Category Archives: Investing Gurus

Simoleon Sense: Investing & Scuttlebutt Research

Posted on February 13, 2013 | Leave a comment

Conversation with Paul Lountzis: Investing & Scuttlebutt Research. Keep checking www.simoleonsense.com to improve and learn.

I’m happy to share with you a conversation I had with my friend Paul Lountzis of Lountzis Asset Management. Over the years I’ve learned a lot about the art of scuttlebutt research from Paul. I asked him if he would share his insights with us, Paul agreed, and the rest as they say is history. Please leave your comments below the post and I’ll ask Paul to answer any questions or thoughts.

Guest Bio:

Prior to forming Lountzis Asset Management, LLC, Mr. Lountzis was employed by Ruane, Cunniff & Company, Inc., New York, NY, a registered investment adviser managing the Sequoia Mutual Fund as well as private accounts, from 1990 through 1999 as an analyst, and as a partner from 1995 through 1999.

Mr. Lountzis was an analyst at Royce & Associates, Inc., New York, NY from 1989 through 1990 where he evaluated small and mid-cap stocks for purchase in institutional accounts as well as various mutual funds including the Pennsylvania Mutual Fund.

Part 1: How Paul Became An Investor (click here for a direct link to the interview)

In part 1 Paul covers:

Learning about Warren Buffett.
Getting a job as a consultant, learning about competitive analysis ,& developing interviewing skills.
Getting a job at Royce & Associates and discovering small cap stocks.
Getting a job at Ruane, Cunniff, & Goldfarb.

Part 2: An Overview of Paul’s Scuttlebutt Process (click here for a direct link to the interview)

In part 2 Paul covers:

Researching Freddie Mac and using proprietary research to make a contrarian call.
Researching Progressive-talking with seasoned agents led to uncovering tipping points.

Part 3: Using Interviews While Researching Investment Opportunities (click here for a direct link to the interview)

In part 3 Paul covers:

Studying companies and industries.
The importance of curiosity & preparation in crafting questions.
Types of questions to ask during interviews.
Picking people to interview.
The importance of uncovering differential insights.
Learning about outdoor advertising and applying scuttlebutt to learn about the best companies in the space.
Learning about Nike by talking with seasoned distributors.
The importance of building long-term relationships with industry participants.

Part 4: Investment Mistakes & Sins of Omission (click here for a direct link to the interview)

In part 4 Paul covers:

Mistakes of Omission.
His extensive research of the HMO industry and missing an investment.
The increasing importance of qualitative research as financial markets become more competitive.

I can’t wait to find the time to view the video interviews. Let me know what you think.

Tap Dancing to Work (Buffett)

Catch up on articles you may have missed on Buffett over the years. Go to www.fortune.com/buffettbook

For example, “Can you beat the market?” http://management.fortune.cnn.com/2012/11/21/buffett-beat-stock-market/

Is this Acceptable?

Posted on January 31, 2013 | 20 comments

http://www.tilsonmutualfunds.com/reports.html

A reader sent the above link. Click on it and then download the Annual Report for the Tilson Focus Fund, See pages 10-12 discussing the year’s results.

also: TILFX-Fact-Sheet. Why has the fund generated this performance? What would you advise a client who is in this fund? Note that the money manager has said that he admires Warren Buffett’s letter to shareholders. Compare and contrast his letter with Buffett’s past letters. Do you understand the results achieved and why? Can you describe what principles are used to construct such a portfolio. Note the portfolio! Comments? Anything hit you in the face?

I will pay anyone their asking price to give me a cogent explanation how this is acceptable.

Glenn H. Tongue – Portfolio Manager, Tilson Focus Fund

Mr. Tongue is a general partner and co-manager of the Advisor and is the co-manager of the Tilson Growth Fund, LP, the Tilson Offshore Fund, Ltd. and the T2 Qualified Fund, LP. Prior to becoming a general partner and comanager of the Advisor on April 1, 2004, Mr. Tongue spent seventeen years working on Wall Street, most recently as an investment banker at UBS where he was a Managing Director and Head of Acquisition Finance. Before joining UBS, Mr. Tongue worked at Donaldson, Lufkin and Jenrette (“DLJ”) for thirteen years, the last three of which he served as the President of DLJdirect, an on-line brokerage firm. During his tenure there, he oversaw both DLJdirect’s IPO and ultimate sale. Prior to DLJdirect, Mr. Tongue was a Managing Director in the Investment Bank at DLJ, where he worked on over 100 transactions aggregating more than $40 billion. Before working on Wall Street, Mr. Tongue managed sales, marketing and certain operations at Blonder-Tongue, Inc., a manufacturer of pay television and cable television distribution equipment.

Mr. Tongue received an MBA with Distinction from the Wharton School of Business and received a Bachelor of Science in Electrical Engineering and Computer Science from Princeton University. He serves on the Board of All Souls School, an early childhood educational facility, and lives in New York, New York.

20 Comments

Posted in Investing Gurus

Tagged Tilson

To Get Big Think Small; Lies of the Bailout

Posted on January 11, 2013 | Leave a comment

To Get Big Think Small

I am having difficulty finding value, so now I gotta go small. More on micro-cap investing…..Liquidity as an Investing Style and Microcap_Investing and then More_on_Microcap_Investing. If you can accurately value a business while the company’s stock price is volatile, then you have a gold mine. Smaller companies tend to be more OVER and UNDER-VALUED than larger, well-known names.

Secrets and Lies of the Bailout

The federal rescue of Wall Street didn’t fix the economy – it created a permanent bailout state based on a Ponzi-like confidence scheme. And the worst may be yet to come

So what exactly did the bailout accomplish? It built a banking system that discriminates against community banks, makes Too Big to Fail banks even Too Bigger to Failier, increases risk, discourages sound business lending and punishes savings by making it even easier and more profitable to chase high-yield investments than to compete for small depositors. The bailout has also made lying on behalf of our biggest and most corrupt banks the official policy of the United States government. And if any one of those banks fails, it will cause another financial crisis, meaning we’re essentially wedded to that policy for the rest of eternity – or at least until the markets call our bluff, which could happen any minute now.

An excellent article that shows what has happened to our centrally-controlled, socialist, Ponzi financial system. Of course, the author does not point out the causes or remedies, but he does show the results of the bailout.

My favorite line:

We thought we were just letting a friend crash at the house for a few days; we ended up with a family of hillbillies who moved in forever, sleeping nine to a bed and building a meth lab on the front lawn.

http://www.rollingstone.com/politics/news/secret-and-lies-of-the-bailout-20130104?print=trueor Crony_Finance_Rolling_Stone.

View these films: http://thebubblefilm.com/cast/jim-rogers/

Conventional Wisdom on Booms and Busts from a Value Guru

Ask yourself what have you learned from reading this article. What can you apply from his thoughts? Read here: Ditto.

PS:I didn’t learn much. 50 seconds to the trash bin.

HAVE A GREAT WEEKEND.

More Herbalife; Interview with a Serial Killer

Posted on January 9, 2013 | 3 comments

Loeb takes an 8% Position in Herbalife (HLF)

Now we get to see who is on each side of the trade.

thirdpoint-4q12investorletter-010913

Daniel Loeb Comments on Herbalife

Based on its strong financial performance, Herbalife is a classic “compounder” – a well-managed company that sustains consistent top-line growth, has a leading market position, and steadily increases margins, earnings per share and free cash flow while demonstrating shareholder-friendly behavior. …Led by CEO Michael Johnson, management has also used the company’s ample free cash flow to de-lever its balance sheet and shrink the share count by nearly 25%. This type of steady non-cyclical growth is hard to find and puts Herbalife at the head of the compounders’ class.

With results like these, the case against Herbalife rests on a bold claim that the company is a fraud. The short seller’s lengthy argument against the Company can be boiled down to three principal smoking guns: the first, a claim that Herbalife has been operating an “illegal pyramid scheme” under the nose of the Federal Trade Commission for the past 32 years; the second, that Herbalife’s loyal customer and distributor base has been exploited and harmed despite the low number of consumer complaints and generous company return policies; and the third, a claim that Herbalife’s products are commodities sold at inflated prices not supported by sufficient levels of advertising or R&D.

Taken in reverse order, the third claim misses an essential truth that invalidates the indictment. No one believes Starbucks is a scam because you can buy a cheaper cup of coffee at your local bodega. A key contributor to Herbalife’s growth has been its distributor-led “Nutrition Clubs”, where consumers can purchase single servings of the Company’s signature beverages. The short seller’s assertion ignores the significant value customers place on every consumer brand and its community “experience” – whether at a Herbalife Nutrition Club, a Starbucks, or a corner bar. The markup is merited by community and brand identity, not by the commodity itself.

(Editor: in disclosure, I am long HLF but not as aggressively as Mr. Loeb. Is HLF a franchise because of its brand? But a brand has no meaning unless there is customer captivity. Does HLF have customer captivity?)

The second claim seems similarly dubious. The FTC, by all accounts, receives a very low volume of complaints annually about Herbalife – fewer than forty per year. ….The Company repurchases an average of only 1% of sales volume pursuant to this policy. It is difficult for us to understand why the buyback volume would be so low if there are in fact so many unsatisfied consumers and distributors who presumably would not hesitate to be reunited with their cash.

The pyramid scheme is a serious accusation that we have studied closely with our advisors. We do not believe it has merit. The short thesis rests on the notion that the FTC has been asleep at the switch, missed a massive fraud for over three decades, and will shortly awaken (at the behest of hedge fund short seller) to shut down the Company.

Applying a modest 10-12x earnings multiple suggests Herbalife’s shares are worth $55-$68, offering 40-70% upside from here and making the company a compelling long investment for Third Point.

Bill Ackman’s reply: http://www.gurufocus.com/news/204597/bill-ackman-comments-on-dan-loebs-8-percent-herbalife-stake

More on MLM’s (BTH) http://seekingalpha.com/article/1101391-forget-herbalife-blyth-is-the-real-mlm-steal

Good Advice

Herbalife Battle: Great Theater, Terrible Trade By Jeff Macke

In the last 30 days shares of Herbalife (HLF) have gone from the mid-40’s to the 20’s and then back again. It’s a dizzying ride driven by bickering hedge fund managers taking turns in the spotlight to make their cases on the long and short sides. It’s a striking turn for an 11-year-old company with a market cap under $5 billion and, until very recently, almost no mindshare in the investment community.

For those considering getting involved with the stock on either side of the trade, the question is whether or not Herbalife is a “Ponzi Scheme,” as Bill Ackman alleges, or if it’s just another relatively boring company most investors should ignore. Value investor Vitaliy Katsenelson, chief investment officer at Investment Management Associates, says the company is probably best avoided.

“I think you just want to stay away from this fight,” Katsenelson says. He has been to Herbalife’s clubs and came away unimpressed. For one thing, most of the people were there, in his words, “just to sell the product to each other.” For another, the product itself seemed overpriced for what you’re getting. “Most people get into Herbalife not because they want to consume the product but because they want to sell it to their favorite mother-in-law.”

That makes HLF a lousy long, but is it a short? Not really. Katsenelson has done his homework. He’s been to HLF stores and he watched all three hours of Bill Ackman’s argument for shorting the company. After all that legwork Katsenelson just doesn’t see the appeal for either bullish or bearish investors.

Companies don’t just tumble to zero, they need to be pushed. Katsenelson thinks Ackman’s best chance in that regard is to create a self-fulfilling fundamental slide. If Ackman generates enough negative publicity it’s going to be harder for HLF to set up distribution centers. Failing that, the stock could muddle along with the company itself for years before hitting the wall.

“I would just basically stay away,” Katsenelson concludes. That’s probably good advice for the vast majority of individual investors.

Interview with a serial killer

To understand what drives hedge fund managers, I studied this video. Chilling but informative.

Interview with a serial killer: Read Quote of Simon Brown’s answer to What Does It Feel Like to X?: What is it like to talk with a serial killer? on Quora

3 Comments

Posted in Investing Gurus, Special Situations, YOU

Tagged Ackman, herbalife, loeb, serial killer

Herbalife Saga, Detecting Luck from Skill

Posted on January 7, 2013 | 4 comments

CNBC Interview of John Hempton (Bronte Capital in Australia) on going long on Herbalife DESPITE agreeing with Ackman.

http://video.cnbc.com/gallery/?video=3000139284&play=1

Hempton: Short-seller Went Long Herbalife Fri 04 Jan 13. The following transcript has not been checked for accuracy.

CNBC: Activist Robert Chatman battling Bill Ackman on Herbalife (see next article in this post). Herbalife’s Chairman says Ackman will lose his fight against Herbalife. But he have not the only one who thinks they will lose. Watching this battle, in his own words, says it is like watching hedge fund porn. Herb, thanks for joining us today.

Herb Greenberg: What makes him so interesting in this case is that he is mostly known as a short seller and he is buying the stock even though he agrees with Ackman. He joins us now live in our studios. John Hempton of www.bronte.com, “How are you.”

Hempton: I’m pretty well.

Greenberg: I got to ask a quick question here. yeah. You’re a short seller and you are — you are long this stock. How does that work? Why would you do that? I’m pretty familiar with scum bags. Multilevel marketing schemes are scum bags. There are a million people in their chain and Bill Ackman says Herbalife is ripping them off. Tobacco companies kill twice as many people a year as Herbalife has in its network. Those companies kill 400,000 people in America. Hugely profitable. They are scum bags but return cash to shareholders for decades. If you have shorted them, you’ve been run over.

Herbalife, five years ago, had about 140 million shares, it now has 108 million shares. It buys back stock regularly; pays a fairly hefty dividend. They are a scum bags, but they are a stock market scum bag.

Greenberg: You have to be careful with what you say here. The question is, will the Federal Trade Commission (“FTC”) go after the company? One reason you don’t believe that Ackman will be right is because you don’t believe the FTC will do that.

Hempton: You say something obviously is wrong and you think the government will rescue you. all Herbalife needs to do is find somebody who was fat and is less fat because of Herbalife and somewhere in the 2.5 million distributors there will be a few of those. Wheel them out in front of them (FTC regulators), and you are know, what Bill Ackman’s case now is that the government’s going to go and help the billionaire hedge fund manager.

Greenberg: I know another hedge fund manager here john, and he is very politically connected, very short the stock, and he believes that the heat will get turned up on this industry very quickly here. And he believes that one of the things they will be looking at is the industry itself targeting lower-income people. So what is to say that even though the FTC didn’t do this before, they don’t come back and do it now?

Hempton: I believe the same thing about the tobacco companies 20 years ago. the FTC has known about multilevel marketing schemes for decades. If this (Herbalife’s scam/cash flows) lasts three years, Ackman is wrong. If it lasts a decade, Ackman is so wrong, it’s just silly. Now this thing really has cash flow. A thesis that says, I got to wait for government is a bad thesis. I don’t know how many really dodgy companies I’ve reported to the FTC and what do they do? Sometimes they fine them. The vast bulk of the time they don’t.

CNBC: “Herb (Greenberg), I’m wondering where we go from here. I know we are looking forward to Herbalife’s rebuttal and Ackman is preparing his rebuttal to that rebuttal. What is the next chapter in the story?

Greenberg: Does this does become the equivalent of the for profit education industry where they go after it and where the industry, people said, they will never go after that industry. The government went after that and in this case you end up with a very hard reset of the business models of these companies.

Hempton: And for profit education industry case the victim is at least in part the government. the government giving stupid loans. a relatively easy way of the government reducing their fiscal drain.

Greenberg: John (Hempton), if in it case the victim is lower-income population, a lot of lower-income population and the Obama Administration could be very interested in that, wouldn’t that potentially have an impact?

Hempton: When did the government care about lower-income people in that way? Lower-income people are largely the victims of tobacco companies too. You look at tobacco, it is completely inversely correlated to wealth and income. Rich people don’t smoke. Poor people smoke. People in most jurisdictions just raise taxes from that.

Greenberg: Okay, we will see who is correct on this one. John, thank you very much for coming along.

And more discussion here…..http://brontecapital.blogspot.com/2013/01/bill-ackman-either-lacks-imagination-or.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+BronteCapital+%28Bronte+Capital%29

Herbalife: Why I Made It a 35% Position after the Bill Ackman Bear Raid

This is a guest post prepared by Robert Chapman. Chapman is the founder of Chapman Capital LLC, which is a Los Angeles based investment company specializing in takeovers and turnarounds. In 2000, Chapman Capital was an activist versus Herbalife following the death of Herbalife’s founder Mark Hughes. This is an amazing article. It’s well-researched and easy to understand. If you’re remotely curious about the future of Herbalife after Ackman’s attack, the mechanics of short selling and the potential value of Herbalife’s stock, this is a MUST read. If you find this article informative, hit the +1 or Like buttons above. Sincerely, +Kevin Thompson

…REGUATORY SUMMARY: FTC has been there, done that.

The Ackman Tell. Many poker games are won and lost upon that infamous turning point when a player properly reads his opponent’s “tell.” To wit, I am confident that during an interview with CNBC’s Andrew Ross Sorkin on “D-Day” (12/20/2012), Bill Ackman slipped his “tell”, confirming my suspicion that he already realized the FTC wasn’t going to make his day by shutting down HLF. I strongly recommend all HLF traders/investors read the transcript of this interview, as Sorkin does a masterful job of fighting the media urge to genuflect before Ackman’s drawn down zipper, otherwise known as “The Whitney Tilson”.

http://thompsonburton.com/mlmattorney/2013/01/01/herbalife-why-i-made-it-a-35-position-after-the-bill-ackman-bear-raid/

Interview with Michael Mauboussin: Untangling Skill and Luck in Business, Sports, and Investing (From www.simoleonsense.com)

Today we’re going to talk about the role of skill and luck in generating success.

Michael Mauboussin’s Background

Michael Mauboussin, is the Chief Investment Strategist at Legg Mason Capital Management. Michael is also an adjunct at Columbia Business School and Chairman of the Board of Trustees at The Santa Fe Institute.

Book Synopsis

What role, exactly, do skill and luck play in our successes and failures? Some games, like roulette and the lottery, are pure luck. Others, like chess, exist at the other end of the spectrum, relying almost wholly on players’ skill. In his provocative new book, Michael Mauboussin untangles the intricate strands of skill and luck, defines them, and provides useful frameworks for analyzing their relative contributions. He offers concrete suggestions for how to put these insights to work to your advantage in business and other dimensions of life.

Click Here To Watch The Interview

Click Here To Access The Transcript

CSinvesting Editor: Just remember that those that know, don’t tell; and those that don’t know, have the floor to themselves. Some might call Mr. Mauboussin, “an entertainer.”

4 Comments

Posted in Investing Gurus, Investor Psychology, Special Situations

Tagged Ackman, Hempton, herbalife, Mouboussin, Skill vs. Luck

Internet Boom and Bust; Herbalife and Bill Ackman

Posted on December 20, 2012 | 2 comments

Here is the Perhsing Square website on Herbalife. Sign up and learn:

Pershing has their HLF deck up on the website: http://factsaboutherbalife.com/

Verdict: This will get ugly but my money would be on Ackman since there is no competitive advantage, so I would place the value no more than tangible book value at best with no more than a 90 second look at the financials.

The purpose of this post is also to study a Ponzi scheme. The response of the company to Ackman’s research leads me to say this company’s days are numbered.

BOOM and BUST

Could Austrian Business Cycle Theory Dotcom Boom and Bust have helped you as an investor? Buffett’s presentation on the Dotcom Bubble in early 1999 (See page 64) A Study of Market History through Graham Babson Buffett and Others. Note how the market went into a speculative frenzy, rising more than 50% AFTER Buffett’s speech. Human action can’t be predicted like a physics experiment.

An excellent book that predicted the bust was the The Internet Bubble: Inside the overvalue World of High Tech Stocks–and What you Need to Know To Avoid The Coming Shakeout by Anthony Perkins and Michael Perkins (1999 and 2001 editions).

Burning up (cash) http://www.fool.com/news/foth/2002/foth020830.htm

A student’s overview: David Carr – THE TECHNOLOGY STOCK BUBBLE

Ackan presents on Herbalife: http://www.reuters.com/article/2012/12/20/us-ackman-herbalife-idUSBRE8BI1MZ20121220. He says that he will be setting up a website with all his research on Herbalife. If anyone FINDS IT, please send me the link to post. This could become a good case study on multi-level marketing.

Dec. 21 2012 Update: Thanks to a reader: www.businessinsider.com/bill-ackmans-herbalife-presentation-2012-12

See presentation here:Who-wants-to-be-a-Millionaire

See this article:http://seekingalpha.com/article/918831-an-investor-s-guide-to-identifying-pyramid-schemes

Motivate thyself: Anthony Robbins http://www.youtube.com/watch?v=Cpc-t-Uwv1I&feature=share&list=PL70DEC2B0568B5469. Yes, he could be a huckster, but he is a great public speaker. Focus on HOW he presents.

2 Comments

Posted in Investing Gurus, Risk Management

Tagged Ackman, Boom and Bust, Buffett, Doncom Bust, herbalife, Nasdaq

Benjamin Graham on Growth Stock Investing

Posted on December 19, 2012 | Leave a comment

Ben Graham on Growth Stock Investing

We last studied Ben Graham’s thoughts on growth stock investing here: http://wp.me/p2OaYY-1se . I suggest studying the best mind in finance past or present. Think about how he approached investing problems, especially the most difficult paradox of all–how to value growth.

The complete chapter (Chapter 39) on growth stock investing by Graham in the 4th Edition of Security Analysis: Newer Methods for Valuing Growth Stocks_1962_Security AnalysisDouble-click on the link to download the documents.

For additional thoughts on valuing growth go here:Growth in 2nd Edition and Ben_Graham_and_the_Growth_Investor_Bryant_College_041008

A Method of Valuing Growth Stocks

Growth Stocks and the Petersburg Paradox

Growth what is it good for and ROIC

What you didn’t know about Value Investing_Skagen

Let me know what you learned………….

Moats and Floats (Buffett and Munger). Good blog on Moats

Posted on December 6, 2012 | 1 comment

Thanks to readers for these contributions on Moats.

An excellent case study on how Buffett learned to love float from the Fundoo Professor: Floats and Moats_Munger and Buffett Worth a study! And read more:http://fundooprofessor.wordpress.com/

An interesting blog: http://25iq.com/2012/12/06/charlie-munger-on-moats-first-of-the-four-essential-filters/

For easier reading: Blog on Moats

As you may realize, Buffett and Munger seek the stable or durable companies. Note where change is disruptive: http://www.businessinsider.com/mary-meeker-2012-internet-trends-year-end-update-2012-12#-48

1 Comment

Posted in Investing Gurus, Uncategorized

Tagged Float, Moat, Munger and Buffett