Feb 26, 2011

Buffett's Successor Revealed (NYSE: BRK.A, BRK.B)

For those who have already had the opportunity to get through the 2010 Letter to Shareholders by Warren Buffett, it is obvious that a plan to his succession is clearly taking shape. It has made sense for him that there will have to be a split for his position in the coming years and there has been great mystery as to who will be in charge of investment decisions when Buffett retires.

As he had already officially revealed in October 2010, it seems that the position of chief investment officer will be split into many persons and the first person to be nominated for the task is former hedge fund manager Todd Anthony Combs. As Berkshire Hathaway revealed results for 2010, he went into great lengths to explain his choice of manager, as this person is relatively unknown to the financial markets.

Here is what Warren Buffet had to say about Todd Combs in his 2010 Letter:

Four years ago, I told you that we needed to add one or more younger investment managers to carry on when Charlie, Lou and I weren’t around. At that time we had multiple outstanding candidates immediately available for my CEO job (as we do now), but we did not have backup in the investment area. 
It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial, as is the  manager’s understanding of – and sensitivity to – risk (which in no way should be measured by beta, the choice of too many academics). In respect to the risk criterion, we were looking for someone with a hard-to-evaluate skill: the ability to anticipate the effects of economic scenarios not previously observed. Finally, we wanted someone who would regard working for Berkshire as far more than a job.
When Charlie and I met Todd Combs, we knew he fit our requirements. Todd, as was the case with Lou, will be paid a salary plus a contingent payment based on his performance relative to the S&P. We have arrangements in place for deferrals and carryforwards that will prevent see-saw performance being met by undeserved payments. The hedge-fund world has witnessed some terrible behavior by general partners who have received huge payouts on the upside and who then, when bad results occurred, have walked away rich, with their limited partners losing back their earlier gains. Sometimes these same general partners thereafter quickly started another fund so that they could immediately participate in future profits without having to overcome their past losses. Investors who put money with such managers should be labeled patsies, not partners.
As long as I am CEO, I will continue to manage the great majority of Berkshire’s holdings, both bonds and equities. Todd initially will manage funds in the range of one to three billion dollars, an amount he can reset annually. His focus will be equities but he is not restricted to that form of investment. (Fund consultants like to require style boxes such as “long-short,” “macro,” “international equities.” At Berkshire our only style box is “smart.”)
Over time, we may add one or two investment managers if we find the right individuals. Should we do that, we will probably have 80% of each manager’s performance compensation be dependent on his or her own portfolio and 20% on that of the other manager(s). We want a compensation system that pays off big for individual success but that also fosters cooperation, not competition. 
When Charlie and I are no longer around, our investment manager(s) will have responsibility for the entire portfolio in a manner then set by the CEO and Board of Directors. Because good investors bring a useful perspective to the purchase of businesses, we would expect them to be consulted – but not to have a vote – on the wisdom of possible acquisitions. In the end, of course, the Board will make the call on any major acquisition.
One footnote: When we issued a press release about Todd’s joining us, a number of commentators pointed out that he was “little-known” and expressed puzzlement that we didn’t seek a “big-name.” I wonder how many of them would have known of Lou in 1979, Ajit in 1985, or, for that matter, Charlie in 1959. Our goal was to find a 2-year-old Secretariat, not a 10-year-old Seabiscuit. (Whoops – that may not be the smartest metaphor for an 80-year-old CEO to use.)
He hints that there will probably other managers added to the team and even a compensation structure already in place. The investment results of Berkshire Hathaway's equity portfolio will therefore present the performance of Todd Combs.

Another interesting part of his letter is the update on the equity put contracts that Berkshire Hathaway carries in his books.

You can access his full letter here.

Feb 16, 2011

Jim Chuong's 2010 Letter to Partners

A couple weeks ago, I came out with an article depicting the performance of the stock portfolio of Canadian value investor Jim Chuong for the past decade. With a lot of humility, he attributed his outstanding 2010 57% performance to just sitting there and watching his portfolio rise. Here are of his own words:

The return I achieved in 2010 is not repeatable, should not be considered a reflection of my investment skill and, if anything, foreshadows a very bad 2011 for me.
In fact, in 2010, aside from picking up a small handful of shares in The Buckle, my activity was non-existent. Readers should expect inactivity in the face of rising prices. For me, it makes no sense to buy at increasingly higher prices. In fact, it appears more profitable to start looking in areas where prices are declining or, even better, have collapsed.
This year my letter will be short because nothing happened – everything rose in price and I sat dumbfounded - gawking at all the businesses that I was suddenly priced out of.

He his very modest indeed and as many will have guessed, his task has not been so easy. In his 2010 letter, he explains his views about investing and the method he uses to find attractive stocks for his portfolio.

He talks about the effect of diversification and asset allocation. He shines the light on the reason why many companies decided ti distribute a special dividend in 2010. As a value investor he shuns companies that have debt on their balance sheets and he gives a lengthy argument to support his view.

He also candidly compares poker to investing in a very light way. And reminds us of the effect of taxes on different ways to earns money, ranging from earned income to dividends.

He also insists on the importance of retirement and what it implies for any person facing the dilemma of immediate gratification versus long term wealth. He thankfully ends with a description of the performance of his portfolio, and the companies in it.
Here are his holdings at the end of 2010:

% of Portfolio
The Buckle (NYSE: BKE)
Columbia Sportswear (NASDAQ: COLM)
American Eagle (NYSE: AEO)
Berkshire Hathaway (NYSE: BRK.B)
General Employment (AMEX: JOB)

You can access his full letter and his insights right on his website.

Feb 8, 2011

The Egypt Crisis Play: Transglobe Energy Corporation (TGA)

Here is an interesting article about how value investors can benefit from technical analysis. Even if it has not been that publicized today, the political crisis that was happening in the past days over in Egypt proved to be very beneficial for investors who were able to fairly assess the level of potential danger arising from this situation..

There seems to have been some situations that offer great opportunities to investors. The case of TransGlobe Energy Corporation (NASDAQ: TGA, TSE: TGL) sheds some light on events of this king. This Canadian company conducts oil well drilling operations in the Arab Republic of Egypt and in the Republic of Yemen, solely or in partnership with local companies.

Those two regions were recently affected by an uprising of the population to the political regimen in place. This proved to be a great buying opportunity for those who could take advantage of it. In the days before the unfolding of the situation in Tunisia and in Egypt, many investors in the company showed little faith in it's future prospects. This fact can clearly be concluded from the declining stock price fo TransGlobe energy Partners before January 31st 2011 that went from over 20$ a share in December 2010 to a mere 12.25 just two months later.

As the company showed in a recent update of their operations, it seems that people were too pessimistic about the outcome of the situation in Egypt and the repercussions it would have on the company:
To date, the Company's West Gharib production operations have not been affected by the recent political demonstrations in Egypt. The Company continues to the monitor the situation and has daily communication with our Cairo staff and our Joint Venture operating company. All employees are safe and accounted for. The Company will take all steps to adapt to the situation and will attempt to mitigate any adverse consequences.
 Moreover, the recent turmoil in the Middle-East is such of insignificant effect that the company's production has actually increased over the month of January. 

For my part, I purchased shares of the company on February 1st 2011 on market open for an average price of 12.13$ per share and my oversold thesis has been clearly validated. I am only left to see if there will be any upside left since the stock of TransGlobe Energy Corporation is getting very close to it's target value of 16$ per share.

Disclosure: The author is Long TGA

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