Ask Packer - No Seriously, Ask Him Anything (AHA)!

[infinitee00]

OK. Maybe not anything but well you know ...!

 

After the insightful and brilliant discussions in the 'Ask Eric' and 'Ask Kraven' threads, I thought I'd would start a thread on Packer as well. I learned about Packers phenomenal track record in the Prince Al Waleed thread (27% annualized for the last 10+ years) and decided to pick his brains.

 

I am a relatively new member of this board ( about a year old, although chronologically I am much closer to Irving Kahn than Munger !) and consequently not very aware of all the superstar investors on this Board with fantastic track records (Packer suggested twacowcfa and JEast as two others - superstars whom I would very much like to hear from). Being a person who likes to learn from both success and failure, I would've also liked to learn from people who have made big mistakes in their investment decisions as well, but unfortunately these investors generally keep their mouths shut or do not stick around.

 

This board has been awesome in terms of learning experience and I am very grateful to everyone who continue to take the time to inform, educate and share their thoughts unselfishly with others. So, the purpose of these Q&A threads, as I see it, is being able to learn from the experiences ( both good and bad) of investors who have traveled the road ahead of us ( without searching every thread for their investment philosophy) and to improve ourselves and our investing processes from their insights and knowledge.

 

So without further ado here is my opening volley for Packer ( a little long but then again no one ever saved the world with brevity)

 

• Concentrated or Diversified? % of portfolio in top 5 positions?
  
• Large Cap, Small Cap, Nano Cap, No Cap ?
  
• Typical portfolio - Plain vanilla longs, special situations, options/warrants, shorts? Use of leverage or margin ?
  
• Typical mix in American listed companies vs Foreign listed companies (%) ? ( Do you eat Chinese RTOs for breakfast? !!)
  
• Top 3 methods for searching investment ideas e.g Screens, message boards/blogs, 52-week low list, bankruptcy filings, newspapers, SEC filings etc.
  
• Favorite type of stock - Net Net, Turnaround, special situations, Cyclicals, Anything that talks and walks ?
  
• Typical due diligence - conf. call transcripts, 10K/10Q/proxies, message boards, forensic accounting, Others - please specify?
  
• Average time spent in due diligence ?
  
• Best Idea (Present)- Why?
  
• Best Idea (Ever)- Why?
  
• Worst Idea (Ever) - Why?
  
• Particular Industry Expertise/Favorite Industry or Sector ? Most important factors to learn (maybe 3-5) about that industry in order to invest ? Any other particular insights ?
  
• Thoughts on when to sell a stock ?
  
• Most important lesson(s) learned in investing?
  
• Do you believe '42' to be the Answer to the Ultimate Question of Life, the Universe, and Everything  ;) ? http://tinyurl.com/9mc4tyc ( Sorry, couldn't help it !!)
  

[giofranchi]

Being a person who likes to learn from both success and failure, I would've also liked to learn from people who have made big mistakes in their investment decisions as well, but unfortunately these investors generally keep their mouths shut or do not stick around.

 

Hey! No problem! You could start a “Ask giofranchi” thread right away!! I would be very pleased to talk about mistakes… I have plenty of experience!!  ;D ;D ;D

 

Anyway, jokes aside, I agree that Packer is among the smartest investors out there!  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[twacowfca]

OK. Maybe not anything but well you know ...!

 

After the insightful and brilliant discussions in the 'Ask Eric' and 'Ask Kraven' threads, I thought I'd would start a thread on Packer as well. I learned about Packers phenomenal track record in the Prince Al Waleed thread (27% annualized for the last 10+ years) and decided to pick his brains.

 

I am a relatively new member of this board ( about a year old, although chronologically I am much closer to Irving Kahn than Munger !) and consequently not very aware of all the superstar investors on this Board with fantastic track records (Packer suggested twacowcfa and JEast as two others - superstars whom I would very much like to hear from). Being a person who likes to learn from both success and failure, I would've also liked to learn from people who have made big mistakes in their investment decisions as well, but unfortunately these investors generally keep their mouths shut or do not stick around.

 

This board has been awesome in terms of learning experience and I am very grateful to everyone who continue to take the time to inform, educate and share their thoughts unselfishly with others. So, the purpose of these Q&A threads, as I see it, is being able to learn from the experiences ( both good and bad) of investors who have traveled the road ahead of us ( without searching every thread for their investment philosophy) and to improve ourselves and our investing processes from their insights and knowledge.

 

So without further ado here is my opening volley for Packer ( a little long but then again no one ever saved the world with brevity)

 

• Concentrated or Diversified? % of portfolio in top 5 positions?
  
• Large Cap, Small Cap, Nano Cap, No Cap ?
  
• Typical portfolio - Plain vanilla longs, special situations, options/warrants, shorts? Use of leverage or margin ?
  
• Typical mix in American listed companies vs Foreign listed companies (%) ? ( Do you eat Chinese RTOs for breakfast? !!)
  
• Top 3 methods for searching investment ideas e.g Screens, message boards/blogs, 52-week low list, bankruptcy filings, newspapers, SEC filings etc.
  
• Favorite type of stock - Net Net, Turnaround, special situations, Cyclicals, Anything that talks and walks ?
  
• Typical due diligence - conf. call transcripts, 10K/10Q/proxies, message boards, forensic accounting, Others - please specify?
  
• Average time spent in due diligence ?
  
• Best Idea (Present)- Why?
  
• Best Idea (Ever)- Why?
  
• Worst Idea (Ever) - Why?
  
• Particular Industry Expertise/Favorite Industry or Sector ? Most important factors to learn (maybe 3-5) about that industry in order to invest ? Any other particular insights ?
  
• Thoughts on when to sell a stock ?
  
• Most important lesson(s) learned in investing?
  
• Do you believe '42' to be the Answer to the Ultimate Question of Life, the Universe, and Everything  ;) ? http://tinyurl.com/9mc4tyc ( Sorry, couldn't help it !!)
  

 

 

"A wet bird never flies at night." is a more memorable absurd answer to the ultimate question than, "42".  But the best short story Isaac Asimov ever wrote (better even than, "Nightfall") will get you within a hair's width of the true answer.  The title of the story is: "The Last Question".  :)

[Packer16]

As a start:

 

Diversifies versus concentrated - I like to buy what at least I think I know.  Given I have a day job and a family, I don't have the time to understand alot of industries.  I tend to focus on media/telecom, oil and gas, insurance, leasing, entertainment and banking.  At some point I would like to know more about real estate.  This space is more than large enough to keep me busy.  My top 5 position are about 62% of my portfolio and 86% in my 10 holdings.  This leads to a volatile ride at times (51% decline in 2008).  I want to do what others are not as this is how you outperform in competitive markets.

 

Size - I go where I find bargains.  This has been primarily below $300 million when purchased but I have owned larger firms as well. 

 

Portfolio composition - primarily stock with a few warrants (about 10%).  Cheap stocks with bargain based weighting (large bargains have a higher weight).  At one time (2005 to 2008), I was heavily invested in LEAPs (greater than 25%) and lost alot of $$ (see 2008 performance).  At this point I limit my leveraged portion of my portfolio (warrants with expiration greater than 4 years) to no more than 10 to 15%.  I found out the hard way it is difficult to get both undervaluation and timing right (although it does not appear on the surface that it is the case).  I also have a competition of stocks in the portfolio versus new prospects every few weeks, to see if a switch makes sense.

 

US vs. foreign stocks - I stay away from non-developed market unless I can get a lot (2x plus) upside from similar upside in developed markets and the firms are backed by assets (ie. Lukoil and Gazprom of Telefonica del Peru).  At times I may have had up to 10% the portfolio in non developed markets stocks.  My approach is to look at US/UK/Dutch-based markets first, then other developed the emerging markets with assets.  I have stayed away from China as I have not been able to get comfortable with I am going to have the rights to the cash flows if successful.  For non UK/Dutch based systems, you have to make sure that the minority interest shareholders are aligned with the gov't and large shareholders.

 

Top method - screen for low EV/EBITDA, Equity of FCF, Greenblatt screen to identify cheap firms and associated industry segments.  Also make sure industries do not have continuosly declining cash flows (such as dial-up internet or paging).  When I see a few firms in a given industry pop up on screens I will put together a spreadsheet the "tracks" the multiples for firms in that industry.  This provides a value framework that assists in buy and sell points for stocks.  I also like to look at proxy statement to ensure that management is not out for themselves (it has good metric based incentives, management holds a multiple of salary on stock and does not change metrics after the fact to give higher comp or change option strike prices).

 

Type of stock - I specifically look at spin-offs, post-bankruptcy and rights offerings situations for mispricings versus comps in the specific segment.  Otherwise I just like cheap stocks with recurring revenues of some sort. 

 

Due diligence - use 10-Ks, annual reports, this message board, value investor holdings, IR presentations and conf call transcripts for firms I am interest in.  Average time spent on DD about 10 hours.

 

Current best idea - Lin TV or Alliance Healthcare (see threads on these in idea section)

 

Best idea ever - LEAPs on FFH, Saga, Salem Communications, NTL (post-bankruptcy) or Petrobank.

 

Worst ideas - LEAPs on sub-prime lenders (LEND, NEW), sub-prime lender (Delta Financial), NTL (pre-bankruptcy) 

 

Industry factors - vary by industry.  Five Rules for Successful Investment and The Little Book that Build Wealth are good starting points for industry factors.  I try to find segments that have some nature of moats so I can focus on valuation.

 

Time to get some ham.  More to come...

 

 

Packer

 

[racemize]

Thanks for doing this Packer, I have a couple of perhaps more personal questions, so feel free to ignore if you don't want to answer:

 

1) What kind of day job do you have?

2) How old are you?

3) Are you planning on retiring from your day job to do investing, and if so, how far off do you think that is?

(FYI, I'm asking 2 and 3 sort of together to get a sense of time spent investing to retirement, or that sort of idea)

 

[writser]

Yeah, thanks for doing this. For the record, on most forums the "Ask Me Anything" threads are opened by the person of interest themselves. Isn't it a bit rude to open a topic to ask Packer anything, if you're not Packer? (Same holds for the Kraven thread). Then again, maybe the topic starters asked for permission.

[Parsad]

Yeah, thanks for doing this. For the record, on most forums the "Ask Me Anything" threads are opened by the person of interest themselves. Isn't it a bit rude to open a topic to ask Packer anything, if you're not Packer? (Same holds for the Kraven thread). Then again, maybe the topic starters asked for permission.

 

But then that can be construed as egotistical as well.  I'm not sure there is any right way or wrong way to do this, but as long as the inquisitive mind is polite about it, and the respondent has the time and inclination to respond...it's all good!  ;D 

 

I think there is also a level of "pay it forward/back" involved here.  Alot of people feel indebted to each other over the years because of the knowledge and comraderie they've shared.  Cheers!

[Packer16]

Yes, the starter did ask permission which I appreciated.  Follow-up on last 2 questions:

 

When to sell - 2 times.  First, when my target is reached.  For example on the media cos it is about 8/9x EBITDA.  The other time is when I am wrong.  I have a tendency to buy levered firms so I need to make sure the EBITDA is not in a LT down trend.  I was able to this with LNET before it went BK.  This is the first time I have successfully done this.  Previously, I have gone down with the ship in NTL (now Virgin Media), Delta Financial and Charter Communications.  Due to this tendancy I check and monitor the coverage and leverage ratios of the levered firms I invest in.  What also helps in some of these situations is a large value investor on my side of the balance sheet (equity) but not always as Monish Pabrai held Delta Financial and D. Einhorn held New Century Financial.  Both of those were built on poor business models that I did not realize until it was too late.

 

Most important lesson - be patient and do what others are not doing.

 

Day job - Business appraiser (value companies, distressed loans, derivatives and intangible assets).  With the job it keeps me focused on what is important due time limitations for investing.

 

Age - 49; kids 18 and 14

 

Retirement - I don't know but as long as I enjoy day job I will keep on doing valuation of some sort. 

 

Packer

[infinitee00]

Yeah, thanks for doing this. For the record, on most forums the "Ask Me Anything" threads are opened by the person of interest themselves. Isn't it a bit rude to open a topic to ask Packer anything, if you're not Packer? (Same holds for the Kraven thread). Then again, maybe the topic starters asked for permission.

 

I am curious, why do you consider asking genuine questions and trying to improve oneself from someone else's experience rude?  On the contrary, I think the AMA threads on Reddit sometimes border on vanity and narcissism.

 

Heck, I want to start a thread for every single investor on this board who have had long term (10+ years) track records of >20% ( while not foolproof, with small pools of capital I consider 20% to be a good threshold that separates the best investors from the good), but then that may get me banned from this board !

 

Btw, I did ask for his permission.

[DTEJD1997]

OK:

 

Mr. Packer, I have a few questions for you:

 

A). How long have you been investing?

B). What type of education do you have?

C). What is the best year you've had, i.e. largest % year up?

D). What is your long term record, annualized?

E). As you age & get more experience, do you find investing to be easier?  Are you finding more opportunities?

F). Do you stay largely 100% invested?

G). Do you hedge your positions, or have significant cash holdings when you think it is warranted?

 

Thank you for your time!

 

 

[infinitee00]

Packer, Thanks again for taking the time do this. I very much appreciate your thoughts and found the following very insightful

 

I want to do what others are not as this is how you outperform in competitive markets.

I found out the hard way it is difficult to get both undervaluation and timing right

I also have a competition of stocks in the portfolio versus new prospects every few weeks, to see if a switch makes sense.

 

Here's a few follow-up questions

 

This leads to a volatile ride at times (51% decline in 2008)

 

I imagine this scenario everyday with my own portfolio. How to prepare myself emotionally so that if there's a 50% or more decline in my portfolio I do not freeze in fear but keep adding to my best and most undervalued positions. Since I invest my family's money, how do I convince my family that this is not a permanent loss of capital but just paper loss.

 

How did you handle the large down swing emotionally/mentally?

 

My approach is to look at US/UK/Dutch-based markets first, then other developed the emerging markets with assets.

 

I am curious - why Dutch? Can you give us a few pointers how the Dutch market is different from the US market? How does one go about looking for undervalued companies in the Netherlands/Holland? How is their corporate governance?

 

If I remember correctly, in the book 'King of Capital' it is mentioned that European markets generally trade at lower multiples compared to US. If that true how do you know when a stock has reached intrinsic value based on (say) EV/EBITDA multiples or does the IV metric still remain the same?

 

Have you looked at Australia/NZ market?

 

When I see a few firms in a given industry pop up on screens I will put together a spreadsheet the "tracks" the multiples for firms in that industry.  This provides a value framework that assists in buy and sell points for stocks.

 

Are the multiples the same for every industry or do you have favorite multiples for each industry? Can you give us an example ?

 

I specifically look at spin-offs, post-bankruptcy and rights offerings situations for mispricings versus comps in the specific segment.

 

How do you search for post bankruptcy/rights offering and how do judge whether they are mispriced or not?

 

I have a tendency to buy levered firms so I need to make sure the EBITDA is not in a LT down trend.

 

How do you get confidence that is the case as opposed to a few bad years?

 

Day job - Business appraiser (value companies, distressed loans, derivatives and intangible assets).

 

I am guessing that your day job definitely helps you on the valuation front. How do you think appraising businesses as part of your day job different from appraising public companies?

 

Will look forward to your responses and I very much appreciate your time.

[Packer16]

Investing Time - stocks 12 years (last 10 more seriously), mutual funds 25 years. 

 

Education - BSEE (Union College), MBA (UCLA), CFA

 

Best Year - 2009 (+108.9%) helped take sting out of 51.4% decline in 2008 (worst year)

 

LT record - 10 yrs (27.1% annualized); 12 yrs (21.2% annualized) (Note: 10-yr record coincides with 2002 bottom)

 

Easiness - focusing on circle of competence is easier and expanding it leads to more opportunities however the stress of not knowing if you are right or wrong is still the same as when I began.  I have tried to stop mistakes from turning into disasters by doing more credit analysis.

 

100% invested - yes I have and it has led to volatility. 

 

Hedge - I have thought about this but at this point in time the equities I own provide the cheapest set of cash flows out there.  If I were to hedge I would by more FFH.  Puts are cheap but my concern is if the Fed can cause asset inflation the puts will do no good and good cash flowing firms will perform the best.

 

Packer

 

 

[Packer16]

51% decline preparation -  I don't know how to prepare other than find something else to do when the losses hit.  I think in times of decline I have put money to work in cheaper stock so I know at least psychologically I am doing the right thing with that portion of my portfolio.  Usually the large declines like this occur in a sector by sector basis so you have some winners to re-invest in the decliners however in 2008 everything went down so it was a little different.

 

Dutch market - historically the Dutch were the first to develop the joint stock company and had a financing monopoly for many years which allowed them to develop a navy and colonies far larger than their size would  imply.  The UK stole the system when they married off their queen to a Dutch statesman.  So the financing monopoly was expanded to the UK.  Most of the UK colonies inherited the market system (US, Canada, Australia and NZ) and thus had the fruit of the market system before others.  These countries have had working market systems longer than others and therefore I think are safer than others who have blended systems (China) or are newer to markets (Japan and Korea).

 

Industry valuation - Attached is an example for the leasing industry.  I started by investing in SSW (a ship leasor) then expanded to include an airline leasor (ATSG) and a medical equipment leasor (AIQ).  As you see from the sheet if you look at the relative mulitiples you can see the cheap stocks jump out (highlighted in red).  This has been and probably will be expanded in the future.

 

Post-bankruptcy, rights offerings search - I text search Yahoo Finance News.  As for valuation, I use spreadsheets as developed above.

 

Confidence if EBITDA data - Like to look at 10-year trend and see in what context the EBITDA was generated.  For example, if you look at radio, most companies have had a decline in EBITDA since 2005.  However, two have not (SALM and SGA).  You can now add BBGI to this list.  When I saw SALM and SGA trading at a discount to other radio with better performance that is what peaked my interest.  Similarly with the TVs (TVL, NXST and GTN) had good growth rates but were behind the valuation of others with similar growth like SBGI.  Overall I think the TVs are misunderstood.  What industry do yo know that has increased EBITDA by 40 to 100% since 2005/6 but the valuations are down?   

 

Private versus public businesses - Private businesses tend to be smaller and in some case good niche businesses.  Other than the valuation drivers are the same, FCF.

 

Packer

Leasing_Worksheet.xlsx

[Yours Truly]

Great thread and impressive track record! congrats!

 

On that, regarding your top 5 successes, what were the % gains on them?

[augustabound]

I agree, great thread.  I've liked all the Ask threads so far.

 

About your leasing spreadsheet, what made you look at them in the first place?

Contractual obligations with the shippers and airlines?

[ShahKhezri]

Packer -

 

Is there any reason why you haven't expanded your circle to container lessors?

 

 

[Packer16]

largest % gains - FFH LEAPS (550 to 875%), Telephonica del Peru (415%), Petrobank (367 to 672%), Uranium One (396%) and  Saga Communications (297% to 614%)  - I also have some 100% losses

 

Lessors - Fist lessor was Seaspan introduced by JEast which has nice recurring revenue that was being levered by lower cost debt

 

I focus on where the bargains are and then expand from there.  I probably should include container lessors.  Do you which ones are publicly traded? 

[zippy1]

largest % gains - FFH LEAPS (550 to 875%), Telephonica del Peru (415%), Petrobank (367 to 672%), Uranium One (396%) and  Saga Communications (297% to 614%)  - I also have some 100% losses

 

Lessors - Fist lessor was Seaspan introduced by JEast which has nice recurring revenue that was being levered by lower cost debt

 

I focus on where the bargains are and then expand from there.  I probably should include container lessors.  Do you which ones are publicly traded?

Packer,

 

      You are too humble. I bought some VRTS around $16-18 which you mentioned about three years ago.  I sold around $60-$80 last March. Now it is trading around $170-$180.  A ten bagger from you!

[Packer16]

I am glad it worked out.  I should have held on longer.  I only got about 30% of the upside, sold at 0.8% of AUM.  The valuation looked like it increased from 0.6% of AUM to almost 3.0% of AUM now as a well as doubling AUM.  WOW!  As I recall, that was one where the value to AUM was way out of line for VRTS versus the other asset managers (@ about 2% of AUM) because it was a recent spin-off.  I sold when I found some of the radios/TVs that were so cheap.

 

Packer

[stahleyp]

good stuff, packer. thanks for posting!

[motownsf]

largest % gains - FFH LEAPS (550 to 875%), Telephonica del Peru (415%), Petrobank (367 to 672%), Uranium One (396%) and  Saga Communications (297% to 614%)  - I also have some 100% losses

 

Lessors - Fist lessor was Seaspan introduced by JEast which has nice recurring revenue that was being levered by lower cost debt

 

I focus on where the bargains are and then expand from there.  I probably should include container lessors.  Do you which ones are publicly traded?

Packer,

 

      You are too humble. I bought some VRTS around $16-18 which you mentioned about three years ago.  I sold around $60-$80 last March. Now it is trading around $170-$180.  A ten bagger from you!

 

 

Did the same thing with VRTS. Sold too early!

[zippy1]

VRTS was a great pick in several ways.  First, it was a spinoff. The company that spun it off, I think, went over bankruptcy. The price vs. AUM is really cheap as Packer noted. It probably will be difficult for investment managers to explain to customers how great this investment is.

 

My thought at the time Packer brought it up was "If I were to be an investor manager, I would not touch it with a ten-foot pole."  It really was a great pick. Thanks to Packer. It paid for my son's four-year college expenses!  ;)

[fenris]

I focus on where the bargains are and then expand from there.  I probably should include container lessors.  Do you which ones are publicly traded?

Container lessors: TGH, TAL, CAP

Recent transactions: Triton Container by Warburg Pincus, GE SeaCo by Chinese conglomerate and BOX (Seacube) by Ontario Teachers' Retirement Plan

 

Compared to other leased equipment, containers have very long useful life and high residual value (scrap value of metal). Also shippers are cash strapped (have been since crisis) and global mix continues to shift from shipper to lessor ownership. Having that said, pretty much all production capacity is located in China and if there is a rush of capital lease rates could get hammered as the production cycle is short and the product a commodity. Nice thing about these firms is that the assets are global and the players are incorporated offshore to minimize tax burden. In combination with depreciation of container fleet this eliminates cash taxes for the time being.

 

Sector has had a great run since the crisis...

[Packer16]

Thanks I have added them to my leasing spreadsheet but they do appear a bit pricey in comparison to some of the other sectors at this time (8 to 15x EBITDA and 6% to 10% FCF yields).

 

Packer

[fenris]

Yes. Check out how much they were able to grow earnings since the crisis as a result of shippers' lack of capital to invest in containers. Combined with good lease rates (vs. ie. lease rates on ships which collapsed) made for a very favorable environment. I think these are great businesses but I'm not sure that this is a great time in the cycle to invest in them (not invested in any of them right now).