Liberty

Good point on the media coverage. I think the media was mostly repeating what AGN, and their PR firms and bankers, were feeding them (and on the other side what Ackman was feeding them, but to a lesser extent because everybody loves an underdog and Ackman isn't it, and Ackman prefers to bypass the media and get the message out directly). The "let's protect R&D!" narrative was also a very easy sell to the media, making VRX look like the bad guy (are big miners who do less costly and uncertain exploration themselves than the average of their peers and instead buy juniors who have found something "bad guys"? or is it just a different, possibly superior model?)

Looks like SUBC is down about 40% since it was presented at the diner. Have no opinion on it either way, was just noticing this now while looking through a pile of PDFs which contained this presentation.

Ackman and Pearson said negative things about AGN's management and board when they realized that they weren't even willing to meet them, so they felt they had to explain to AGN shareholders directly why the board and management had to be thrown out. Pyott and his buddies probably didn't like that at all. I think a lot of what ensued was personal and about saving face. It's not like management or the board are big shareholders, and they were selling at less than half the current price. If this was only about maximizing value, there's a million things they could have done years ago... But they certainly couldn't go out in disgrace. ACT has a model fairly similar to VRX, but they never said anything bad about Pyott and the board, so they're quite ok to them. That's my impression, anyway.

Watchkit is out: https://developer.apple.com/library/prerelease/ios/documentation/UserExperience/Conceptual/WatchHumanInterfaceGuidelines/index.html Of course, they're keeping a lot of things under wrap (ie. fully native apps) until it launches and they truly show the software, but it gives a good idea of some of the capabilities. Update: Also, some nice usage stats on iOS vs Android: http://techcrunch.com/2014/11/18/ios-app-launches-nearly-double-that-of-android-apps-used-for-twice-as-long/ Thanks to the person who sent this to me on twitter.

I haven't succeeded in reaching this level of zen detachment yet, but have you tried not looking at the market as much? Or at least, cutting out almost all financial news. Guy Spier has some interesting ideas on this (shutting down his bloomberg terminal and keeping it in a different room, only looking at prices when the market is closed, only looking once a week or whatever, etc)? Maybe this can help with all those problems, even without going as far as someone like Spier.

Cycling like a boss!

Another part of the dynamic is that if VRX stock reprices up significantly in the meantime, up to a point that Pearson feels it's at least fairly valued if not overvalued, they might be able to do a big merger of equals or mid-sized transactions using more stock, and thus delever more quickly. The main reason they piled up so much debt is that so far they felt their stock was undervalued (and they were right).

This might be what they do. Or buying assets from large public companies rather than trying to buy the whole thing. Or a lot of smaller 1-5bn deals. Probably a mix. But they only have to succeed with one of these big public companies at the right price to totally transform the company. If it was a good idea with Allergan, then it's a good idea to keep trying with others that have similar mixes of good assets and bloated structures. Maybe if they can just find a board that will actually meet with them and do DD, they can convince them without a big fight. VRX are decentralized enough that these attempted mergers don't seem to disrupt operations too much (they've had great operational results the past few quarters), so cost seems fairly low vs. a big upside if it works. The main costs seem to be 1) Management's energy & time, and 2) being locked out from most other deals while waiting to see if the merger works. #1 seems worth it because this isn't some CEO pet project that won't move the needle, it's a potentially very value-creating deal, and #2 isn't too bad because while that slows growth, it also allows the company time to strengthen its balance sheet and show the world that non-GAAP converges with GAAP in the right direction when they stop acquiring.

The ink isn't even dry on the ACT-AGN deal, and already there are rumors that VRX could make a $68 bid for TEVA. Might be totally unfounded, we'll see.

Apple seems to be developing a nice relationship with China UnionPay, as well as with AliPay: http://blogs.wsj.com/digits/2014/11/16/apple-adds-chinese-payment-system-unionpay-to-app-store/ More here: http://qz.com/297501/apples-new-unionpay-deal-could-pave-the-way-for-apple-pay-in-china/ http://img.qz.com/2014/11/rtr4dynj.png?w=640

Exactly. Here's what I wrote in my investing journal this morning: What we have to remember is that this was never about ‘winning’ the deal or ‘losing’ it, but about creating per share value for shareholders. So at a certain price, it’s worth it, and at a certain price, other alternatives for capital deployment are more attractive. It’s a very good sign to see this discipline to step on their egos and to walk away when that line is crossed (or to not come close to that line, even if nice value could have been created at those prices; better to keep a margin of safety in case things don’t go according to plan - that's probably why they always over-deliver on synergies, because they have a nice MoS built in). Maybe the media will see it as ‘losing’ , but that doesn’t matter. (who lost anyway? Ackman made a ton of money, Pearson mostly spent time on something that could have been transformational if it worked but doesn’t really penalize the business if it didn’t, so that was nicely asymmetrical. And I’m sure he and his team learned a ton in the process so next time will be different. The saga also has the side-benefit of having shown everybody that VRX isn’t easily dissuaded once it sets its sights on something, and its model and financials have been publicly battle-tested and scrutinized in a way that few companies have been…). Now it’ll be interesting to see how VRX is priced by Mr. Market since a big uncertainty has been lifted and arbs who bought AGN and shorted VRX will have been covering lately. It’ll be priced more on fundamentals, which should be interesting. The only thing I’m sad about is that the AGN management wasn’t kicked out unceremoniously like bums as a warning to other shareholde-unfriendly managements, but you can’t have everything…

Tomorrow will be an interesting day for sure. If ACT gets AGN, it'll be interesting to see how many other companies adopt the horse-choker bylaws that AGN has...

I can't speak for Racemize, but the way I understood it, some people target a certain % of cash "just in case" some big huge fat pitch comes along, because they believe that having the cash to jump on these infrequent opportunities makes up for the drag that the cash creates the rest of the time. So they might have a hurdle of 15% and invest in whatever they can find that meets that, but they keep an extra 20% cash on hand waiting for "blood in the streets" scenarios, even if they could use that 20% to just buy more of what they have in the other 80% of their portfolio, or similar things.

Wouldn't this be mostly a problem for people buying regardless of valuation? If you do the bottoms up work and only buy things that you find attractive enough, it seems like it should mitigate that risk. But if you just lever up to lever up and end up buying indexes at the top of the dot com bubble or whatever, then that obviously could cut the wrong way pretty deeply... If you lever up to, say, 1.3x, it would take something pretty fierce to make you a forced seller. And over 30-40 years, if you can pick good businesses and if history is any guide, there will be a lot more good years than bad, so having extra exposure to good businesses certainly seems like a good thing, especially in light of the premise of the paper about lifecycle balancing (people invest fewer dollars when young, at the time when compounding would be most powerful for them). I didn't know there was a book. Is this the one? http://www.amazon.com/Lifecycle-Investing-Audacious-Performance-Retirement/dp/0465018297/ Interesting, the top review is by Robert Schiller: "I have been getting flak for endorsing the Ayres and Nalebuff book (see above on Amazon.com), just as the authors are for writing it. People are thinking it certainly sounds reckless for young people to leverage two to one into stocks. For some young people, it certainly is. Those who do this with their personal savings and are contemplating buying a house soon could lose their down payment, and thus be unable to buy. This factor is increasingly important after the subprime crisis since no-down-payment mortgages are hard to find now. But Ayres and Nalebuff are advocating such aggressive stock market investing only for retirement portfolios. Most young people could survive an annihilation of their retirement savings; they still have plenty of time to rebuild it later and it may generally be a good bet to take just such a risk. This is the basic point that Ayres and Nalebuff make, and it is right. I worry that this book in the wrong hands (of people with a gambling impulse or who are really more precarious in their financial situation) the book could encourage irresponsible investing. At the present time, the stock market looks rather pricey, and I am less optimistic about young people leveraging stock market investments right now. But, as a general, long-haul advice book, for savvy people who can judge their situation and not get themselves into a corner, the book is indeed valuable. This is not "Dow 36,000" again, as one reviewer says. This is a book about overcoming standard prejudices about investing, and as such it is an important book. Robert Shiller" For those who haven't read the paper that I linked above (I recommend it), another review has a summary of the general idea: "I believe that this is a ground-breaking book. Here's a summary: 1) Most folks tend to have the overwhelming majority of their exposure to the stock market (i.e., most dollar-years of stock market exposure) during a one-to-two decade period late in life (e.g., perhaps during their 50s). The reason for this is that folks tend to accumulate wealth exponentially -- they save exponentially and their investments tend to grow exponentially. 2) This generally works fine UNLESS they are unlucky and the stock market suffers through a bad decade when they have the most dollars exposed thereto. 3) The main idea here is that you would be better off, conceptually, if it were somehow possible to more evenly spread out your stock market exposure over your entire life. This idea of "time diversification" is quite sound. If you were somehow able to do that, and during the decade of your 50s the stock market goes to h*ll, so what! You've hot lots of other decades of stock market exposure to make up for it! 4) Of course, the devil is in the details. Is it possible to more evenly spread out your stock market exposure through your entire life? Yes."

Thanks Liberty. Regarding leverage, I haven't done a lot of actual testing, but I've been thinking about how it might work, given the testing I've done. And I think the answer is that leverage is generally good to use, but you can't ever get margin called, as that is highly destructive. So, it will come down to how volatile your portfolio is (which is similar to what this essay comes down to). Thus, if you are very volatile, no leverage is likely best (and perhaps holding cash routinely as well). But if you are less volatile, then some leverage is good. So I tend to think that some leverage is probably warranted for the best long term results, assuming a long-enough time period. Again though, I haven't done a lot of testing to be sure about that line of thinking. Perhaps I should make it a follow-on essay... That makes a lot of sense. If I was routinely sitting on uninvested cash, your essay would definitely make me rethink my approach. But when I read the paper I linked above last year, I did a lot of thinking about it and ended up starting to use some margin. I'm 32, and it makes a lot of sense to me that I'll benefit more from compounding (as long as I don't have to be a forced seller at exactly the wrong time, which is why I'm not using a lot of margin capacity) by having more dollars invested in the early years of my life than I would without margin. The unused margin capacity can also acts like cash would in extraordinary situations. If there's a fat pitch coming my way, I can always jump on it with margin and then delever later back to my target multiple. I know that in some ways it's not as conservative as not using any debt, but if you take the longer view, I think it's in some ways riskier to not use at least some small amount of margin (especially at the 1.5% that I'm paying at IB); I feel that I have a higher chance of being poorer in 30 years if I don't use it than if I do. Sure there might be another 2008-2009 crisis where everything is correlated and goes down 50% and I become a forced seller. But what if there's a 20-30 year stretch without any crisis bigger than I can absorb without forced selling at my relatively conservative level of margin use? I think the benefits during the good times would likely outweigh the negative impact during the really bad times.

Just finished it. Good job! Obviously a lot of work went into this, you should be proud of the result. One question: Have you looked at leverage? The next logical step, IMO, is to look at what'st he optimal level of leverage (as long as cost of leverage is below expected returns by a big enough amount that you have a margin of safety, and that the level of leverage is low enough that you can go through most downturns without being a forced seller. ie. maybe 1.3-1.4xx gives the best results over the long term and you would only delever a few times when interest rates spike up..?). Just curious to know if you've looked into this. Thanks again for sharing your work! Update: kind of thinking of this paper: http://islandia.law.yale.edu/ayres/Life-Cycle%20Investing%20Working%20Paper.pdf

Awesome, thank you! Looking forward to reading it 8)

Interesting, thanks. Trueposition is in LBRDA now, though (which is an interesting decision by Malone in the first place...).

Thanks. It was good, though it's mostly the stuff that we here already all know about. Nothing really new.

Modesty is a nice quality. But you've been playing the game for 10+ years getting Michael Jordan level stats. Not exactly comparable to a single lucky shot :) I need an Asha Bhosle in the background if I'm to keep on the hit parade. The board stopped giving away ideas on a silver platter. I'm like the Milli Vanilli of investment talent. Well, from what I can tell, for you to press the big green 'GO' button on your desk (and not just park capital in something that would merely beat the market by a handful of percents, which would be underachieving for you), you want a massive no-brainer. These don't come around every year or even every other year.. Capital allocation isn't like sports. You get better with age. I'm sure that at some point in the future there will be another BAC or ORH/FFH that will roll around, or you'll smell another quick MBIA settlement, and you won't be able to stay away from the table ;)

Exactly! Imo debt is very useful, until it gets to be harmful… And those instances when debt gets harmful don’t happen very often, but when they do, they tend to be very detrimental to your net worth… Two such instances might be enough to mar a lifetime of successful investing… Therefore, either you partner with people who shun debt altogether, like Buffett and Watsa, or you partner with people who make use of debt, but have a long enough track record to show they had been able to weather comfortably enough hard times in the past. Liberty Media has returned 15% annual from 2002 to 2013 with 2008-2009 in between: volatility YES, overall bad results NO. Here is something important for me: I have not said “permanent loss of capital NO”, meaning that I am not only looking for evidence of an effective enough protection of capital, but that I want to see a track record of very satisfactory returns over a long period of time through good environments and bad. What you say about Transdigm might be very correct. So, let me clear this a bit: I suffer from a sort of inertia that makes me stay with or even add to businesses that I already own and know very well, instead of buying new businesses that I don’t know as well. Therefore, for me to make a new investment, it is not enough “a great entrepreneur, a good business, and a good price”… Probably I need “a great entrepreneur, a good business, and a great price”… Surely a far better price than the one a business I already own is offered for at the moment! And right now Transdigm seems to me more pricy than Liberty Media, not less… Therefore, I concentrate my funds in Liberty Media, instead of splitting them between Liberty and Transdigm. Maybe this has nothing to do with debt, but I wouldn’t be so sure: if Transdigm had less debt, I would feel more secure about investing in it… therefore, the price I’d require would probably be less “great”… Though I don’t know if this is clear or makes any sense at all… ??? Gio Thanks Gio.

Modesty is a nice quality. But you've been playing the game for 10+ years getting Michael Jordan level stats. Not exactly comparable to a single lucky shot :)

Hi Gio, If I may, I'm curious to know how you think about Malone's use of debt. He uses lots of it, and even seems to use margin in his own portfolio (was a forced seller during the crisis, afaik). Are you comfortable with it because he has a longer track record? Valeant might be more recent - the 2008-2009 crisis was a nice real-world stress test, though they were much earlier in their transformation at that point - but Transdigm has been using the same model pretty much for 20+ years. Of course, they use more debt than Malone (or at least, their peaks are higher, they tend to delever quickly and then lever back up), and I don't think they'll ever have low debt (that's how they optimize their capital structure), but you also have to look at their business. They basically have a bunch of high-margin annuities that even 9/11 and the GFC barely affected. If you don't lever that up, especially when the credit market is so accommodating, you're leaving a lot of money on the table.. And most of their debt is pretty low-cost and on matures in 5+ years. Anyway, just curious about your thought process on use of debt. Cheers.

That's true. Why did they buy back shares at the lofty 20 x pe this year? Is that an attempt to push up the stock price so they can get their options vested, or it really justifies the valuation? They said the FCF is about 55% of EBITDA. How would I verify that is the case? Their machines will depreciate and needs maintainence capex for sure, but how much would that be? How about reading the 10Ks and transcripts of calls and investor days?

I can't say quantitatively. Multiples of the current size is probably right. This is a really huge industry. But it's not with the top line that shareholders will be paid anyway, it's with per share FCF. The way they shrink the equity with huge special dividends and buy back shares, it's clear that they aren't empire-building and trying to swallow everything in sight, they care about per share returns and have high hurdles.