Investment Process

[wknecht]

Has anyone come across descriptions or interviews where some of the greats discuss the specifics of their firm's investment process that they could point me to? I'm thinking along the lines of Graham-Newman, Baupost, Hamblin-Watsa, Oaktree, Tweedy Browne etc. I know there's a little about Graham-Newman in Snowball, and HW on this board, but was curious what else is out there.

[onyx1]

Has anyone come across descriptions or interviews where some of the greats discuss the specifics of their firm's investment process that they could point me to? I'm thinking along the lines of Graham-Newman, Baupost, Hamblin-Watsa, Oaktree, Tweedy Browne etc. I know there's a little about Graham-Newman in Snowball, and HW on this board, but was curious what else is out there.

 

I forget where I got this, but no matter, enjoy!

Bruce Berkowitz on investment process… 9/30/2009

Ignore the crowd

Owner earnings computed in as many ways as possible

SEC reports, conference calls, investor presentations

Focus on every business element that requires judgement

Review every element of accounting that may not reflect reality

Including insurance claims, bad debt, lawsuits, healthcare liabilities, pension obligations, and the government

Look for hidden expenses

Management is guilty until proven innocent

Compare reported earning to free cash and ask why they are different

Look for inconsistencies between BS, CF, and Income statements

Look at landscape business is operating

Recognize headwinds in economic, demographic, technological, political, or competition

Is business growing?

Assess the entire capital structure of enity

Look at leverage, ROA vs ROE, tangible equity

Off balance sheet items

Can business work without leverage, nad how much do they depend on lenders

Examine goodwill

Review customers, suppliers, competition, substitutes, industry concentrations of power

Regulators, taxing authorities, creditors, retirees, unions.  How powerful are employees?

Study management

How compensated

Do they under promise and over deliver?

Are they true owners vs option holders?

Allow a level playing field with the owners?

How good is paper trail of key executives?

Deep understanding of business?

How have they allocated capital over time?

Cant make good investments with bad people

Review old transcripts and see how they compare to results todays

Consider worst case and illogical extremes

Are there too many variables to examine, monitor, or estimate?

What are correlations with other investments?

How can this investment blow up?

Review price

Margin of safety

Allows for bad luck, stress?

Can we achieve double didgit, growing, FCF yield without risking principal?

Playing russian roulette

Picking up pennies in front of steamroller?

Bruce Berkowitz's Basic Checklist For Investing

1. Can you kill the investment? Is there adult supervision at the company?

2. Is the company essential? Does it depend upon the kindness of strangers?

3. What can the company make? Reasonable profitability for owners?

4. How are owners paid? Distributions?

5. Management - honest in past and present?

6. Does accounting reflect reality?

7. Does the balance sheet match up with the income statement?

8. Catalysts - Buybacks? Misunderstood? Is enterprise having a big problem that is fixable? Everyone's been burned by the stock so afraid to buy it.

9. Are there irrational fears of current headwinds?

10. Does the business have pricing power or unit growth?

11. Can you hold the investment for a long time & does it improve portfolio performance?

On Financials: He's "all in" on financials now. American International Group (AIG). CIT Group (CIT): misunderstood. Bank of American (BAC): misunderstood. Fixable problems. Likes holding companies like Berkshire Hathaway (BRK.A / BRK.B) or Sears Holdings (SHLD). No interest in Europe, plenty to do in the US.

On Sears (SHLD): "I'm happy for people to push down the price." You have to understand the history of anchors in malls in the US to appreciate Sears and Kmart.

Top Ten Lessons Berkowitz Wishes He Learned Long Ago:

1. You always have to have cash, especially when no one else has it. (John Burbank of Passport Capital has said the same: "Cash is most valuable when others don't have it.")

2. No free lunch- it’s not free, or it’s not lunch.

3. You can’t change people! You can change yourself, but not others.

4. You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress. (MF note: Completely baseless guess, but does anyone else think he's possibly referencing the situation where Fernandez left FairholmeCap here?)

5. Volatility is not risk!

6. Always assume you will have bad luck.

7. Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low.

8. If you have to use more than 6th grade math, you’re in trouble.

[wknecht]

Thanks, this is interesting.

 

I'm curious though, has anyone seen specifics of how these principles and things are translated into their firms business processes? Meaning how their decisions are reached, how they divide roles/responsibilities, is capital centrally deployed or is this delegated selectively, what is the process they use to periodically monitor their investments etc. For example, I remember in reading in Snowball that at Graham-Newman, Buffett and other analysts filled out forms of some kind which they presumably passed to Graham and/or the Newmans who made the decision based on unanimous (or majority?) agreement.