Rabbitisrich

Good thinking Rranjan. I like that problem because it demonstrates the difference between intuited odds and logical odds. If you wikipedia Marilyn Vos Savant, the problem apparently provoked strong reactions amongst even trained mathematicians.

Here's another famous question (if you know the answer don't say it): A gameshow host invites you to pick one of three doors. One door leads to a brand new Rolls Royce. The others lead to goats. After you make your choice, the host will make the game easier by opening one of the doors hiding a goat. Do you now stick with your first choice, or do you pick the second door?

Thanks for the link. This is definitely one of my can't miss transcripts.

I'm still finding decent bargains, but the trouble I've had is adjusting my return expectations. March '08 and November '07 presented companies trading at 75% normalized free cash flow, or at 5% of monetizable assets. And you didn't have to go far up the risk curve to dramatically boost your returns. Now, I think you can find decent companies trading substantially below intrinsic value, but it's difficult to forget the excessive reward of having plenty of cash.

Thanks for the clip. It also has a link to Charlie Munger's speech at USC in 2007:

The interview doesn't get interesting until part 2.

DB, what made you think that SHLD would become an investment vehicle like BRK? Sorry if that sounds challenging--not my intention--but I am truly curious because Martin Whitman of Third Avenue suggested the same thing here: http://www.businessweek.com/magazine/content/04_47/b3909001_mz001.htm. "There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," says legendary value investor Martin Whitman. He runs Third Avenue Management LLC, which teamed up with Lampert when Kmart was in bankruptcy court and now owns a 4.6% stake in the retailer. "That's what I am valuing into the stock." That article is from 2004 and SHLD has not diverged from its role as a retailer.

Well, that's just, like, your opinion, man. Phelps abides. I hope Usain Bolt is clean, but even if he is, he might be a historical relic in a few years. http://www.csmonitor.com/2004/0823/p12s01-stgn.html I would be surprised if, in 30 years, people limit themselves to their genetic endowments. Adderall was fairly common when I went to college. Even coffee is part of the post-human trend. If someone said that they could make you more productive for 4-5 hours a day, would you say that $1,095 a year ($3.00 a day) is a fair price?

I remember reading a David Winters interview where he predicted that the Chinese, and Asia for that matter, would increase their standards, resulting in more business for Wynn Resorts. That's probably true in the long run, but I've been to Hong Kong many times and China once, and what struck me is how selective the people are in their luxuries. There were quite a few Chinese people who were extremely rich, +$20MM, but who lived in upper-middle class homes, traveled coach or business, and basically scrimped. Then they would spend huge amounts on food, oriental medicine, etc... It just seemed like the Chinese and Hong Kong rich were, for now, very focused in their luxuries.

Don't Canadian companies use proportionate consolidation? Even so, that's an interesting point about the outsized balance sheet effects relative to the investment size. Can someone better versed in Canadian GAAP explain the effects of consolidation on statutory capital?

The $1.50 figure seems to come from operating cash flow before the working cap. adjustment net of cap. ex. Then to get to $2.00, they anticipate an increase in payables to match historical figures. Regarding the cash adjustment, Southeastern probably referred to cash net long-term debt. The current ratio will mislead you because Dell's receivables pay off about twice as fast as their they pay their payables, and their inventory turnover is tremendous. Just run the numbers on their cash conversion cycle to see why their balance sheet is actually stronger than it first appears.

Regarding off-patent products and Pfizer, I've heard more about that topic from Berkowitz than from the Pfizer team. I also got the impression that Fairholme had been caught off guard by the Wyeth deal. Have you heard anything from management to suggest a focus on off-patent branding? The conference call with Berkowitz seemed to focus more upon purchasing late stage products with a reduced emphasis on early stage research.

http://www.nytimes.com/2009/08/10/opinion/10zencey.html?sq=g.d.p.%20r.i.p.&st=cse&adxnnl=1&scp=1&adxnnlx=1250517670-qrGjRBiFDSrujsiYCBaWvA The basic problem is that gross domestic product measures activity, not benefit. If you kept your checkbook the way G.D.P. measures the national accounts, you’d record all the money deposited into your account, make entries for every check you write, and then add all the numbers together. The resulting bottom line might tell you something useful about the total cash flow of your household, but it’s not going to tell you whether you’re better off this month than last or, indeed, whether you’re solvent or going broke.

The Fed still has $50 billion of treasury repurchases scheduled by the end of the year.

The track record doesn't necessarily tell the whole picture (although I am a fan of Sprott). Look at Seth Klarman, who underperformed the U.S. indices throughout the 90's, but who achieved his returns through much more sensible vehicles. Using nominal returns to compare managers is especially misleading with low-turnover or high concentration investors. Excellent results over a few years can make someone look like a genius, and great investments made early in a career can bolster results over a long period despite a lack of "true talent" in the manager. Imagine buying a swath of Berkshire Hathaway in 1975. You could have gotten away with mediocre performance in your non-BRK portolio for a long period. My personal view is that the numbers only provide limited information. I need to hear from my money managers and get a sense of their decision engines. I would feel more comfortable with Francis Chou's above average results from prudent man investing than with George Soros' incredible results achieved through means that I don't understand using leverage that I wouldn't use myself. Sorry for the double-shot coffee rant.

This proposal by FASB introduces an unnecessary amount of volatility. I'm not looking forward to having to adjust for years of impairments and true-ups on an increasingly opaque income statement. FASB must be a fan of the monoline insurers. The Hold to Maturity standard is fine, IMO. If a bank makes a clear statement that it has the intention and the ability to keep a loan on its books, then I can make my own judgement about the viability of the loan. Does FASB coordinate with regulatory officials at all?

Good interview, thanks for doing it. I would have liked to know how he goes about purchasing such small companies. In the past, I've had trouble making purchases of less than $10,000 for a company trading at more than $3M. How does a fund like Sonkin's establish a position without getting eaten up by traders?

Frankly, it's not worth getting upset about. This process of diminishing Buffett has allowed value investors to flourish. If the public did not periodically diminish Buffett's reputation, by now the competition would be fierce.

It's fascinating to see that we are all getting rich on this company despite our differing opinions. I'm with Cardboard on the topic of FFH as a mutual/hedge fund. You can't separate the investment and underwriting sides because the activities of one affects the other. I certainly hope that Watsa and Co. are not internally dismissing 100+ CR because of their "likely" investment returns. When you leverage assets with varying volatilities, you want to minimize the cost AND the volatility of the liabilty.

I thought the boardmembers might appreciate Verizon's ballsy move: http://www.bloomberg.com/apps/news?pid=20601103&sid=aurVg4Jm1ItU.

I usually see references to real estate in the Wesco or Berkshire Hathaway AGMs. In the 2007 Wesco meeting, or in a Caltech speech, Munger basically said that real estate valuation was a separate art, and that the industry relied upon leverage to produce good returns. He mentioned that he used to mortgage commercial property that he owned in order to juice his investment returns, but that the strategy did not translate to big money.

http://www.chron.com/disp/story.mpl/business/energy/6549127.html And it only took 10 years! How is it that the original inhibiters of the CFTC, like Lawrence Summers, are still respected? This interview with Brooksley Born communicates the tone of Washington back in the day: http://www.stanfordalumni.org/news/magazine/2009/marapr/features/born.html “Well, Brooksley, I guess you and I will never agree about fraud,” Born, in a recent interview, remembers Greenspan saying. “What is there not to agree on?” Born says she replied. “Well, you probably will always believe there should be laws against fraud, and I don’t think there is any need for a law against fraud,” she recalls. Greenspan, Born says, believed the market would take care of itself.

On face value it looks like Baupost made a great deal. From the 8-k filed today: The Credit Facility has a two and a half year maturity and bears interest at LIBOR plus 10%, with a 3% LIBOR floor, payable monthly. It provides for (i) a commitment fee of 5% of the total advances made thereunder, payable upon the funding of each advance, (ii) an unused line fee with respect to undrawn commitments at the rate of 1% per annum and (iii) a 2% exit fee on amounts prepaid or repaid and the unused portion of any commitment. The Credit Facility will be secured by a perfected first priority lien on substantially all unencumbered assets of the Guarantors, which shall include 100% of the stock of CIT Aerospace International, and 65% of the voting and 100% of the non-voting stock of other first-tier foreign subsidiaries (other than direct subsidiaries of the Company), in each case owned by a Guarantor. The covenant requires the ratio of the book value of the collateral securing the Credit Facility to the loans outstanding thereunder to exceed 5:1 as of the end of each fiscal quarter commencing as of the fiscal quarter ending September 30, 2009, and the ratio of the fair value of the collateral securing the Credit Facility to the loans outstanding thereunder to exceed 3:1

It's also interesting that Prem states that he will not purchase a future or derivative. Yet, only ten years later, he purchases index puts to guard against a "nuclear bomb" scenario. You can see the development of his craft, as well as his long history of guarding against unforeseen events (before 'black swans' even).

http://hbr.harvardbusiness.org/2009/07/restoring-american-competitiveness/ar/1 You have to log on, or purchase the issue, to read the full article, but I highly recommend it the next time you go to Borders. The authors investigate the steady outflow of high-tech manufacturing and R&D capacity. They argue that competitive pressures compel outsourcing industries to gradually cede more and more of the value chain. It's a fascinating article because it deflates the notion that advanced countries should always outsource manufacturing capacity to the low-cost producer.