Adventures in Capitalism

[calonego]

AdventuresinCapitalism.com

 

A good friend of mine writes this, some of you know him.

I met the guy while visiting NICK in ’05 or ’06, he asked some really interesting questions, had things figured out in a hurry (good and bad).

We were both short the mortgage insurance and financial guarantee companies at the time and he had a really good take on commodities due to his understanding of the bad economics of building mines and the effect of inflation on mining economics (think Buffett ’81 or ’82 letter).

 

He’s a really smart guy, a value investor that also digs deep into the macro.

 

I believe he may have had one of the best returns on the planet from about ’02-’08, and still with the decline of ’08 and ’09 is in the top 0.1% of money managers out there for a return over the last 8 or 9 years.

He’s operating his partnership as-is and not raising capital.

However, he is writing about some of his ideas and travels on the website and I think many would get a kick out of his findings and learn something in the process.

 

I'd recommend looking back to the earlier posts as well - they're really good.

[biaggio]

Thanks Calonego,I have enjoyed what I have read so far:

 

"My strategy is to identify a relatively small number of really exceptional companies that I think can increase more than five-fold in the next five years (5 in 5’s). At the same time, I keep some cash available for trading as interesting opportunities always seem to show up and create low risk short term opportunities.

 

Here are some links to key strategy concepts:

 

Why Invest In Smaller Companies?

 

What Does Cheap Really Mean?

 

Gearing

 

Let's Talk Risks...

 

What To Look For In Small Company Management

 

When To Sell?"

 

Most here would agree with what is written here. The only thing I have not heard before is the 5 in 5 strategy...I would love to be able to do this!

[Parsad]

Hi Jordan,

 

Are you sure about his numbers?  I know that's what he says on his site, but from what I've read it seems as though he isn't a value guy, but trades alot.  Also, take a look at some of the positions he held:

 

http://www.insider-monitor.com/trader/cik1337851.html

 

Alot them are tiny micro-caps, went bust, etc.  How much leverage was he using?  You also said he shorts.  The one thing I've found out over the last few years is that you really have to investigate how returns were earned by alot of managers.  Do you have any details on his annual results?  Cheers!

[Parsad]

Here's an article about him when he was 18.  He was making 50 trades a day!  I think he suffered a gigantic loss in 2008 from what I see.  Jordan, do you know exactly what the percentage loss was?  Cheers!

 

http://www.observer.com/node/41848

[Opihiman]

He was an active participant on trading boards pre-2008 - I never got the impression he was a value guy. Just aggressively buying micro-caps during a bull market. Someone posted this quip from his Aug '08 letter. The link at the bottom notes the restructuring of his fund at the end of '08.

 

Praetorian Capital Investments LLC

Praetorian Offshore Investments Ltd.

Performance Summary

September 2008

Current Month Year-To-Date

Performance Measures

Time-weighted Rate of Return (Gross of

Performance Allocation)

-35.12% -58.55%

S&P 5001 Rate of Return -9.21% -20.68%

Exposure (as % of Equity, including the notional

value of futures positions)

Long 96.2%

Short 0.0%

Net Exposure 96.2%

Holdings (as % of Equity, including the notional

value of futures positions)

Precious Metals Mining Equities 20.4%

Base Metals Mining Equities 1.5%

Mining Services Equities 41.5%

Our performance this month was horrendous. Trading was down 1 percent and the rest of

the loss was from large hedge funds liquidating positions that we also own. The enclosed

Fund Performance letter has a great deal of information as to what happened to the

portfolio in September and provides data regarding our core portfolio ...

 

http://www.marketsmediaonline.com/news_details.htm?wP=1&wPI=1&cN=2837

[Parsad]

From what I've seen elsewhere, the comments seem to say he lost over 80% in 2008?  Does anyone know if that is correct?  Cheers!

[calonego]

What I've said here is entirely true. Cannot comment on his exact returns, it's not public.

Most of his positions do not show up on an SEC filing and his historical 5 and 10 baggers won't show in an SEC filing... some of the small ones that do obviously haven't worked too well (International Monetary Systems, the competition to your ITEX... etc). They used to file on International Absorbents, which is the smallest company I've seen on an FFH 13f...

 

He usually owns a mix of micro-cap and some larger stuff, but at the base of the collapse in '08 he had some micro-caps that effectively went no-bid, most have bounced back and the fund has tremendously as well.

I'd hazard to guess he lost more from shorting good shorts (puts and shorting) from '04 on, than from his gains on it in the collapse.

The majority of their portfolio is value or distressed - the cash has generally been used in a small insurance operation and some trading. But the trading is more valuation based than anything.

 

Sanjeev, that article is from over ten years ago, so 1999! ; )

Let's just say he doesn't fake trade 50 times a day or speculate like that anymore... He's learnt a lot since he was 18 - found Buffett - etc.

 

What do you think is the break for the top 0.1% of managers during '02-'10?

[bonechip1]

Calonego,

 

Thanks for posting this blog link.  In that article from when Kupperman was 18, he reminds me of Holden Caulfield from J.D. Salinger's Catcher In the Rye. As far as best returns on the planet from '02 to '08, I don't think that Cornwall Capital's growing of a $105,000 Schwab account over 1,000 fold in that timeframe can be beat (detailed in Michael Lewis The Big Short).

 

Chip

[Parsad]

What do you think is the break for the top 0.1% of managers during '02-'10?

 

I think greater than 10% annually above the S&P500 TR would put you pretty close...but over a reasonable time frame...10-15 years.  You grow one dollar to $26 over six years, but lose 80% of that in the seventh year, you compounded at 23% annually and that's pretty amazing.  Not sure exactly how I would view the results though if you were any of the people who put in money from 2006-2008. 

 

I think the truly great managers are the ones that can balance risk and reward over very long, long periods of time.  Buffett losing money in only 2 years out of fifty is the gold standard.  Seth Klarman managing a 17% return over 25 years with only two down years, while holding large amounts of cash is the silver.  And none of those losses were catastrophic in any manner.  Cheers! 

[calonego]

Best return on the Planet - may have been a little much... He had the best return I had heard of, from a professional that used good logic. But I don't know anyone that has done over 60%/annum for that period.

 

1000 fold is pretty insane! Didn't know about the Cornwall track record...

 

I bought the book - from your comment, I should read it.

 

Sanjeev, he's done better than what your source is stating - by a large margin.

[twacowfca]

The public filings of Praetorian capital explain a lot about how the returns were made.  From 05 through 08, there were repeated purchases of a handful of microcap stocks.  There was only one sale, for about 5 cents on the dollar of a stock of a company that may have failed.  Praetorian may have unintentionally supported the price of these stocks to some degree with their purchases.  This would not necessarily be problematic if the IV of these companies grew substantially during this period.  In the last few months of 08 they stopped purchasing shares in these companies, for what reason I know not. Around this time, the prices of those shares tanked, losing about 80% of their value.  Praetorian then liquidated their international fund that owned much the same handful of small stocks as their domestic fund by distributing those shares to those investors.

 

In early 2009, Praetorian resumed purchasing shares in some of these companies at prices much lower than what they had paid in earlier years.  For example, they had built up a very large position in Bingo.com as its main insider, paying an average of about $ .30 per share in the period before late 08.  In Jan 09 they paid $ .07 per share for that stock.  Then they paid increasing amounts for the same stock as they continued buying it through '09 & '10.  I don't know if the availability of shares of those companies at a low price was enhanced by forced sales by investors in their international fund that may have unexpectedly had the shares of stocks held by that fund put back to them on the last day of 2008 in the fund's liquidation.  Comments?  Does anyone know how much the IV of their holdings may have grown in recent years?

[Parsad]

Sanjeev, he's done better than what your source is stating - by a large margin.

 

Can't say unless there was some disclosure, but I have an extremely hard time believing those results were not a matter of either luck, or pushing up prices of microcap stocks.  In the meantime, the manager builds up a huge incentive allocation, while the fund tanks in a year when you can't keep the prices moving up. 

 

Have you actually seen any audited financials?  If you have, then I stand corrected, but unless I could see a fund's behavior and what they were up to year after year, I don't believe the hype.  It is extremely difficult to do just 3% a year better, and even harder to do 10% better than the indices over a period of time.  Twenty six fold in six years is incomprehensible with a basket of stocks...even if you only held 3-5 stocks.  Cheers!

[Rabbitisrich]

All that being said, the website looks like a worthwhile read.

[calonego]

I've seen audited numbers.

 

TWA - let me go over the filings and figure out what portion of their capital was in those microcaps (won't be hard to do), I dont think it's that much though.

 

I'm pretty sure he still has an international fund, there seems to be some errors in reporting and information out there. He did get some crazy redemptions in '08 though.

[twacowfca]

All that being said, the website looks like a worthwhile read.

 

Surprisingly, I agree. :-\   There are a few gems.  I like the one when he says that all returns are made in bull markets.  (most people don't live in Premville).  His point is that people should find a bull market somewhere else when every thing is rolling over on them.  He mentioned Australia's still booming from 07 - 09 with the continued high demand for ore as most other markets worldwide were turning down.

 

[calonego]

TWA - I went over his recent 13d's and g's... from my guesstimate, 25% of his capital is in these nano-caps. You can't say he made 50%/yr or more by pumping micro-caps... And there were sales in there, go to the SEC and see the sales mixed into the 13d's (DAC Tech, International Absorbents, etc). It's not a fair conclusion to reach, that someone cheated, just because they did well.

 

He had a fair number of securities at any one time... I remember his owning NICK coming out of that '02 period, IBA back when I owned it as well (was at 2 or 3x E). All kinds of smart stuff. Different companies that held massively undervalued inventories and real estate.

 

He also knows and understands accounting better than 95% of the people I know in this business... far better than most CPAs.

 

Most of his holdings are a little different and don't follow under the "value" model of say Francis Chou or Wally Weitz... it's just different. And his wording is a little off - if I were a buyer of RIG last week at $53, hoping to sell it for $70-90, would you call that a trade? and me a trader? He does for some reason... (the basis of the valuation of RIG is grounded on fundamentals, replacement costs, where most of the profit is generated (non-GoM ultra-deep)).

 

I'm in this field to make money and understand businesses - this isn't a religion. You need to be a little agnostic and judge something based on what it is, rather than what it appears like on the surface or the language used (look at the language of the "Hamburglar"... his holdings were mainly trading around BRK over the years...)

 

People enjoy reading about an Australian safari and currency fluctuations more than they do about the competitive advantages IBA has over Mississippi chicken companies... or the fact that RIG looses employees every year (this one was worse obv), but that most of their rigs are very mobile and already located in non-US waters... plus PBR is close and doesn't give a shit about what Obama thinks - they drill deep!

 

I'm tired of defending him, he shouldn't need to be defended. Just check back in 10yrs, I'm sure he'll have done well.

And for anyone that likes his writing style, I'm sure there'll be some gems in his blog over time...

[twacowfca]

TWA - I went over his recent 13d's and g's... from my guesstimate, 25% of his capital is in these nano-caps. You can't say he made 50%/yr or more by pumping micro-caps... And there were sales in there, go to the SEC and see the sales mixed into the 13d's (DAC Tech, International Absorbents, etc). It's not a fair conclusion to reach, that someone cheated, just because they did well.

 

He had a fair number of securities at any one time... I remember his owning NICK coming out of that '02 period, IBA back when I owned it as well (was at 2 or 3x E). All kinds of smart stuff. Different companies that held massively undervalued inventories and real estate.

 

He also knows and understands accounting better than 95% of the people I know in this business... far better than most CPAs.

 

Most of his holdings are a little different and don't follow under the "value" model of say Francis Chou or Wally Weitz... it's just different. And his wording is a little off - if I were a buyer of RIG last week at $53, hoping to sell it for $70-90, would you call that a trade? and me a trader? He does for some reason... (the basis of the valuation of RIG is grounded on fundamentals, replacement costs, where most of the profit is generated (non-GoM ultra-deep)).

 

I'm in this field to make money and understand businesses - this isn't a religion. You need to be a little agnostic and judge something based on what it is, rather than what it appears like on the surface or the language used (look at the language of the "Hamburglar"... his holdings were mainly trading around BRK over the years...)

 

People enjoy reading about an Australian safari and currency fluctuations more than they do about the competitive advantages IBA has over Mississippi chicken companies... or the fact that RIG looses employees every year (this one was worse obv), but that most of their rigs are very mobile and already located in non-US waters... plus PBR is close and doesn't give a shit about what Obama thinks - they drill deep!

 

I'm tired of defending him, he shouldn't need to be defended. Just check back in 10yrs, I'm sure he'll have done well.

And for anyone that likes his writing style, I'm sure there'll be some gems in his blog over time...

 

 

Sorry that my remarks appeared to be judgemental.  All I know is based on what I pulled up in a quick check of a site that aggregated the reported changes in the holdings.  Of their current holdings, do you have an opinion about any that are trading at a large discount to IV?

 

The comments on the website are interesting.  Much appreciate your bringing this to our attention.  They show a good grasp of value and insights about how the market prices companies.  :)

[Myth465]

his holdings are a little different and don't follow under the "value" model of say Francis Chou or Wally Weitz... it's just different. And his wording is a little off - if I were a buyer of RIG last week at $53, hoping to sell it for $70-90, would you call that a trade? and me a trader? He does for some reason... (the basis of the valuation of RIG is grounded on fundamentals, replacement costs, where most of the profit is generated (non-GoM ultra-deep)).

 

People enjoy reading about an Australian safari and currency fluctuations more than they do about the competitive advantages IBA has over Mississippi chicken companies... or the fact that RIG looses employees every year (this one was worse obv), but that most of their rigs are very mobile and already located in non-US waters... plus PBR is close and doesn't give a shit about what Obama thinks - they drill deep!

 

Speaking of Rig, we need you Calonego in this thread - http://cornerofberkshireandfairfax.ca/forum/index.php?topic=2449" data-ipsquote-contentclass="forums_Topic" 20230;topicseen#msg20230

 

Also my coworker loves RIG and I dont get it. Ensco, DO, and others are just as cheap without liabilities related to Horizon. Thanks for the link, I will checkout the blog.

[calonego]

Myth,

 

There just seems to be a much better supply/demand relationship in deep water drilling (there aren't any rigs).

RIG has a ton of these, the others don't seem to.

 

I have to look at them all again though (for the valuations), things are changing so fast -

 

RIG has some liability, maybe, but it doesn't seem like much to me. They seem to have merely leased the unit to BP, with a crew, but no one calling the shots. And it sounds like the BP guys were pushing the RIG operators to do things that they weren't in agreement on. But I can't cite where I got that from, forget.

 

What's odd is that the CEO mentioned that exact rig and job for BP in the annual as something that was highly technical and difficult...

[twacowfca]

Myth,

 

There just seems to be a much better supply/demand relationship in deep water drilling (there aren't any rigs).

RIG has a ton of these, the others don't seem to.

 

I have to look at them all again though (for the valuations), things are changing so fast -

 

RIG has some liability, maybe, but it doesn't seem like much to me. They seem to have merely leased the unit to BP, with a crew, but no one calling the shots. And it sounds like the BP guys were pushing the RIG operators to do things that they weren't in agreement on. But I can't cite where I got that from, forget.

 

What's odd is that the CEO mentioned that exact rig and job for BP in the annual as something that was highly technical and difficult...

 

 

RIG may have great liability if the sworn testimony of an eye witness crewman is believed.  Apparently, the RIG supervisor spoke to a group of key people about a plan he and the head manager for BP had agreed on to speed things up by withdrawing the drilling mud prematurely, saying they were in agreement to do this.  At that point the BP head guy spoke up and said he hadn't approved that.  After an awkward pause, the RIG boss continued telling them about the plan of action.  After a minute or so, the BP representative spoke up again saying he didn't agree.  At that that point, the meeting turned to ice and the talking stopped.  Then, the RIG boss dismissed the general meeting and sent everyone away.  He then went into a long private meetin with the BP rep.  Afterwards, the general meeting resumed and both the BP rep and the RIG boss were then in agreement on the risky course of action that resulted in the blowout.

[Myth465]

Premium Jackups are in decent demand right now and Deep water may have supply demand issues over the short term due to the ban.

 

RIG could have zero liability, but will spend millions and millions defending themselves. They are named on every lawsuit (my guess). I also assume that somehow they fucked up and are liable in some way. Also my guess is BP and other customers have noticed that RIG basically threw everyone under the bus and pointed the finger. That cant bold well for business. They also have a less than stellar safety record, which will start to receive much more consideration in bids.

 

Noble is mostly jackups. Ensco has a great Deepwater fleet coming online, DO is number 2 in the space, and Pride and Seadrill are more or less pure players. All are off by 30% and all have $0 liability towards horizon. RIG is off by 35% or so. Is really worth it when you have so many "better" deals in the same space.

 

I own Ensco and DO via Loews. Ensco is the best in the space in my opinion, which isnt worth much. Checkout their presentations online for additional detail. They are also awash with cash.

[calonego]

http://www.insurancejournal.com/news/national/2010/06/01/110319.htm

[biaggio]

latest commentary from Adventures in Capital

 

http://adventuresincapitalism.com/post/2010/06/06/Got-Gold.aspx

[Myth465]

Thanks for the link.

 

The guy has some great posts and answers email.

 

This post is a gem - http://adventuresincapitalism.com/post/2010/07/09/Just-A-Little-Patience.aspx

 

Also I really like a few of his small cap ideas.

[Baoxiaodao]

All that being said, the website looks like a worthwhile read.

 

Surprisingly, I agree. :-\   There are a few gems.  I like the one when he says that all returns are made in bull markets.  (most people don't live in Premville).  His point is that people should find a bull market somewhere else when every thing is rolling over on them.  He mentioned Australia's still booming from 07 - 09 with the continued high demand for ore as most other markets worldwide were turning down.

 

 

I agree. Check out Sri Lanka's stock market. How many of us actually noticed that the civil war has ended? How many of us know that Sri Lanka is actually a semi-developed country? If you were aware of that, you'd have made 100% in one of the worst financial crisis without any risk.

 

Nothing is impossible.