BB - BlackBerry

[petec]

my post was not about singling him out. he's an accomplished investor who clearly does not need any defending from anybody here. however, he appeared to have signed off on an absolutely flawed go forward plan. many many mobile analysts (and some here) said as much at the time. and now the stock is $7.50. he also had deep and long established ties to ml, who he trusted as a techno visionary. so reasonable people can come away with different interpretations of his role on the bod.

 

Understood - and I did not mean to accuse him of singling him out.

[txlaw]

The sad thing is it seems the company would have been better off keeping the co-CEOs... Heins seems to be a disaster.

 

They would have been better of not investing anything new, living off off the existing subscribers and returning everything to shareholders while cash-cowing their way towards the end of the company. Sadly, no CEO ever seems to do this, even if it's best for shareholders.

 

Yeah, as I said on the "mistakes" thread:

 

I overestimated the reconstituted board's (and Prem Watsa's) ability to prevent poor decision making by management and to make necessary cultural changes to preserve and maximize value.  I assumed that awareness of the necessity of preserving resource value (for "highest and best use" resource conversion) would trump the inertia of strategic plans already put in place.

 

I really am surprised that PW went with Heins' flawed plans (not releasing BB10, necessarily, but spending so much money on the Z10 and marketing to consumers), instead of ML's.  If BBRY had just gone with the niche market approach from the get-go, concentrating on putting BB10 on the Q10 and into corporate and government hands, they'd be in much better shape today, both from a NAV perspective and a market sentiment perspective.  Nordberg said recently that BBRY's handset biz could survive as a niche biz, but where was he when they were making the plans to launch BB10? 

 

They also would have been able to concentrate more on the software/services part of the portfolio.  Cross-platform BBM would already be out by now.  Secure Workspace would have been released earlier.  BES10 would have a greater penetration rate by now.

 

Let's just hope they can salvage what they can now.

[Guest wellmont]

my post was not about singling him out. he's an accomplished investor who clearly does not need any defending from anybody here. however, he appeared to have signed off on an absolutely flawed go forward plan. many many mobile analysts (and some here) said as much at the time. and now the stock is $7.50. he also had deep and long established ties to ml, who he trusted as a techno visionary. so reasonable people can come away with different interpretations of his role on the bod.

 

Understood - and I did not mean to accuse him of singling him out.

 

sorry my fault. I meant that I wasn't trying to single him out in particular. and he was just one voice on the bod facing an entrenched management in self preservation mode. this is a good lesson for shareholders. managements are humans first and shareholder representatives second.

[txlaw]

That is a very good point Wachtwoord and why traditional value investing, even using Graham net-net approach, needs to be well diversified. Schloss carried something like 100 stocks at most times.

 

Managers always have their grand vision, are full of ego and always believe that they will accomplish wonders. For most, they have never failed before since they always kept on climbing a ladder. Once they reach such situation, their past accomplishments and most often their optimistic attitude does not let them contemplate a runoff of their business.

 

Overall, I have made money with troubled firms, but I am getting sick of it. The headaches along the way and fear of losing it all at times isn't worth it. And nowadays, things seem to change more rapidly than in the past even for non-tech firms, so obsolescence is a real risk to the margin of safety calculated once upon entering the investment.

 

On the opposite side of the spectrum, good businesses keep seeing a steady flow of cash. So even if they miss a quarter or see a little hiccup, you always have that reinforced margin of safety via incoming cash. They never have debt issues and the biggest question is what to do with the cash which is a nice problem to have.

 

Cardboard

 

As usual Cardboard, this is a phenomenal post. It was interesting scanning through the "mistakes" thread - from my quick scan, it appears the turnaround/dying businesses/asset valuation situations are where most investors get caught up.

 

That  seems to be the case.  It is certainly the case with me.  One really does need to hold dozens of these asset plays to make a good return in aggregate.  I too am sick of it.

 

I'm not sure if one needs dozens of these types of positions, but there definitely needs to be some serious thought put into portfolio sizing when going into these types of companies.  And management is almost always the X-factor that matters.

 

CLWR was a big hit, but it took a Charlie Ergen to really get S to pay value.  It was a small position.

 

BBRY will be profitable overall, but probably not on my latest tranche of shares.  Another small position, though it grew larger when it was trading sub-$7.  If PW hadn't gotten on the board, I wouldn't have invested, but he doesn't appear to have made that much of a difference in terms of preserving value.

 

SHLD has been profitable, but it remains to be seen if ESL will really utilize the assets for their "highest and best" use.  This is a pretty big position for me, and it's in part due to the notion that ESL has a plan (albeit, a flexible one) and is trying to execute.

 

SD will be profitable for me, but only because TPG came in with their activism -- if they hadn't, perhaps we would have another FBK situation.  SD is a big position, but only because TPG came in.

 

CHK will be highly profitable, but it really became a big position only after SEAM and Icahn got McClendon to step aside.  Another management change.

 

DELL was very profitable and was a pretty big position for me, but in the end was stolen from OPMIs by management and the board.

 

AIG and BAC were troubled companies, but management got put in place who had the right ideas and that were willing to undertake what was necessary to turn the ship around.  Humongous positions here.

 

Bascially, management is huge and should be taken into account when sizing positions.

[txlaw]

when ml and jb were fired, bod of directors should have brought in an outsider, like CI did @ motorola mobility, and Nokia did with SE. bbry maintained the status quo by promoting someone who was partly responsible for putting bbry in such a poor strategic position. What he did was not surprising. He wanted to prove that "their" vision was correct. So he forged ahead with a doomed plan from the start, which was essentially deliver a new from the ground up mobile platform that was neither needed nor wanted by consumers.

 

The bbry bod was insular and clubby. pw was likely mesmerized by all the techno bs being thrown around, as well as outnumbered in terms of being a member who thought like an owner.  A new ceo, an outsider, with no ties whatsoever to home grown bbry technologies would have likely recommended moving away from bbos and quickly moving to windows phone or android. or exiting hardware altogether. as was just mentioned, that would have been courageous, and unpoplular, and extremely difficult to do. Lots of responsibility goes onto the bbry bod.

 

Except for Samsung, nobody is making money offa Windows or Android either. They would be no different place today even if they followed that strategy.

 

They would have maintained their service revenues and profits. They would have still been able to hold a niche market in hardware. They could have focused turning BBM into the vision that Basille had for it. They wouldn't be having multi-billion writedowns and restructuring fees like they've put up over the past two years. It would have been a smaller company with smaller profits - but profits nonetheless.

 

I actually supported and liked BB10 after having seen it with my own eyes. Really enjoyed using the phones. But it didn't get developer support, was targeted at the wrong audience, and they didn't market it at all in the U.S. outside of YouTube and the Superbowl ad from what I can tell. They also wasted time on PR stunts like Alicia Keys and their carrier partners in the U.S. weren't training people on the devices nor were they recommending them to people. Blackberry was killed by poor management, poor partners, and the uninformed/fickle consumer market who deemed the phones garbage before ever even researching them (the strength of a brand...)

 

Agreed. 

 

Sticking with BB10 wasn't the mistake.  It was sinking so much money and time into the consumer side of the Blackberry hardware biz.  The should have specifically gone towards the niche market end, which I think would have been profitable (after expense rationalization).  Eventually BB10 (and QNX) profit would go to $0 as the tied software and services would be generating most of the revenue and profits.

 

The ideas about commoditization were right, yet they spent way too much money and time on the wrong parts of their technology portfolio, even while knowing how things were going.  It's perplexing.

[rpadebet]

Here we go, rumors of potential bid by Cerberus

 

http://www.marketwatch.com/story/blackberry-shares-up-on-report-of-cerberus-bid-2013-10-02

[zenith]

one of the biggest bears just upped price target and earning estimates

 

Citigroup‘s Jim Suva this evening raised his rating on shares of BlackBerry (BBRY) to Neutral from Sell, and raised his price target to $9, writing that even though he’s not convinced the buyout offer of $9 a share that Fairfax Financial Holding is trying to put together will work, nevertheless his main worry, about erosion of its smartphone platform, has played out.

 

“Our Long term thesis of market share losses amidst BYOD threat has largely played out,” he writes, “as the stock is now down -75%, -18% and -32% in 2011, 2012 & 2013, (vs the market up flat, +13% & +19%) respectively. We”

 

On the other hand, “We note the due diligence process could provide additional information on such items as patents and potential monetization opportunities of these patents, details around service contracts with carriers.”

 

After reviewing the details of the quarterly filing made on Monday, and making minor “tweaks” to his financial model, Suva cut his net loss estimate for this fiscal year ending in February to 91 cents from 93 cents, and cut his loss estimate for next year to 70 cents form 79 cents.

[vinod1]

I'm not sure if one needs dozens of these types of positions, but there definitely needs to be some serious thought put into portfolio sizing when going into these types of companies.  And management is almost always the X-factor that matters.

 

CLWR was a big hit, but it took a Charlie Ergen to really get S to pay value.  It was a small position.

 

BBRY will be profitable overall, but probably not on my latest tranche of shares.  Another small position, though it grew larger when it was trading sub-$7.  If PW hadn't gotten on the board, I wouldn't have invested, but he doesn't appear to have made that much of a difference in terms of preserving value.

 

SHLD has been profitable, but it remains to be seen if ESL will really utilize the assets for their "highest and best" use.  This is a pretty big position for me, and it's in part due to the notion that ESL has a plan (albeit, a flexible one) and is trying to execute.

 

SD will be profitable for me, but only because TPG came in with their activism -- if they hadn't, perhaps we would have another FBK situation.  SD is a big position, but only because TPG came in.

 

CHK will be highly profitable, but it really became a big position only after SEAM and Icahn got McClendon to step aside.  Another management change.

 

DELL was very profitable and was a pretty big position for me, but in the end was stolen from OPMIs by management and the board.

 

AIG and BAC were troubled companies, but management got put in place who had the right ideas and that were willing to undertake what was necessary to turn the ship around.  Humongous positions here.

 

Bascially, management is huge and should be taken into account when sizing positions.

 

I think the difference between AIG/BAC and the others (DELL, SHLD, SD, BBRY, etc) is quality of the business in terms of inherent earnings power. Both AIG and BAC have solid underlying earnings power due to the nature of their businesses. They are burdened with issues but they did not impact the core earnings that these businesses generate. All they needed is competent management who would focus on resolving these issues and the core earnings would shine through. No great heroics needed.

 

For the others (DELL, SHLD, SD, BBRY, CHK, etc) the core earnings power is suspect or you are relying on asset value to be monetized. All these require some significant changes to their business model (DELL, SHLD, BBRY) or asset dispositions and significant operational changes (SD, CHK). Good management is not enough. We need both great management and lots of luck.

 

To use Mr. Moynihan example, BAC and AIG are like well trained athletes burdened with 200 pound backpacks going up a mountain. All they have to do is get rid of the backpacks and they can zoom up. The others (DELL, SHLD, SD, BBRY, CHK, etc) are like morbidly obese and only way they would be successful in climbing up the mountain is by losing weight which is a pretty tough task and not many are successful.

 

If Mr. Moynihan and Mr. Lambert had reversed their roles I do not think BOA and SHLD would be vastly different from what they are today. Same with Mr. Benmosche and Mr. Dell.

 

The causality, I think, runs in the other direction. Good businesses would make us think management is much better than they really are and vice versa. I am not saying management is not important. Once you can assure yourself that management is competent (based on long track record and their ideas for how to run the business) and have the right incentives, it really is more about the quality of the underlying business.

 

Vinod 

 

[Guest valueInv]

I'm not sure if one needs dozens of these types of positions, but there definitely needs to be some serious thought put into portfolio sizing when going into these types of companies.  And management is almost always the X-factor that matters.

 

CLWR was a big hit, but it took a Charlie Ergen to really get S to pay value.  It was a small position.

 

BBRY will be profitable overall, but probably not on my latest tranche of shares.  Another small position, though it grew larger when it was trading sub-$7.  If PW hadn't gotten on the board, I wouldn't have invested, but he doesn't appear to have made that much of a difference in terms of preserving value.

 

SHLD has been profitable, but it remains to be seen if ESL will really utilize the assets for their "highest and best" use.  This is a pretty big position for me, and it's in part due to the notion that ESL has a plan (albeit, a flexible one) and is trying to execute.

 

SD will be profitable for me, but only because TPG came in with their activism -- if they hadn't, perhaps we would have another FBK situation.  SD is a big position, but only because TPG came in.

 

CHK will be highly profitable, but it really became a big position only after SEAM and Icahn got McClendon to step aside.  Another management change.

 

DELL was very profitable and was a pretty big position for me, but in the end was stolen from OPMIs by management and the board.

 

AIG and BAC were troubled companies, but management got put in place who had the right ideas and that were willing to undertake what was necessary to turn the ship around.  Humongous positions here.

 

Bascially, management is huge and should be taken into account when sizing positions.

 

I think the difference between AIG/BAC and the others (DELL, SHLD, SD, BBRY, etc) is quality of the business in terms of inherent earnings power. Both AIG and BAC have solid underlying earnings power due to the nature of their businesses. They are burdened with issues but they did not impact the core earnings that these businesses generate. All they needed is competent management who would focus on resolving these issues and the core earnings would shine through. No great heroics needed.

 

For the others (DELL, SHLD, SD, BBRY, CHK, etc) the core earnings power is suspect or you are relying on asset value to be monetized. All these require some significant changes to their business model (DELL, SHLD, BBRY) or asset dispositions and significant operational changes (SD, CHK). Good management is not enough. We need both great management and lots of luck.

 

To use Mr. Moynihan example, BAC and AIG are like well trained athletes burdened with 200 pound backpacks going up a mountain. All they have to do is get rid of the backpacks and they can zoom up. The others (DELL, SHLD, SD, BBRY, CHK, etc) are like morbidly obese and only way they would be successful in climbing up the mountain is by losing weight which is a pretty tough task and not many are successful.

 

If Mr. Moynihan and Mr. Lambert had reversed their roles I do not think BOA and SHLD would be vastly different from what they are today. Same with Mr. Benmosche and Mr. Dell.

 

The causality, I think, runs in the other direction. Good businesses would make us think management is much better than they really are and vice versa. I am not saying management is not important. Once you can assure yourself that management is competent (based on long track record and their ideas for how to run the business) and have the right incentives, it really is more about the quality of the underlying business.

 

Vinod

 

It's what Buffet says. You're better off betting on a business with a short term solvable proble rather than one needing a full turn around.

[Alekbaylee]

So supposedly Fairfax submits draft offer and the share price dives. What give?

 

http://www.theglobeandmail.com/report-on-business/fairfax-submits-draft-blackberry-offer-as-spectre-of-rival-bid-looms/article14674315/

[txlaw]

I'm not sure if one needs dozens of these types of positions, but there definitely needs to be some serious thought put into portfolio sizing when going into these types of companies.  And management is almost always the X-factor that matters.

 

CLWR was a big hit, but it took a Charlie Ergen to really get S to pay value.  It was a small position.

 

BBRY will be profitable overall, but probably not on my latest tranche of shares.  Another small position, though it grew larger when it was trading sub-$7.  If PW hadn't gotten on the board, I wouldn't have invested, but he doesn't appear to have made that much of a difference in terms of preserving value.

 

SHLD has been profitable, but it remains to be seen if ESL will really utilize the assets for their "highest and best" use.  This is a pretty big position for me, and it's in part due to the notion that ESL has a plan (albeit, a flexible one) and is trying to execute.

 

SD will be profitable for me, but only because TPG came in with their activism -- if they hadn't, perhaps we would have another FBK situation.  SD is a big position, but only because TPG came in.

 

CHK will be highly profitable, but it really became a big position only after SEAM and Icahn got McClendon to step aside.  Another management change.

 

DELL was very profitable and was a pretty big position for me, but in the end was stolen from OPMIs by management and the board.

 

AIG and BAC were troubled companies, but management got put in place who had the right ideas and that were willing to undertake what was necessary to turn the ship around.  Humongous positions here.

 

Bascially, management is huge and should be taken into account when sizing positions.

 

I think the difference between AIG/BAC and the others (DELL, SHLD, SD, BBRY, etc) is quality of the business in terms of inherent earnings power. Both AIG and BAC have solid underlying earnings power due to the nature of their businesses. They are burdened with issues but they did not impact the core earnings that these businesses generate. All they needed is competent management who would focus on resolving these issues and the core earnings would shine through. No great heroics needed.

 

For the others (DELL, SHLD, SD, BBRY, CHK, etc) the core earnings power is suspect or you are relying on asset value to be monetized. All these require some significant changes to their business model (DELL, SHLD, BBRY) or asset dispositions and significant operational changes (SD, CHK). Good management is not enough. We need both great management and lots of luck.

 

To use Mr. Moynihan example, BAC and AIG are like well trained athletes burdened with 200 pound backpacks going up a mountain. All they have to do is get rid of the backpacks and they can zoom up. The others (DELL, SHLD, SD, BBRY, CHK, etc) are like morbidly obese and only way they would be successful in climbing up the mountain is by losing weight which is a pretty tough task and not many are successful.

 

If Mr. Moynihan and Mr. Lambert had reversed their roles I do not think BOA and SHLD would be vastly different from what they are today. Same with Mr. Benmosche and Mr. Dell.

 

The causality, I think, runs in the other direction. Good businesses would make us think management is much better than they really are and vice versa. I am not saying management is not important. Once you can assure yourself that management is competent (based on long track record and their ideas for how to run the business) and have the right incentives, it really is more about the quality of the underlying business.

 

Vinod

 

I think there definitely is a distinction between different types of "troubled" companies, but I would hardly call any financial company a good business.  On the contrary, management is vital -- at least in the long run.  Otherwise, it's a matter of time before implosion or severe dilution occurs. 

 

AIG almost imploded -- if the original plan to break it up occurred, equity holders would have gotten $0, but Benmosche and others convinced the Feds to allow them to shrink instead.  BAC probably wasn't in danger of imploding, but if Moynihan hadn't taken a stand on litigation and really started to cut the expenses, it's possible that ML could have caused severe dilution to occur for equity holders.  ML itself was in danger of being a complete $0 too before BAC stepped in.  (And remember Bear Stearns, which had NAV but almost got a $2 bid based on Treasury's desire to combat moral hazard.)

 

But you're right that with AIG and BAC, you could "cut away at the cancer" and have a nice going concern biz remaining.  And that might not require excellent management.  But it certainly required good management. 

 

I'd put SD and CHK more on the same side as AIG and BAC.  The lowest possible NAVs there is fairly certain (as certain as can be in the O&G biz), and when you put in proper management -- they don't have to be brilliant, just disciplined -- you unlock that value, while possibly getting upside in new investment.  Again, though, good management was necessary for the "turnaround."

 

With BBRY and DELL, management is certainly more important because the assets, which are largely intangible in nature, can waste away or become obsolete/less valuable more quickly based on management action (or inaction).  I think that largely has to do with the fact that these are tech sector assets.  With DELL, I think with time, they would have made the highest and best use of their own assets, which were better than BBRY's because they are more like IBM's assets (more distribution channel-related). 

 

BBRY management was much less competent than DELL's, and their assets are much more technology-centric, where innovation and creative thinking is required.  So, arguably, great management was needed to fully get the value of those assets in house.  Otherwise, a resource conversion would be necessary, which is what I was counting on to put a floor on BBRY's value.  However, management can also affect when resource conversion occurs, while simultaneously affecting the value of the assets themselves over time.  That was always a risk with BBRY, and then you also have other dynamics at play (control investors, management financial incentives, etc.).

 

CLWR was a special situation because the spectrum they controlled was very valuable, but S and CLWR were tied to the hip, and CLWR management was subpar in comparison to S management.  Luckily, Ergen stepped in to prevent the control investor (S) from stealing the assets. 

 

So I would argue that in any "turnaround" or "troubled" or "distressed" situation, you need to have some actor in there that will actually unlock value, whether in the form of asset sales or turning around the going concern biz.  The ease of "turnaround" and the caliber of management necessary will vary based on each particular situation.

[enoch01]

So supposedly Fairfax submits draft offer and the share price dives. What give?

 

http://www.theglobeandmail.com/report-on-business/fairfax-submits-draft-blackberry-offer-as-spectre-of-rival-bid-looms/article14674315/

 

Don't know.  But I think Watsa's letter of intent has lit the appropriate fire.  I bought my first shares ever yesterday.

[T-bone1]

I'm gonna trust Prem on this one (and basically anything else he says he is going to do).

 

Bought calls today after never investing in BBRY before . . .

[Guest valueInv]

That point has already been proven.

[Guest valueInv]

What off-balance sheet commitments?

 

http://allthingsd.com/20131004/blackberry-could-burn-through-most-of-its-cash-in-just-six-quarters/?reflink=ATD_yahoo_ticker

 

Anybody know about this?

[A_Hamilton]

What off-balance sheet commitments?

 

http://allthingsd.com/20131004/blackberry-could-burn-through-most-of-its-cash-in-just-six-quarters/?reflink=ATD_yahoo_ticker

 

Anybody know about this?

 

Yes, they have supply purchase agreements for raw materials and have to pay to utilize the manufacturing lines of their manufacturers (Jabil) who are making Z30 and Q10 paperweights.

[rpadebet]

What off-balance sheet commitments?

 

http://allthingsd.com/20131004/blackberry-could-burn-through-most-of-its-cash-in-just-six-quarters/?reflink=ATD_yahoo_ticker

 

Anybody know about this?

 

Yes, they have supply purchase agreements for raw materials and have to pay to utilize the manufacturing lines of their manufacturers (Jabil) who are making Z30 and Q10 paperweights.

 

Yes supply purchase agreements were 5+ billion last quarter and now after the write down, some sales and inventory charge it is 2.5+ bill.

 

You can do your own calcs on how much cash would be burnt getting through those supply commitments. Another source of cash burn is laying off employees (current estimate is $400 mill for laying off 1/3 employees). Final source of cash burn is "intangible acquisitions" they have to make each quarter, which is another name for the licensing fees they pay others for using their patents (it is a kind of capex). They show it in their reports as acquisition of intangible property, but take equivalent amortization charge against it. But that is a cash burn economically speaking and I would imagine it would be proportional to the blackberry phones currently in use utilizing that technology (so on declining path)

 

Offsetting these are sources of cash like declining hardware sales and declining service revenues.

 

One can estimate net cash burn from the above. And that is why time is critical for this sale to happen. Longer you wait, the worse it gets. I believe that is the motive behind PW's bid, he seemingly put together at such short notice without financing in place. He probably wanted to light some fire under the management and get them to start selling some pieces soon.

[krazeenyc]

http://finance.yahoo.com/news/exclusive-cisco-google-sap-discussing-001728065.html

[alertmeipp]

According to analysts, BlackBerry's assets include a shrinking yet well-regarded services business that powers its security-focused messaging system, worth $3 billion to $4.5 billion; a collection of patents that could be worth $2 billion to $3 billion; and $3.1 billion in cash and investments.

 

Okay, that's like close to 20 bucks.

[mikazo]

BlackBerry hit with shareholder lawsuit

 

Pearlstein is seeking to represent a class of "thousands" of shareholders who bought stock between Sept. 27, 2012, when the company touted its strong financial position, and Sept. 20 of this year, when it revealed it would have to write down between $930 million and $960 million US related to unsold BlackBerry 10 devices, according to the lawsuit.

 

http://www.cbc.ca/news/business/blackberry-hit-with-shareholder-lawsuit-1.1913852

 

Man buys BBRY, company isn't doing as well one year later, man loses money. How is this different than any other time someone has bought a stock and the company doesn't do as well as they had hoped?

[Guest wellmont]

According to analysts, BlackBerry's assets include a shrinking yet well-regarded services business that powers its security-focused messaging system, worth $3 billion to $4.5 billion; a collection of patents that could be worth $2 billion to $3 billion; and $3.1 billion in cash and investments.

 

Okay, that's like close to 20 bucks.

 

those numbers are wrong.

[vinod1]

 

I think there definitely is a distinction between different types of "troubled" companies, but I would hardly call any financial company a good business.  On the contrary, management is vital -- at least in the long run.  Otherwise, it's a matter of time before implosion or severe dilution occurs. 

 

AIG almost imploded -- if the original plan to break it up occurred, equity holders would have gotten $0, but Benmosche and others convinced the Feds to allow them to shrink instead.  BAC probably wasn't in danger of imploding, but if Moynihan hadn't taken a stand on litigation and really started to cut the expenses, it's possible that ML could have caused severe dilution to occur for equity holders.  ML itself was in danger of being a complete $0 too before BAC stepped in.  (And remember Bear Stearns, which had NAV but almost got a $2 bid based on Treasury's desire to combat moral hazard.)

 

But you're right that with AIG and BAC, you could "cut away at the cancer" and have a nice going concern biz remaining.  And that might not require excellent management.  But it certainly required good management. 

 

I'd put SD and CHK more on the same side as AIG and BAC.  The lowest possible NAVs there is fairly certain (as certain as can be in the O&G biz), and when you put in proper management -- they don't have to be brilliant, just disciplined -- you unlock that value, while possibly getting upside in new investment.  Again, though, good management was necessary for the "turnaround."

 

With BBRY and DELL, management is certainly more important because the assets, which are largely intangible in nature, can waste away or become obsolete/less valuable more quickly based on management action (or inaction).  I think that largely has to do with the fact that these are tech sector assets.  With DELL, I think with time, they would have made the highest and best use of their own assets, which were better than BBRY's because they are more like IBM's assets (more distribution channel-related). 

 

BBRY management was much less competent than DELL's, and their assets are much more technology-centric, where innovation and creative thinking is required.  So, arguably, great management was needed to fully get the value of those assets in house.  Otherwise, a resource conversion would be necessary, which is what I was counting on to put a floor on BBRY's value.  However, management can also affect when resource conversion occurs, while simultaneously affecting the value of the assets themselves over time.  That was always a risk with BBRY, and then you also have other dynamics at play (control investors, management financial incentives, etc.).

 

CLWR was a special situation because the spectrum they controlled was very valuable, but S and CLWR were tied to the hip, and CLWR management was subpar in comparison to S management.  Luckily, Ergen stepped in to prevent the control investor (S) from stealing the assets. 

 

So I would argue that in any "turnaround" or "troubled" or "distressed" situation, you need to have some actor in there that will actually unlock value, whether in the form of asset sales or turning around the going concern biz.  The ease of "turnaround" and the caliber of management necessary will vary based on each particular situation.

 

Do not disagree with what you have said, but, I am trying to understand if you see any distinction between AIG/BAC and others. I have been able to invest in AIG/BAC and make them a very large part of my portfolio but never got comfortable with the others and wanted to see if my reasons make sense.

 

To me Michael Burry's approach of dividing all businesses into three categories makes a lot of sense

 

(1) Those that steadily increase their IV

(2) Those that roughly maintain their IV

(3) Those that lose IV as time goes on

 

Those businesses of type #1 above do so primarily (but not always) because they increase their earnings. I would put BAC and AIG into this bucket. These types of businesses are an easy decision for me to buy when they encounter temporary problems and have good enough management. BAC and AIG met these criteria in 2011 and afterwards. All the problems you mentioned have mostly been addressed or have enough visibility to have reasonable confidence that they would be resolved.

 

Businesses of type #2 to me includes CHK, SD, SHLD, DELL. Core earnings are too difficult to assess and you are estimating net asset value. NAV can occasionally jump but it is mostly luck (due to commodity prices). Even when you have high level of confidence in the "worst case" NAV, realizing NAV via either asset sales or operational improvements is too unpredictable. I can see buying a bunch of these as a group but making any one of these into a large position seems too risky to me.

 

Businesses of type #3 includes something like BBRY, Net Nets losing money, etc. All the comments for type #2 applies only these are much worse.

 

A business of type #1 that generates earnings seems to be an easy choice versus a business that relies on asset value monetization. Does this have any impact on your decision to invest or the size of the position?

 

Thanks

 

Vinod

 

 

 

 

 

 

 

 

[ERICOPOLY]

To me Michael Burry's approach of dividing all businesses into three categories makes a lot of sense

 

(1) Those that steadily increase their IV

(2) Those that roughly maintain their IV

(3) Those that lose IV as time goes on

 

That seems like a rephrasing of Buffett's style.  Stick with predictable businesses and you'll get fewer negative surprises.  Although this boils down to the most basic of fortune cookie wisdom -- "predict what is predictable and you will be richly rewarded".

[txlaw]

Do not disagree with what you have said, but, I am trying to understand if you see any distinction between AIG/BAC and others. I have been able to invest in AIG/BAC and make them a very large part of my portfolio but never got comfortable with the others and wanted to see if my reasons make sense.

 

To me Michael Burry's approach of dividing all businesses into three categories makes a lot of sense

 

(1) Those that steadily increase their IV

(2) Those that roughly maintain their IV

(3) Those that lose IV as time goes on

 

Those businesses of type #1 above do so primarily (but not always) because they increase their earnings. I would put BAC and AIG into this bucket. These types of businesses are an easy decision for me to buy when they encounter temporary problems and have good enough management. BAC and AIG met these criteria in 2011 and afterwards. All the problems you mentioned have mostly been addressed or have enough visibility to have reasonable confidence that they would be resolved.

 

Businesses of type #2 to me includes CHK, SD, SHLD, DELL. Core earnings are too difficult to assess and you are estimating net asset value. NAV can occasionally jump but it is mostly luck (due to commodity prices). Even when you have high level of confidence in the "worst case" NAV, realizing NAV via either asset sales or operational improvements is too unpredictable. I can see buying a bunch of these as a group but making any one of these into a large position seems too risky to me.

 

Businesses of type #3 includes something like BBRY, Net Nets losing money, etc. All the comments for type #2 applies only these are much worse.

 

A business of type #1 that generates earnings seems to be an easy choice versus a business that relies on asset value monetization. Does this have any impact on your decision to invest or the size of the position?

 

Thanks

 

Vinod

 

I do make a distinction between AIG/BAC and some of the others mentioned.  But it's less to do with throwing them into buckets of increasing IV, maintaining IV, and decreasing IV than with assessing the moat surrounding, or longevity of, the business (which tends to imply a floor on IV), and the discount to IV based on market price. 

 

The reason why I personally wouldn't use "IV rate of change" buckets is because whether a company fits into a bucket can change based on a number of variables.  A lot of financial companies steadily increased their IV per share until the IV per share got completely destroyed in the financial crisis.  BBRY had a huge increase in IV and then a pretty drastic decrease in IV.  Of course, it's debatable whether IV is a moving target or whether there is one true IV.  I'm of the school that defines IV as a range assessment based on the information currently available, which means that I always consider IV a moving target. 

 

So the reason why I would generally put more money into AIG/BAC is because I view them as quasi-public utilities.  They provide commodity products that we will need for the foreseeable future, so the expected IV range is more easily assessable than, say, a tech company.  And the discount to the floor on that IV range is still very high.  However, if I have a cigar butt that is trading at $0.05 on the dollar, and I think that even with value burn, I'm going to recover $0.5 on the dollar, I might a put a substantial amount into that.  Especially if there's a catalyst involved. 

 

I guess it's a matter of style.  I definitely will tend to put more money into the "surer" things, but not always.  I strongly believe that there's more than one way to skin a cat, as they say.

 

Regarding CHK or SD, I'm not sure that it makes sense to put an O&G firm into your second bucket.  Let's just say that PV-10 is an approximation of IV (more of a DCF-based IV versus an earnings capitalization-based IV).  Well, as exploration activities continue, the PV-10 hopefully increases, even if the commodity price remains fixed over the long term at the cost of production.  Of course, to sustain an increase in IV, the O&G firm must obtain additional inventory that will yield energy in a way that is profitable.  An XOM has so much scale, expertise, influence, and cash that they are essentially a merchant bank that should always be able to find inventory that they can monetize for a profit, which makes it closer to a BofA than an SD.  Which means you can take their growing earnings and put a cap rate on it.  CHK, IMO, is becoming more like XOM, so I view them a bit differently than SD.

 

That was a bit of a rambling answer, but the short of it is that I will trade some certainty on IV range away for potentially higher payoff, but I do tend to concentrate more in the "surer" bets, particularly because I am always investing as an OPMI.  But to each his own, I say. 

[constructive]

I'm skeptical that an investment process which buys struggling companies like BBRY, DELL, CLWR, SHLD, SD, and CHK somehow always manages to bottom tick them and has a 100% batting record on those companies.