of a commercial real estate crash; I still think that the cash flows that will come out of the company will be quite significant, and think that the company is still quite cheap.

SNS price falling after earnings release?

Apparently, SNS IS going to be falling in price after the earnings release tomorrow... I thought that you might find the link interesting (found via InfoNgen)

http://www.m2.com/m2/web/story.php/20091AB710230BC283BB802576890063285B/text/M2PW

While I have no idea what will the results will be, I am pretty sure that they will be good. More later, after I have read Sardar Biglari's Chairman's Letter.

Disclosure: Long SNS

Saturday, December 12, 2009

Nova: The Trillion Dollar Bet

Here is the first of several Nova videos that are on the Longterm Capital Management debacle. I remember stumbling upon it on KET on a Sunday evening in when I was in middle school. Even then, I thought that the whole situation was one of the neatest things in the world. It may well have been one of the moments in my life that shaped me into being the contrarian value investor that I am today! :)

While I do think that some of the video is missing, the jist of it is there.

One thing that I didn't understand the first time that I watched it, and still don't get, is how much credence they still seemed to give the the Black-Scholes option pricing formula.

Principles be damned!

Here.

Wednesday, November 4, 2009

Rand Paul and Trey Grayson in Stalker Gate.

Trey Grayson (the former front runner who was supported by Mitch McConnell) has to be sweating bullets, after Rand Paul is now the front runner in the KY 2010 Senate Race.

Regardlss, here is a video, where it seems that Trey Grayson still can't get enough of Rand Paul. Somewhat ironically, I attended this event with my friend (and now, fellow blogger) Mike; it should be noted that Trey Grayson didn't bother to drive a measly 1/2 hour to come to an event (that received a decent amount of press coverage) so that he could share his views on various issues with his constituents... Rand Paul, on the other hand, drove 2 1/2 hours- just to get there!



Another note of interest: Trey Grayson talked to the crowd via speaker phone for a few minutes. At the end of said speaking, he "wanted to give a shout out" to some students that apparently went to the same high school that he did- ironically, the student said that they had never met the guy and seemed surprised (if not embarrassed) that he even mentioned it. Go to 2:05 to see the creepy clip.



Strange... but regardless, the plot gets even thicker in 'Stalker Gate'.

Here are the 2 videos of Rand speaking:



Paul Sonkin On Forbes.

Tuesday, November 3, 2009

A really old note(s).


Since I have posted a few things tonight and also came across some old notes from my facebook; I figured that I would post some of the very entries that helped spur me to start this blog. I especially like the second one... Keep in mind that these are pretty old. :)

The Governor of Kentucky temporarily repeals the law of supply and demand.

Here is a link to the story from the Herald Leader.

Let me sum it up... Due to the hurricane in Texas, and rising gasoline prices here in Kentucky (which, Heaven forbid could have to do with much of our refining capacity going offline) our Governor, Steve Beshear declared a state of emergency to protect the public from evil corporations that have lower profit margins than most industries...

The funniest thing about this is that yesterday when I tried to fill my tank up, low and behold, there was no regular gasoline to be had! Since that happened, I filled up with the mid grade. Obviously, since there was a shortage in regular grade, the price had not risen enough to keep people from depleting the supply of regular grade gas. Even as prices had already begun to rise, people obviously felt that they were getting a good deal, since they bought the gas-are they really gonna do something that they feel makes them worse off today than they could have been?

The action of the Governor will only create further gas shortages (like the ones that I assume may have been limited to my station), and in the end, hurt the consumer.


The madness of crowds and misinterpretations of gas prices.

Here is something that I have had on my mind for all of a day; this encounter will stick with me for a good-long while.

Obviously, this whole note is nothing more than observation-well, I won't go that far, as it is certainly influenced by my laissez-fair beliefs... but mainly it's observation.

Yesterday, when I was working at the pawn shop that employs me, a pawn customer came in to get a loan on a bracelet that she owns. The conversation was as follows:

Her: "I need to get a loan of $150 dollars on this bracelet"
Me: "OK, I'll see what we can do."

After weighing the piece, I saw that it was a 14 Karat, 7.2 penny weight, 1 Carat of diamonds, white gold tennis bracelet. What that basically means is that the gold in it is worth about $180 dollars, and you get the diamonds for free (which aren't really worth too much-maybe $50 dollars...)

Me: "We can loan you $100 on it."
Her: "Thats it? This other pawn shop offered me $135... I really needed $150, can you do any more than that?"
Me: "If I could, I would, after all, it's not my money." (which is the truth, I would have loved to make her a larger loan.)
Her: .......pondering things....... "I'm just trying to figure out if it is worth it to go back there, after all, it is all the way over on the other side of town... And gas is REALLY expensive. How much more and I getting there?"
Me: "$35 bucks"
Her: ........pondering for at least a minute......... "How much will it be for me to get it out?"
Me: "$120 within 30 days."
Her: "I'll do it!"

After she did this, I went over to the computer, and looked at how far the other shop was from our store; 2.6 miles. At that rate, she would have to get less than 3.37 GALLONS PER MILE (which is far worse than even an Abrams tank) to break even on the additional 35 dollars (excluding the extra 7 dollars in interest). An extra $35 in gasoline would have gotten her to Louisville and back, provided that she averages 25 mpg.

What is to be concluded from all this?

People need to learn some simple math.

I will also venture out to say that this helps to indicate the madness of crowds that occurs in times of economic bubbles and differing business cycles. If you have a 15 gallon gas tank, it costs you roughly 30 dollars more to fill up now than it did just 2 years ago. Yet, everybody is freaking out and saying that oil prices will go up forever-the very idea of which is fatally flawed. This lady apparently valued 20 minutes of her time and 1/10th of a gallon of gasoline more than 35 dollars too (which I honestly believe they offered her, I know for fact that the other shop gives more for gold than anyone in the city.)

In addition, the same people that are screaming that gas prices are too high, are also trying to raise the taxes that Exxon Mobil and other oil giants pay, and restrict drilling and refining efforts... Raising taxes on Exxon would increase gas prices while easing drilling and refining regulations would lower the price. Prices can not go up forever, and if the market place were truly fair, taxes that are levied on foreign ethanol were dropped, oil producers were allowed to drill and refine gasoline as the saw best fit, then oil and gas prices would be significantly less than they are today. It really makes little sense to regulate and tax if you take a step back and think about supply, demand, and margins for even a brief amount of time.

Finally it seems that consumers are very aware of gas prices, and little else. After all, you seldom hear people moan and groan about movie tickets rising in price-even though rising corn prices have made tickets go up since popcorn sales subsidize your movie ticket. You never hear about the pain of paying more for Coca Cola-despite the company having profit margins that are around 2 times that of Exxon Mobil. And you certainly never hear of people moaning about the wild swings that common stocks take. Would you be surprised to hear that despite close to record profits, GE's stock is trading at about 2/3 what it was 9 months ago? What about that the US dollar is worth about 1/2 what it was (in comparison with the Euro) when it was introduced about a decade ago? A devaluation that would help to explain part of the rise in the price of oil.

All I am getting at is this, things change, and while you can get a good idea for how long things will be screwy, you are never gonna truly know how long it will last, what will be the events that will effect it the most, and most specifically, how every one will react to all the given events. As of now, it looks like we are going to elect a Democrat to the presidency, even though he doesn't care about the economic effects of raising the capital gains tax-in a debate he said that it was an issue of "fairness" and not about increasing government revenue (which a tax and spend liberal should want the most of, no?)

I will end this rather lengthy Libertarian's rant with this:

"The market can stay irrational longer than you can stay solvent."
-John Maynard Keynes

Oil will again be below the $50 dollars a barrel mark, it may be 1, 5, 50 or 500 years, but eventually it will. It shouldn't take a genius to figure that out.


My rant against public libraries.

So today I sat down at my computer desk on a mission to buy a book... Not just any book-it is a rare book, the kind that you can only get on Amazon.com through the "new and used" feature.

I figured that since libraries always seem to be moaning and groaning about how they "need" more funding, that I would try to help them out. I surmised that if I did a search on worldcat.org, I could find a list of libraries that had the book, make them an offer on it and hopefully end up buying it. Obviously, if they would sell it to me, then we both win. They would get a couple of hundred bucks for a 25 year old book on value investing; which I doubt too many people are interested in reading and I would get a crappy copy of a book that I want to own. Simple, right?

No.

Apparently, libraries, under no circumstances, sell the books that are in their collection-unless they have an excessive amount of wear or they are stuck with an abundance of them that they don't need (so we get to buy their leftover crap?). Upon hearing this from about 7 different libraries, I asked "so even if I offered you $1000 dollars for this book that I want, you still can't sell it to me?"

"No, we can't-" was the response, "we don't sell books out of our collection."

Now, let's think of this objectively for a moment, why is it that a library won't sell a book? It really makes very little sense if you ponder about it for very long. Given that the purpose of a library is to spread knowledge to the people of the area that encompasses it, wouldn't the library getting $1,000 for a book by selling it on Amazon.com (or to me) make everyone better off? It would be quite simple for them to retain a digital copy of the book by scanning it into a database, paying the publisher for use of the copyrighted material, and then they could use the other $900 dollars to further the implementation of the online database. At a minimum they could buy more books-either should make them sufficiently happy. I get a hard copy of the book that I want-which would make me happy. Obviously, if we are both happy and are better off, then everyone wins... Right?

With the coming of the Kindle and the various virtual libraries (such as the http://www.kyvl.org/>Kentucky Virtual Library), it should be pretty indisputable that an online database is the direction that we are headed in. Think of it... walking into a library, picking up a Kindle type device and having access to all the books in the libraries database via a wi-fi cloud that covers every square inch of the library! The great part about the Kindle is that there are cool features on it such as being able to click on a word that you are not familiar with, and immediatly seeing a definition of it (kinda like a hyper-linked essay on Wikipedia). There is even a feature that will keep your place in the book-no more losing a bookmark or falling to sleep while reading a book and forgetting where you left off. Even if "a Kindle in every living room" is a far off in the future, the technology to do something similar right now is here-as you will be hard pressed to find any library in the US that doesn't have a few desktop computers and an internet connection.

Who knows, I would imagine that the book I want will be put into a digital format in the near future anyway... It will be a lot cheaper, and I will have the advantage of getting to buy a cool electronic device to further my dependence on technology.

Maybe it is better for me that they don't sell books out of libraries-with Amazon competing with them, my standard of living goes up, as does everyone associated with Amazon and most other people too-provided that they utilize the company's products and services...

The only people that get screwed are the ones that are only able to use the public library to further their education-which is the saddest part of all.

Capitalism: So natural that even a monkey can do it.

It seems that capitalism isn't something thought up by humans, but is rather animal in nature. Thanks go to Greg Mankiw's blog for the link.

Saturday, October 17, 2009

how few people there really are.

When pondering about things such as the *gasp!* swine flu coming through and killing off a significant chunk of the world's population, it is quite natural to think about the number of people that are out there... roughly 6.79 billion. Which does, on the face of things, seem like a ton of people (or rather, about 525 million tons, if each person weighs much more than of 150 lbs.) ;)

Certainly, there are scores of movies, books, and commentators that say present levels of population growth are unsustainable. The say that we are going to run out of food, water, and space. Frankly, these statements are rather... well- they don't make much sense to me...

Something that I have noticed in my recent travels, is how much land there is out there. Quite literally, when you fly to/from Chicago, Denver, Charlotte, or New York, things look pretty dense; for about 5 minutes. After this minimal amount of time, you will then see a vast wasteland of trees, fields, and a few scattered roads. There is a ton of land that doesn't appear to be utilized, for whatever reason (e.g. lack of resources, zoning laws, greenbelts, or lack of people). In my home state of Kentucky, for example, there is a TON of unexploited land that would be perfect for farming.

As another example, roughly 2/5 of the lot that my home sits on is truely utilized by people (that includes the underground utilities); the rest of it, is simply there to annoy me by forcing me spend time, money, and effort on keeping the yard from living up to it's full potential via primary succession.

To further put this in perspective: given that Texas has 261,797 sq. miles of land (water is not counted), you could fit all of the world's ~6.79 billion people into the state, and they would EACH have just a hair under 1075 sq. feet of space (really, it is pretty simple arithmetic). Roughly, this means that there would be about 25,935 people every square mile and just over 10,000 for every square kilometer.

Frankly, this wouldn't be all that bad. After all, I presently reside in a dwelling where I have much less than 1000 sq feet of my own, personal, living space. Despite living in an area where we have super affordable housing and larger than normal yards, in the case of virtually every person that I know, few have 1000 ft of property per person, let alone living space! There just isn't a need for it.

In fact, if you look here, you would see that Tehran has a population density that is about as bad as the UN of Texas would potentially be. If Texas would then be considered a city, by comparison to the others on the list, it would be the 20th most dense city in the world.

Certainly, while this calculation doesn't give any credence to the needs of people to generate electricity, grow food, or even get water, I think that we will be able to figure out what to do. I am sure that we will figure out a way to utilize all the remaining resources in the world and survive as a species...

Off to the Value Investor's Congress I go. :)

Tuesday, October 13, 2009

Economics, Morals, and Drugs

I think that Milton summed up at least 75% of my feelings toward the drug war.

Dinner after the value investor's congress

As some of you know, I will be in NYC next week for the Value Investing Congress. As of right now, some fellow value investors are planning on getting dinner on Tuesday evening and geeking out by talking common stocks and such- if you are game, email me for details.

To any Seeking Alpha editor reading this, I respectfully ask that you don't publish this. Thanks in advance.

Monday, October 12, 2009

British Government to the market: "we're not idiots"

Apparently, the British government is selling off it's assets, in order to fund more spending. My favorite quote from the article was this: "Of course we're not going to sell at the bottom of the market ... we're not idiots,".

Notice how cut up the quote is; between not having the audio of the statement and the way that the ellipses and comma are inserted, it would be possible for the official to of said:

"Of course we're not going to sell at the bottom of the market, we plan on selling at a premium price! After all, doing anything less would be stupid; we're not idiots, and we fully plan on getting the taxpayers a huge ROIC."

"Of course we're not going to sell at the bottom of the market, we are going to sell 5% above the bottom." Then, 5 minutes later, on a different subject: "Of course we're not idiots, Hitler was a terrible person, we are not going to invade France."

While early intervention in the markets has proved profitable for the taxpayers (a la' TARP), we should certainly be open to the fact that things may or may not work out as hoped. After all, not long ago, management of Southwest looked brilliant, then stupid, and now appear to be pretty average for their hedging of oil.

Obviously, only time will tell how this move will be viewed.

Thursday, October 8, 2009

What is a trillion bucks?

A great video for the lay about inflation... In addition, it is reason why you should do your part to get Rand Paul elected. =D

One has to wonder about the growth potential of McDonalds


In this article you have to wonder about the growth potential of MCD. In light of reading the article's stating that the greatest distance you will drive to get to a McDonald's in the continental US is roughly 145 miles, I realized that in the event I am in the 'Middleofnoweheresouthdakota', I am probably less than 2 hours from squelching a Big Mac attack. While the company can certainly grow in other areas, such as China or even delve into other businesses, a P/E of ~15 and a PEG (on Yahoo Finance) of 1.62 are thought provoking as a mental exercise, but cheap my no means (when compared to other food chains, especially).

Disclosure: I own no shares of MCD. This is not investment advice, only something that I thought interesting enough to pass on.

Tuesday, October 6, 2009

I am scared.



Really, this idea of a 'V' shaped recovery that is being thrown around simply seems to be too good to be true. Hell, if oil isn't completely traded in dollars, that wouldn't help anything either; despite that fact that we prolly deserve the smack in the face that a move of that nature would be. While the above picture certainly isn't any evidence that the market will be going up or down in the future, it is interesting to see how things have happened, when compared with other crashes.

Frankly, I am presently pretty nervous, as there are not nearly as many compelling valuations when compared with virtually any other point in the past year... We were all spoiled with a plethora of companies that were selling for under 5x sustainable cash flow and/or less than cash minus all liabilities. Until sales of antacids fall, in the Kingdom of Value Investment, Cash is King, Pricing Power the Queen, and as always, Jim Cramer is most certainly the Jester.

Tuesday, September 15, 2009

Awareness Of What You May Not See.



After you watch this, I think that you will figure out why I posted it... at least, if you have 1/2 a brain about you. And by the way- I hate cyclists.

The one thing that is truely non-partisan

Apparently, bitching about your political opposition is the only thing that is truly non-partisan.

http://www.cnn.com/2009/POLITICS/09/15/wilson.resolution/index.html

Don't get me wrong, yelling 'You LIE!' at the President is pretty uncouth, however, implying that the guy is a racist is pretty big stretch (I had previously thought that we had moved past the issue of race in politics).

Personally, I think that more outbursts of the 'you lie' nature would make our legislative bodies run a bit more like the chaotic House of Commons... This would certainly make our elected representatives' concerted efforts to run our country into the ground a bit more entertaining to watch. :)

EDIT:

Now, Jimmy Carter feels the need to speak out:



Now, are we gonna say that the people that did any of the following pictures of George Bush were terrible racists? No, because that would be absurd. George Bush was no doubt a big government d-bag, whereas Obama is a big government d-bag, but, one that is at least relatively honest about being for big government.

Fortunet Finally At A Valuation That Makes Sense.

Fortunet has been a stock on my radar for quite sometime; which, shouldn't be a surprise, since I am a well known sucker for companies that can be bought for less than their cash minus all liabilities. In March, this was the certainly the case, but since there were other companies that I was more impressed with, never bought into the company. After FNET paying out a massive dividend, the share price fell to just over a dollar and hasn't really moved since. I personally never understood the valuation, as their ability to seemingly print money held up quite well during the recession, coupled with their board feeling confident enough in the business to distribute 2.50 a share in cash.



Today, it seems that FNET can effectively be taken off of my radar, as it is at a valuation that makes some level of sense... and on no news, at that! It isn't that stuff of this nature never occurs with nano-caps, but, this is certainly weird. The entire float of the company has changed hands almost 3 times, despite there being an hour left in the trading day. I look forward to hearing why this happened; regardless of if it some sort of manipulation or takeover attempt.

Disclosure: This is not investment advice. Unfortunately, I never owned shares of FNET (which shows what I know!) :(

Tuesday, August 18, 2009

Rand Paul's Chance

The first poll numbers for the 2010 Kentucky Senate race came out... Rand Paul is doing quite well, too. If the general election were held today, he would literally be in a dead heat with our popular Lt. Governor, who almost beat Jim Bunning 5 years ago.

On another note, thus far, Rand has raised well over $300K in today's money bomb in honor of Ron's birthday... Total, he has raised well over 1/2 a million bucks-not bad for a guy that is a virtual unknown to the political establishment, who has only been officially in the race for about a month. With the primary in about 9 months and the general election a little over a year away, this is a great start.

You guys would be crazy to not go to www.randpaul2010.com and donate!

Monday, August 17, 2009

Western Sizzlin 2009 Annual Meeting Notes

This year, the WEST annual meeting was important, meaningful, and interesting as ever... Fortunately, I was able to attend the meeting of the company that is going to be rolled into my Steak 'n Shake investment (unless these idiots somehow screw it up). Not only did I get to enjoy several days in NYC, but I also got the chance to meet and converse with a number of other value investors; which in and of itself was awesome.

Since Noise Free Investing has already published their own set of notes, I will add in some commentary to my own. Anytime that I use 'quotes' they are as close as possible (keep in mind, my notes were hand written and recording devices were not allowed).

The meeting started with what seems to be customary quip from Sardar Biglari, who held up his 1-liter bottle of Coca-Cola while saying something to the effect of 'Warren Buffett would be proud!'. Following was a PowerPoint presentation that outlined the recent history of WEST. When going over the presentation, it was noted that without the Friendly's deal, 'who knows where we would be right now.' The presentation also displayed how the company is organized.

Ironically, the annual meeting was held the on the 2 year anniversary of the day that Biglari and Cooley journeyed to Indianapolis to meet with the management of SNS in effort to try to develop a plan to unlock value for the company's shareholders... Who would have thought that 9 months after letting Jeff Blade and Alan Gilman know that they intended to launch a proxy battle, that they would be elected to the board in the kind of landslide (74%) that would even make Barack Obama feel like a loser? Furthermore, who would have thought that just 2 years after such intentions were made clear, that WEST, the micro cap of micro caps, would be merging with SNS!?!

Needless to say, upon taking control of the company, costs have been cut, quality of product/experience has improved, the balance sheet/brand are healthier than ever, and the company is throwing off cash like crazy.

And now, my notes...

Margins: Sardar said that the company doesn't really look for gross margins, but rather, a great product- not wanting to make it 'less functional by tweaking'. As examples, the burger buns and tomatoes are changing for the better. Obviously, this is a company that would rather sell more, make a little less, and have increased sales to more than make up the difference. Phil Cooley, ever the teacher added that when gross margins decrease, either the price is decreasing or the cost per unit is increasing- competition generally teaches that price will come down.

SNS is a great example of using cost efficiencies to boost sales- the have also done so while lowering prices. Not even Chipotle, once the poster child for a growing restaurant chain, is trying to raise prices; me personally, I was pretty upset when that happened- the price of my Vegetarian Fajita Burrito has jumped in price roughly 20% in the past year... and yes, I am cheap enough that I eat there a lot less over it. :( But need I digress.

Hedging: The company does not hedge it's input products. Sardar stated that he didn't feel that the insurance you pay for by hedging is worth it. He also openly admitted that hedging prices wasn't in his circle of competence by saying 'I know what I am good at and what I am not good at'. He added that if you would have gotten a consensus for the future prices of various commodities last summer and compared with them now, that you would probably be surprised with what would be shown.

Franchisees Under Preforming: Mainly, the reason for the franchised SNS's not preforming up to expectations is due to their unwillingness to change. I can't say that is entirely irrational for them act in such a way. The way that I see it, when management changes, that will make the franchisees nervous. Further more, it seems that if management changed to a 30 year old who launched a proxy fight, ousted a bunch of the higher ups that you knew at corporate, then after all of that, one of the company's historically largest franchisees resigns from the board after publishing a nasty letter, and then the young hot shot tells you that 'we are repositioning the brand; there will be new promotions, food, and pricing'; you would be nervous to risk your nest egg... However, Biglari did imply that they are coming around, since they needed to be convinced with company results first (as they had heard similar talk of promotions from previous management). He added that had the company been all franchised, that the turnaround would have been a lot harder. Furthermore, he views consistency as something that is quite important for the company, citing KO and MCD as examples that they need to follow. Really, I am hoping that they can get the brand into the minds of people like GEICO has managed to; one of my friends took the picture at the WV state fair... I thought was too good/ridiculous an example of free advertisement to pass up posting. :)

Phil noted that both WEST and SNS have seemed to buck the trend when it comes to franchisees out preforming company stores. Generally, one would speculate that an owner operator would care for his baby in a way that a manager never could. Being entrepreneurs, they would run the midnight oils to make sure that everything is up to par. But again, he is hopeful for the future.

New Stores/Refranchising: It looks as if the company will be keeping most of it's corporately held stores, though, it will refranchise them 'if the deal is right'. An example that was given was that of selling off a location in a tertiary market, as part of a great franchise development agreement. While not going into the specific geographic regions that expansion will take place in, there has recently been a new franchisee that will be opening a store in Richmond, VA. Sardar also said that he had show the plans for the new prototype stores that will be self service and in strip mall centers (these plans were developed much faster than were originally expected at the 2009 SNS annual meeting- where pictures were expected to be available in a year).

Sardar also said that he had been surprised with how resilient the brand has been. He was sure to say that Western Sizzlin, as a brand, is over 50 years old and that SNS is now 75- they have staying power and have merely hit a rough spot. As always, he wouldn't disclose what he valued the company at, but did say 'I love the cash flows.'

Future of the Holding Company: Since SNS is now a holding company, all of the subsidiaries will be throwing off cash for Biglari to allocate in the greenest pastures. While unable to comment on the specifics of the cost efficiencies that WEST and SNS would have as a combined entity, he blanketly said that when 2 public companies become 1, that they will have lower back office costs, fewer costs associated with being public, and also lower marketing expenses. He made sure to say that the company needed to be as efficient as possible, adding that they have done away with a ton of unnecessary expenditures (such as ineffective consultants that did work which should have been in house). While there is still work to be done, they have gotten a great start. With this said, it seems apparent that he will be focusing more of his attention on capital allocation and that the upper level managers now have a good handle on things.

It seems that the time is coming near for significant capital deployment. Biglari doesn't see investments taking place outside of the US, since there are so many opportunities domestically. While not focusing on one particular industry, it seems apparent that they will go wherever they can in order to get the best risk adjusted returns.

Activism: While they would rather not be activists and get great returns, it was recognized that often time, the greatest return comes from buying under preforming assets. The bottom line seems to be that if SNS can increase returns by being activists, then they will do it. Phil said that "No one is more surprised than me that Sardar become CEO.'

Sardar quipped that he was 'the accidental CEO'.

In regards to future investments, it was noted that 'there are a number of small companies that we could take over, though, due to ownership we are uninterested, since we would want to allocate their free cash flows.' Furthermore, Sardar stated that 'we will be in the insurance industry.' They are waiting for the right size of company and the right deal, saying that capital can evaporate quickly if you bet wrong. He added that ' just because you have the money, doesn't mean that you should do it... you need the right people to be partners with.'

Lessons Learned: The most important things that Biglari has seen is a reinforcement of ideas; specifically, the need for a strong balance sheet and liquidity. The levels of debt for the company were too high and had to be reduced. "Cash is king, and valuation his queen." Phil was shocked at how long it took for the financial crisis to unfold in the past several years.

On the note of debt; I will add that the company is now paying virtually nothing to borrow money- significantly less than 1/2 the level of interest just a few months ago.

Extracting Value From Real Estate: While the company does like to be in the real estate business, due to the flexibility that it can give you, it all depends on valuation. An example that Biglari gave was that the company recently sold a property at a 5% cap rate and in turn, deployed the money into a property with a 10% cap rate.

Loop Property in San Antonio: While stating that San Antonio has weathered the real estate market quite well, Biglari seemed optimistic about the future of the property for the company. Most people had thought that the area was void for a reason, they may actually get an extra acre-acre and a half out of the property by working with the local government. Despite this and the potential to have to build a bridge for access, they feel that they underpaid for the property, in part, by not paying for this potential. They may have to pay 1/2-1 million dollars to build a bridge to gain access the property and are also exploring various options in regard to the upcoming debt payment on the property.

Capex: While cap ex is currently around $5 million a year, it may grow a small amount in the coming years. Certainly not get to the excessive levels of the past! Cooley pointed out that spending a bunch to grow a brand, while potentially illogical, does make sense (in a sympathetic way) under the following pattern: there is a belief that companies must grow to hire the right people, since they want to be part of a growing company with the chance to climb the corporate ladder. This can lead to a philosophy of 'well, we know this industry really well, so lets grow!' Then, it will eventually manifest into a goal of expanding at particular rates every year/quarter- regardless of the profitability of such growth.

Woodgrill Buffet: While looking to expand the concept, it requires a great operator to run one; Cooley saying that the operator is the scarce resource. In addition, it is expensive to start. As a result, they only want owner operators that are great, letting them grow as much as they can handle (they will do the same with SNS franchisees too). Phil spoke of his love for the concept, adding 'if you walk into one and are not hungry, you are going to eat... they are great!'

When asked about the Express location, we learned that they took that operation over from a franchisee that was experiencing financial trouble. Furthermore, the location was just off of an interstate exit; with miles driven decreasing for the past 2 years, it was a death nail for the store. With it ultimately failing, they admitted that they had done poorly, and decided to cut their losses.

Shareholder Letter: When asked, Sardar gave his second most forceful answer of the day (the most, coming up): 'I will write a letter. I owe shareholders a letter every year.' He also stated that the reason for the letter not coming out was because of the uncertainty and the timing of the merger agreement.

ITEX: When asked about ITEX, Sardar leaned into the mic and gave a very force full, on the verge of angry 'I have no comment on ITEX.' I can't say that I blame him either; while I have not been upset with the company's results on a relative basis, I have been disappointed with the results on an absolute basis.

Phil spoke of the Associated Press article on bartering for health care that mentioned ITEX. While proclaiming that the fundamentals continue to be good, he felt that the company was under covered. Since this wouldn't be a typical Ragnar Is A Pirate post without something about the government sucking, here is my libertarian-esque link of the day- Bartering: the way of the libertarian!

Raising of Capital for Investments: While John Linnartz is raising capital for Mustang, Western Investments is not.

After The Meeting: After questions, 30-40 of us ventured downstairs to the closing bell of the NASDAQ for a quick ceremony and photo op.

While I was briefly talking with Jonathan Dash after the meeting (in the middle of Times Square of all places), I asked if he knew where the annual meetings would take place when the merger is finalized (as Indianapolis, the HQ of SNS, is a lot closer to me than NYC). I was shocked with the answer- "We don't know yet; we will take a look at where the shareholder base is and figure out where the meeting would have the least economic effect on them..." I was stunned.

And that's when it hit me... This isn't just closing under preforming stores, taking 1/2 of a square inch of red ink off of 'to go' cups, changing from sliced to grape tomatoes on salads, or negotiating better terms with suppliers and lenders; this is a method of cost cutting that directly goes to the core of my philosophy as a value investor. The question I asked is one that no one could prepare a scripted answer for-especially on the very day that the intent to merge WEST and SNS was announced. I am delighted to be partners in this great and growing business with these guys.

Disclosure: Long SNS and ITEX/Do your own research before buying any sort of security I talk about/This is not investment advice/insert your favorite blanket warning here _________...

Friday, August 7, 2009

Jeff Macke: Pay Up.

Yesterday, I won my bet with Jeff Macke in a mere 4.5 months. In a dispute on minyanville.com, he bet a dinner that SHLD would trade in the single digits before it doubled in price... I, along with a minyanville user with the handle "SAM C" accepted the bet. SHLD doubled and is presently well above the $74 dollar mark (and still below book value).

To give a little background info on the situation, Macke made some un-researched and/or false claims about SHLD (and more specifically, Eddie Lampert taking billions out of the company) and then changed the claims without calling attention to the fact that he screwed up. I highlighted the errors and changes (which, I assume were due in part to me, since my write up was picked up by Seeking Alpha) here and here.

I have no idea if Macke will actually make good on his bet, but, I will coincidentally be in NYC for the Western Sizzlin' shareholder's meeting this week. I think that it would be a good time for Jeff to pay up on his lost bet; especially if he is in the city... BTW, I will also be posting my notes from the WEST meeting (Noise Free Investing will also be posting notes on their site).

Jeff, please don't welch out on me. :D

Friday, July 31, 2009

Rand Paul Fundraiser in NYC

To all my readers in the NYC area, if you are interested in hearing some of what Rand Paul has to say, in person- he will be your way on August 5th.

Here is a link to the event on facebook (it does cost a small amount of money):

The details:
Date:
Wednesday, August 5, 2009
Time:
7:00pm - 9:00pm
Location:
Webster Hall
Street:
125 East 11th (bet 3rd & 4th ave)
City/Town:
New York, NY

Unfortunately, I won't be able to make it to Manhattan for this, but should be at the WEST annual meeting. :)

Also, there is gonna be a money bomb for Rand on August 20th. If you have yet to and are a supporter, go to http://www.runrandrun.com/ and sign up (as I did a while back)! The goal is to get him a million bucks. Here is a link to the progress so far- the goal is to get 10,000 supporters to pledge $100 bucks to the campaign, so that we can get him $1,000,000 dollars in a single day.

Wednesday, July 29, 2009

The Virtue and Patience of Owning a Business

As any business owner will tell you, it takes a lot of time, patience, and a strong stomach to last long. Paul Sonkin, the manager of the Hummingbird Fund (plus a few others) and his stake in Dewey Electronics takes this description to a whole new level. Sonkin is a co-author of one of my favorite books on value investing and Dewey makes military electronics and commercial snow making machines.

Earlier in the month, in an SEC filing, Sonkin became a beneficial owner of more than 10% of Dewey Electronics. Formerly, he had acquired more than 5% of the company towards the end of 2005. In that time, there have been anti-war sentiments, reduction of troop levels in areas of conflict, and a recession (which has to of eaten into the snow machine business; despite global warming :D).

The company does own it's 49,200 sq ft manufacturing facility that sits on 90 acres of land; free and clear, which is no doubt on the books less than it is worth. On the books for a mere $1 million dollars, it has been depreciated since 1981. Here is a view of it:


View Larger Map

The company entered into a contract to sell 7 acres of their land for 205K, which sits across the interstate from their main facility, in May of 2008. While the sale of the land is subject to the approval of the Highlands Council and other state agencies (thanks to the Highlands Water Protection and Planning Act). When I called the tax department of the borough to find out what the property's tax assessment was, they told me that is was assessed in 2005 at just over $5.4 million.

The company does have a pension liability, which seems to be significantly underfunded (though, not by a large nominal amount of dollars) since the company is expecting a growth rate of 7.5% for the assets of the liability. This estimate is quite rosy, since the company has a ROE of 1.75% for the past year-which would suggest that the company is either overestimating their pension returns or that they are in the wrong business, since they could more than quadruple their ROE by managing their equity as if it was a pension fund!

To further put this into perspective, Sonkin's position in the company is just over 127K shares, or, put another way, is roughly ALL of the shares that have traded hands in the past 15 months! Obviously, Sonkin has to be sure of his bet, due to the liquidity issues at hand. This, in addition to the under performance of the investment in respect to the broader market; at some point that has take a toll on your investors and investment ego...

Another interesting point about Dewey, is that the company derived over 80% of last years revenue from 2 products; a 2 and 3.5KW generator for armored military vehicles. While I am sure that their products are top rate, it seems to me that military equipment is something that has the potential to change a bit more than I like... granted generators and guns are pretty basic, and once you get some that work, they work for a long time (the Colt 1911A was used as the standard sidearm of the army for many decades and is still one of the best handguns ever designed; the AK-47 has a similar story); though, this company will have to be mothballed or evolve like crazy if they lose their contracts.

Personally, I would love to be an owner of the business- at least, if I could own more than 1/2 of the company. Right now, I don't understand what kind of catalyst there could be to bring the stock to full value, though, the prospect of their land, less all liabilities being worth more than the stock is pretty enticing at the moment. From where I sit, the company should either liquidate, which I doubt will happen (due to management owning a ton of shares) or it will keep on keepin' on with it's low levels of ROIC. Due to low/spur-attic income levels and crazy credit markets, I highly doubt that much could be done to monetize the company's real estate without the company ceasing to exist-but I have been wrong on this sort of thing before.

Disclosure: I have no position in Dewey/Do your own research before buying any sort of security I talk about/This is not investment advice/Yadda Yadda Yadda...

Thursday, July 16, 2009

The Flip Side of Health Care Being a Right.

Here is Ron Paul talking to Aaron Task at the Yahoo Tech Ticker about the current health care legislation that is before the congress.

Now, let's take a step back and assume that the majority of Democrats are correct in their belief that health care is a right... what could this mean if we inverse the idea?

Without a doubt, the first thing that comes to my mind, is that someone must preform a medical treatment, in order to fulfill your right to receive it. Since it is your 'right' to get treatment, someone, somewhere, effectively becomes your slave; who has been coerced into doing something that they may or may not have done in the first place. Granted, there are people out there that do this sort of thing for free (say, Doctors Without Borders), yet, I get the feeling that there isn't enough altruism to go around.

It is unfortunate that the masses of people are attempting to tell doctors (who are certainly in the higher 1/2 of the intelligence spectrum) how to run their practices, who they can (or can't) treat, what medicines to use, and how much their time is worth.

Think about it.

Saturday, July 4, 2009

The Tax Protesting Companies and Government Intrusion

Here is an article on thestreet.com that highlights Amazon's (and others) efforts to go against states levying taxes on their services. No surprise here, but, it is great that companies are banding together to fight for their own interests, against this sort of marketplace disruption ( which ultimatly makes us less efficient of an economy). In the event that legislation of this nature would pass in all states, it would make big box book sellers more competitive, thus, wasting a tremendous amount of resources and time belonging to the consumer.

Here is a brief synopsis: Every time that I buy something on Amazon, I not only save a trip to the book store (sometimes multiple ones, if they don't have what I want), but I also get the option of buying the book- used from some mom and pop used book store; on the cheap too! In addition, I am able to get all sorts of reviews on books and a great recommendation list from the website. I can also add items I want to a centralized wish list, where, people can gift me things that I actually want, rather than guessing at it. The list of advantages goes on and on...

In the spirit of it being my country's independence day, I will also throw out an anti-tax/anti-regulation thought: 'If people so vigorously oppose taxing and regulation of anything related to the internet (which seems to be how the public thinks), then why would they support the taxing and regulation of anything else?'

It seems to me that we don't need regulation to protect me from Amazon.com, since, if they screw up, I will go to some other on line vendor. This being the case, why would I need protection from the evil oil conglomerates (pollution being a property issue), Wal-Mart, or even food producers (both similar to AMZN)? While certainly, we need some government to keep us from killing each other (to quite literally protect life, liberty, and property), it does seem that we have way too much intervention...

To highlight this, let's take a look at the first 15 minutes of my day: using the alarm on my cell phone to wake up, I just paid direct taxes at times; once for the power the phone uses and the other for the usage fee of the cell service (which controls the phone's clock)... I get out of my bed, of which, it is a crime for me to remove the tag of. I then shower, brush my teeth, and take a vitamin; the government regulates that, too- water quality, water company ownership, and the FDA regulating the toothpaste and vitamin. God only knows the amount of regulation that is dealt with if I choose to eat breakfast that morning...

Really, it's pretty absurd.

Happy 4th of July. To any readers in England; thanks for putting up far too little of a fight roughly 230 years ago ;-)

Thursday, July 2, 2009

CEO/President/Chairman Pay at Steak 'n Shake & the Opinion of the Masses...

Recently, as many of you know, Sardar Biglari got a pretty big raise for his role at Steak 'n Shake. While not making any money in director's fees, not getting stock options, and not having a contract, he is still going to be the recipient of $900K/year. Being Chairman of the Board, Biglari has a fiduciary duty to the shareholders- to oversee management and set a profitable direction for the company. As CEO and President, his duty is to run the company effectively and profitably. He has done these things quite well.

Now, let's examine the facts:

1) The company had generated a ton of cash and paid off a chunk of debt.
2) The company is no longer in danger of being close to insolvency.
3) The company has introduced new (and popular) products that have helped snap 14 quarters of negative same store sales.
4) The company has become much leaner from an operational view, helping profitability.
5) There are several members of management and the board now gone, who had presided over a flawed 'expansion at all costs' policy.

First and foremost, the issue of executive pay has garnered a good discussion at the level headed value investing community Corner of Berkshire and Fairfax. My big surprise however, are the comments and commentary surrounding an article in the IndyStar. I wonder if any of the people (including the journalist) even read the 8K, which told of the raise and of the company paying off it's credit line (to the tune of $12 million) with Prudential. That action alone makes the once distant possibility of a share repurchase/dividend/acquisition a very likely development in the next year. It is also a good sign of the company *surprise* being managed rationally.

From reading the comments on the article, it seems that most of the people are angry over the pay raise in relation to hourly employees not seeing 'their share' of the company's good fortune. I surmise that the servers at the chain are doing better than they were last quarter; same store sales are up which means that they are most likely getting more in tips. If the tips are paid in cash, the additional money would probably be more significant, since they probably won't claim the wages at tax time. I fail to see how this is a bad deal for anyone, including diners, who are enjoying new and relevant products (despite some service issues- which are improving).

Not surprisingly, I am astonished at the stupidity of people that lambast a guy for making $900K (even though he turned around a restaurant chain based in their state, which brings them tax revenue), but don't seem to care that California is issuing 3,733x as much in IOU's JUST THIS MONTH! (that link comes curtousy of S. Parsad). Our priorities as a nation are really screwed up. I guess that having a gut reaction to a hot issue is easier than thinking.

On a calmer note; as much as I hate speculating on the matter, I'm betting that Biglari wouldn't have taken the raise if there were not some good news coming our way- and soon, at that.

Disclosure: Long SNS

Monday, June 29, 2009

Is Global Warming a Swindle?

I watched this video (on DVD) about a year ago and found it pretty interesting. However, I just found a link to the YouTube video on The Humble Libertarian's site. Basically, The Great Global Warming Swindle suggests that man made global warming is a lie. Personally, I am not gonna throw out my views on climate change since about everything that could be said, has been. This post is meant to share an interesting video series and to expand horizons (regardless of if there is truth contained or not).

I will say these 3 tongue in cheek things:

1) If climate change is as bad as predicted, then I will be a few hours closer to the beach when I am on the verge of being senile... which wouldn't be bad at all.

2) If climate change is a myth, then I guess the world won't be going to hell in a hand basket and my gas guzzling truck will skyrocket in price since we are quickly approaching a time when it will be impossible to buy a new vehicle that has any real amount of power (due to fuel efficiency standards). I'd be pretty happy with having a vehicle that wouldn't be depreciating in value anymore!

3) My brother is convinced that the flock to green energy is going to create and be the next big bubble... and I'm not convinced that he isn't right. For example, FSLR has tanked in the past bit; though, the effects of any said energy bubble may be lessened by tightening credit. After all, the alternative energy markets have tanked and it is getting even harder to build power plants without tons of money to be lent.

Regardless, in any of the 3 scenarios, I should do pretty well. :-)

The whole thing is 8 parts and is well worth your while (particularly to serve as a balance to An Inconvenient Truth)... crack open a beer, prop up your feet, and get ready for the epitome of contrary thinking.


Thursday, June 11, 2009

Jim Cramer = Mr. Market

Jim Cramer just announced that housing has bottomed. Now, while I personally hope that he is correct, my gut instinct is to say 'look out below!'... at least when it comes to real dollar stabilization. Though, as I just said, nothing would thrill me more than to have real estate prices shoot though the roof.

Historically, our 'friendemy' Jim (who I love to hate), has been really good at... well, not timing the markets very well. For example, in the edition of The Intelligent Investor with commentary by Jason Zwieg, Cramer trumpets that the 'old economy' stocks and 'value metrics' are dead. Later, he says that you should be fully invested in tech (and pokes fun at Buffett over not drinking the tech kool-aid). A person that would have taken his advice would have seen their holdings precipitously fall by well over 90% in price. As I have said before, who can blame them for getting caught up in the bubble if they had no understanding of price and value?

Cramer also was good at saying 'Bear Sterns is fine', while he may now say that it was in reference to deposits (which, I still think him twisting some vague wording); Jon Stewart, of all people, did a good job of schooling him. I enjoy how Cramer said towards the end of the video 'anytime that you recommend a stock that goes down, you've made a mistake...' well, maybe not. Practically speaking, market fluctuations have nothing to do with the underlying value of a company. Let alone what the market will send the price of the security to, after it has fallen.

Certainly, Cramer may be right in his housing prediction in nominal dollars, but, where I have my doubts are in real dollars; I have long said that I think the Federal Reserve is trying to print enough money to raise the price of everything, so that prices as a whole can catch up with the inflated cost of housing.

While I certainly hope that olde' Jimmy boy is right (both in real and nominal dollars), I generally feel safer doing the opposite of what he says. To me, Jim Cramer is the epitome of Mr. Market. Don't get me wrong, this truly is a great thing for us. While I have little regard for the guy, I certainly appreciate that he has attempted to make the masses feel like they can invest on their own and trade their way to financial independence. In addition, we get to see him on TV after he drinks a few to many red bulls, goes nuts on the air, and adds to the manic depressive sentiment of the markets... making securities more attractive to buy/sell for us value investors.

Now that I think of it, maybe I should support the guy, by buying his books. I certainly don't want to see him go away.

Book Review of Distress Investing: Principles and Technique

In the book "Distress Investing: Principles and Technique", Martin Whitman and Fernando Diz successfully outline many of the issues surrounding the complicated world of investing in the bonds of companies that are in bankruptcy. If you want my opinion in 5 words here it is: 'go buy the damn book'.

If you are sick and tired of buying/reading books on investment that are watered down, this would be a good way to step it up. If you read 'One Up on Wall Street' or 'Rich Dad, Poor Dad' and they changed your life, I suggest that you take a pass on Distress Investing. It is certainly not for the faint of heart and will definitely be picked up for college level finance classes.

Throughout various passages, Whitman and Diz outline the many different intricacies of US bankruptcy laws; not only that, but they do a great job of showing how they are applied in real life scenarios. Honestly, I think that the only way that you could learn more about the details of bankruptcy law would be to read all the pertinent legislation... the only problem being, you wouldn't know how it would be applied in various cases, such as Kmart.

The case studies on K-Mart and Home Goods International were excellent and certainly shed light on the practical application of theory, which value investors desperately need in this time of uncertainty. It was rereshing to see what sort of payments the companies were actually able to collect and/or distribute off of the balance sheet in the filings. Often times, as value investors, we are forced to guess at what we think a company's inventory is really worth in the event of a liquidation... remember Buffett talking about liquidating the textiles and the equipment going for pennies on the dollar?

Another great segment of the bond industry that was illustrated were the debentures of Ambac and MBIA. These are investments that Third Avenue (headed up by Whitman) presently have positions in; it was refreshing to get their opinion/thesis of the position. As you know, it is rare that managers go into great detail as to why they have a position in a company (generally, it is limited to 'well, it is pretty obvious that the company is significantly undervalued')... Whitman goes so far as to tell you what he thinks the likelihood of a default on the debt is!

One of the most important points made in the writing, is that it is safe to say that professionals and management make out like bandits in bankruptcy filings, due to restructuring proceedures and fees. There are also other problems with bankruptcy law that are outlined; though, the authors are quick to say (in that Winston Churchill sort of way) that America's bankruptcy laws would be the worst, if it weren't for all of the rest!

The bottom line is this: Distress Investing is one of the few books that I have read recently which has provoked a great deal of thought on my part. Without a doubt, this is the best book that I have read since The Black Swan. You should do yourself a favor and pick up a copy; you'd be crazy not to.

Disclosure: I did get a free copy of the book, though, don't receive any sort of compensation if you purchase a copy (even through the link that I provide). Also, if you want me to review your book, email me and we can work something out. :-)

Wednesday, June 10, 2009

God Bless The Fed.

Here is a good article on the Federal Reserve allegedly threatening oust Ken Lewis if he didn't go through with the Merrill acquisition. This is about as ridiculous as TARP, the bail out of the autos (and subsequent forced sale to Fiat), and the government propping up AIG. It is like we are living in China.

On a related note, I am reading the book Gold by Nathan Lewis. It, combined with the devaluation of our currency and articles such as the one I just posted, are making me more in favor of a non-fiat currency. Given that I am reviewing the book, I will be doing a pretty detailed post on it in the coming weeks-along with several others.

On that note, if anyone reading this wants me to review their books, I will be more than willing to (just email me)!

Wednesday, May 27, 2009

Rand Paul, again.

I just found out that if Rand Paul raises a significant amount of money (say, a million bucks?), he will challenge Jim Bunning for his Senate seat. This in contrast to him saying previously that he would only run if Jim Bunning didn't. As I said before, he is a very viable candidate... heck, if he just gets the votes his dad got (at a point when it was more than obvious he wouldn't win) in my state's Presidential Primary, he will be well on his way out of the primary and onto the general election!

Read the fund raising article here.

Read up on the guy, watch his YouTube videos, like him, and then donate...

Seriously, folks, it would be crazy for you to not donate to Rand's campaign! I am sure that a small investment in the guy will pay huge dividends :-)

EDIT 06.01.09:

I am pretty sure that I am on some sort of list now... ;-)


Sunday, May 24, 2009

Rand Paul



I am sure that it comes to you as no surprise (if you have read this blog for very long) that I am a fan of Rand Paul (Ron Paul's son)... I figured that I would take a break from posting value investing stuff to throw out his name to you all and to take the time to say that I am gonna be donating as part of June 1st 'money bomb'.

In a nutshell, Rand is going to run for Jim Bunning's US Senate seat, should Bunning not run for re-election (which, it doesn't look as if he will). Paul, like his father is pretty anti-government and really pro-freedom. If elected, he would certainly be a great voice for liberty and even better to have in office. It seems to me that the 'Campaign for Liberty' will help him fund raise, but still... we need to get him some real press-and NOW!

If you like the following videos (which I got to see in person) and want to donate money to a principled candidate that actually has a chance of winning, give him some money-even if it is just $20 bucks. I am sure that it will pay better dividends than your favorite stock. It may come as a shock to you that if there is a 3 way race in the primary, Paul could feasibly win with only 30,000 votes. In the general election, he will probably be running against our Lt. Governor (who is a total jack ass.)



Thursday, May 14, 2009

The New Illiterates... Part 1

In advance, this isn't really about investing, but more so a lead-in to a coming post or 2 on the historical roles of eroding economic moats and people willingly becoming illiterate.

Living in the day and age we do, we don't appreciate what we have or the rate at which we have advanced (even in my short life). For example; just a few years ago, I remember getting my first cell phone: a candy bar style Nokia that had one of the gray screens (complete with an antenna that you could pull out!). I vividly remember calling my grandmother after a few hours of having said phone, to test it out- she was quite impressed that I had a cell phone. After all, it was a time when they were pretty expensive (maybe it was just eastern KY being 10 years behind the times, but nonetheless...).

Presently, no one that I know of within a decade of my age has a land line. My current phone is the G1; more of a computer than a phone.

I even remember my family getting our first PC, before which, we had a Commador64. At the time, I recall thinking that a gigabyte was such a vast amount of memory, which could never be used... Now, it is pretty common to have Micro SD cards in our phones that are 16 gigs!

My point is that we live in a rapidly advancing world, with our standard of living constantly going up. Two seemingly unrelated items are commonly related through the field of internet search. Recently, a few members of my family were talking about St. Louis and the National Boy Scout Museum being close by in Murray, KY. I typed in the phrase "national scout museum location" on my phone, and found out that the museum had been moved to Texas within 30 seconds.

If I want to find my favorite mewithoutYou song by typing in some of the lyrics, I can type in a few, find the name of the song, and even one of the band's pirated youtube videos. I can do all of this from my cell phone (including watching the youtube video) JUST 5 YEARS AGO, THIS WAS NOT POSSIBLE. 3 years ago, it wasn't accessible to mere mortals, such as you and I. Today, one of my tenants, who is a single mom with 3 kids, who works the dead shift at Wal-Mart, has the same phone that I do; complete with a full data plan (all of which, is a testament to the goodness of capitalism)!

When thinking about these huge advances in both the scope and affordability of technology, I can see 3 things pretty clearly (but I am sure there are many more that I am completely missing):

1) It is no surprise that 'old' people don't get new things (as they are not used to the new, drastic nature of the exponential curve in regard to the change in technology)... even my older brother, who is just under 10 years older than I (even with me having a limited knowledge), has a much harder time figuring out computer issues than I do. This is despite being a hell of an electrical engineer that does controls programing; he's also much smarter than I- by a factor of about 10,000.

2) I can understand why people got stuck up in the tech bubble-after all, communications systems have done more to increase our standard of living than anything else in my short time on this earth. This is a concept that is strikingly similar to the speech that Warren Buffet gave in Sun Valley about car and tech companies roughly a decade ago; importance to society doesn't equate to economic viability... historically, take a look at airlines, airfreight, rails, tulips, etc.etc.etc.

3) Companies die all the time and things have the ability to change faster now than ever before. (Alta Vista v. Yahoo!, Yahoo! v. Google, and now, for better or worse, Apple v. Microsoft v. Google)

Obviously, the conclusion I draw from this is that we need to invest in companies that we understand, with a huge margin of safety. If we feel that we 'get' a tech company, then that is great! Value it and buy accordingly. I would love to buy google for 5x earnings. If not, then it is OK to wait for a grand slam. So much of investing is about not screwing up.

On the note of 'old' people not getting changing technology, I think that they generally do pretty well, after all, if you would have given my grandmother a microwave in 1930, she probably would have thought it to be a 'devil box' or something... if you ease them into it, I guess things work out pretty well.

On that note, I am pretty interested to see how I (and people my age) adapt to the rapid changes that are coming... especially when I am, say, 80 years old and have a walker-or maybe, new mechanical legs. :-)

Sunday, May 3, 2009

Jonesing For a Crazy Few Years...

Jones Soda (JSDA) is probably my favorite example of a John M. Keynes "Sometimes, the markets can stay irrational longer than you can stay solvent" stock... They have some pretty tasty products too. Check out it's chart since 2003:


A few years ago, I was tossing around the idea of shorting the stock-when it was trading at what seemed to be an astronomical 100x+ earnings. 'The price?' you ask? Around $12 bucks a share. Oddly, I remember thinking that if it was around $3 dollars, it might be compelling; or at the very least, at a price in which I would want to cover any potential short.

In various conversations that I had with people over shorting the stock, I got the following reactions (in no particular order):

1) I can't believe that the stock is that expensive.
2) You may think that it is worth $3 bucks a share, but it will never get there. You are a cheap bastard.
3) Shorting is a bad idea because, hypothetically, your losses have no limit.
4) Huh?
And my personal favorite:
5) Jeff, shorting is evil and sleazy... even for you.

For several reasons, I didn't short the stock. Mainly, I was busy deploying capital into other equities and properties-I simply didn't have any cash left laying around for a relatively speculative play. This turned out to be a really good thing; if I would have done any sort of a meaningful short, I wouldn't of had any downside (or upside, depending on how you look at it) protection in the event of a margin call stemming from an up tick in price.

In the months following my thesis the stock rose... it rose, rose, and rose some more-getting above $28 bucks a share. So, there I was, thinking "WHAT!?!?!?" and "Wow, I am glad I didn't go short." Further more, I was shocked that the little company could be bid up to such absurd levels of price-did the people buying the stock have brains? Were they too stupid to look at the financials and filings of the company? Did they even care? Needless to say, at this point, I was more confident in the idea of shorting than ever, but in a moment of weakness, I still couldn't bring myself to do it... After all, I had pretty passionately spoken against the stock and was looking really bad to the handful of people I had discussed the idea with ('Way to go against the crowd', I know).

Then came the precipitous fall, complete with a boat load of insider selling... the price of a single share recently went down to less than 1/2 what a bottle of their soda will fetch in Starbucks; the stock would probably be a better investment than the soda too! This, after the company mis-judged the demand for their product and sold it in cans, rather than the traditional bottles that a charm of their own. The thing that I think management missed, was that there is nothing wrong with a company NOT growing at exponential rates, so long as they generating a ton of cash and then returning it to shareholders... so long as the growth is less prudent, from a capital allocation standpoint, than stagnation.

As for the future of the company, I could guess that it will go private, but probably not. Ownership of the company is incredibly fragmented, with there never having been a 13D filed. It is quite unfortunate too, had shareholders been united and smart enough to go against management, then maybe the company wouldn't have been hemorrhaging cash for the past few years. Heck, had management had more skin in the game, maybe things would have been a bit different.

Interestingly enough, the company not only has the historic ability to generate significant cash flows, but are one of the few that actually has a cult following- there may actually be a future for the brand! Personally, I still remember the first Jones Soda that I ever tasted... a 'Berry Lemonade' that I got at a gas station in southern Illinois on a summer trip-I thought it was the best soda ever. It's that kind of memory that may save the company from a history of poor capital allocation.

With that said, the founder of the company recently stepped down from his position on the board, over concern of the direction of the company. This, after having stepped down from being Chairman and CEO in 2007. While it may seem that he played a significant role in wrecking his own company, you still have to wonder what he saw-did he realize that the bad direction was his own doing, couldn't be righted, and didn't want to be on a sinking ship? Or were his reasons legitimate?

Lessons Learned:
1) Only question yourself based on facts, not the opinions of other people (learning this was a good thing-for example take my huge losses, which turned to great gains on SNS).
2) Don't underestimate how expensive 'growth' can be.
3) The markets can and often stay irrational longer than you can stay solvent (thanks to JMK for that tid bit).
4) Things do get 'just that cheap'... all the time.

Disclosure: No position, just thinking out loud...