Non-recourse Investing

[nspo]

Hi All,

 

I wanted to get opinions on something I've been rather obsessed with the last few years. This concept has been written before by the likes of Ericopoly and others involved with the TARP warrants, and leveraged GARP investing threads.

 

My starting point for this idea is the following: The idea is that we want to find leverage in sustainable franchises that have a strong probability of success from current values (Visa, Mastercard, WFC, Googl etc..) and lever into them. This assumes that there's either A.) Warrants or B.) LEAPS available to trade.

 

The reason I've been keen on this subject is that the more I look into Munger in the early days, and Joel Greenblatt in the Gotham Capital days they were both proponents of non-recourse leverage. My take on what Greenblatt says about his special situations is he was jealous of the LBO guys of the 80's and wanted to mimic their success. After a somewhat botched LBO deal in the cooking pan business he sought to apply this technique to public markets. While there's no public record of his holdings during the period I believe that his 40% returns were largely contributed to by the use of prudent leverage. A few examples: Host Marriott (over leverred company), WFC LEAP(after reading Bruce Berkowitz report), Viacom (engineering warrants at a lower strike price), Dean Witter LEAPS...

 

This kind of strategy only really works if you're good at handicapping stocks since the asymmetric returns should outweigh the losses assuming you know how to pick em.

 

If every company had 3-5 year warrants which would you feel most comfortable making a binary bet on? Also, list some warrants/LEAPS you're watching...

 

Best,

 

[given2invest]

DELL is a *great* example of this.  It's my largest position; I own Jan '21 LEAPS, common, etc.  Jan '22 will be listed in Sept but those more risky as there is a decent chance well before that date they do some form of tender or something that ruins the time value as you would need to early exercise. 

[kab60]

One way to "do like" the PE guys (back when they generated crazy returns) is to invest in public LBO's (cheap cashflow beasts with high leverage). I think there's a crazy discrepancy between what junk bond investors are willing to accept atm due to low rates and what one gets by investing g in the equity. Mittleman and Verdad Capital runs this playbook, as does Packer on here. Packers fund, Bonhoeffer, has some very informative quarterly letters. His framework for investing is better than anything I've come across.

[SharperDingaan]

Focus on just those with high operating leverage (airlines, rail, etc.) and don't try to use financial leverage.

A standard DuPont analysis will do much of the rest.

 

SD

 

[Spekulatius]

Focus on just those with high operating leverage (airlines, rail, etc.) and don't try to use financial leverage.

A standard DuPont analysis will do much of the rest.

 

SD

 

I don’t think that a good idea right now though. Financial leverage is cheap and plentiful right now (it may change, but if the debt laddered well, it’s shouldn’t become a problem), but operational leverage probably will stay - considering that we are probably about to encounter slower growth or even a recession, the former might do much better than the latter financial model.

[nspo]

One way to "do like" the PE guys (back when they generated crazy returns) is to invest in public LBO's (cheap cashflow beasts with high leverage). I think there's a crazy discrepancy between what junk bond investors are willing to accept atm due to low rates and what one gets by investing in the equity. Mittleman and Verdad Capital runs this playbook, as does Packer on here. Packers fund, Bonhoeffer, has some very informative quarterly letters. His framework for investing is better than anything I've come across.

 

Thanks for the reply kab60!I agree that publicly levered companies with some consistency in cash flows/recurring are the best places to find high forward returns. I appreciate you including Packer's name as well. After reading I ran through his letters and found them extremely helpful..