The One Good Reason Why David Sokol Is Clean (NYSE: BRK; LZ)

Even if it is widely discussed that the former Berkshire Hathaway (NYSE BRK.A, BRK.B) executive David Sokol acted in an unethical manner in the Lubrizol Corporation (NYSE: LZ) deal, people seem to forget one important matter.

A lot of the buzz is generated by the fact that Sokol took his position after that meeting with investment bankers at Citigroup on December 13th 2010. those who are in such a ruch to throw accusations at Sokol seemed to miss that there were 18 companies proposed to David Sokol on that day.

Even if he acknowledged that Lubrizol was the most interesting company out of that list. There is no way he could have known in advance which of those 18 companies Berkshire Hathaway's Chairman Warren Buffet would come to chose in the end. It is also interesting to note that Buffet was pretty cold about buying Lubrizol until near the end of January 2011.

A way to know that Sokol acted in a way to profit from an acquisition by Berkshire Hathaway would have been for him to buy all of the 18 companies. One must remember that before the acquisition, as he said in an interview on CNBC, David Sokol purchased those Lubrizol stocks for his own account because he thought that the company had a good long term potential. He also mentioned that he trades pretty rarely. That is also the same reason why he was pressing for a deal between Berkshire Hathaway and Lubrizol. He was just acting in the interest of Berkshire Hathaway shareholders according to his duties. 

This all just seems to be a matter of bad timing and probably bad judgement about the perception of those moves from David Sokol if we take into account that his portfolio turnover is dismal on a yearly basis.

On the right is a timeline of the deal between Berkshire Hathaway and Lubrizol from an article provided by the Wall Street Journal.

Marauder Ressources East Coast (MES.V): An Overrated Penny Stock?

Investing in a penny stock is a bad ideas most of the time, they are very risky and are pretty easily manipulated. It seems however that one can come across interesting companies trading on the TSX Venture Exchange. Going through some screenings recently, I came across this company with some impressive valuations. Marauder Ressources East Coast principal business is the exploration for and the (potential future...) production of pretroleum and natural gas reserves off the east coast of Canada (for now) and elsewhere.

What is interesting to notice at first is that a lot of populat sites like google finance do not provide a lot of information about the financials of the company. Looking deeper on the website of SEDAR for their most recent quarterly earnings report, dated september 30th 2010. The company seems under valued. Here are some summary financial information about the company. All amount are in thousands of dollars.

Balance Sheet for the year ended 2009

Evolution of Liabilities and Equity over the last five years

Income Statement for the year ended 2009

Cashflow statements for the year ended 2009

Currently, the company does not sell any of the ressources that are on their fields. If they manage to find a way to exploit those fields of if s company comes to acquire a part of their assets, This would be greatly valuable for shareholders of the company.

One good example is the sale of it's interests, in July 2009 of certain zones in Production License 2901, Offshore Nova-scotia, to Encana Corporation, operator of the Deep Panuke Natural Gas field. Marauder Ressources East coast received 3.5 Million CAD in the transaction, plus an overriding royalty on the future production from two currently non-producing exploration licenses offshore of Greenland.

As the company will not have enough cash fo finance it's own exploration of the area and that their principal sources of cash is the issuance of debt or equity. The first option has not been used yet, and probably will not be used since the company doest not generate enough cashflows from it's continuing operations to justify a loan from any right minded bank or investor.

Their main assets are currently their petroleum and natural gas properties, with an aggregate value of a little over 32 million CAD. With liabilities mainly composed of a differed

It seems that investors have been very discouraged with this company. To the point that they have left the company for dead. As it can be seen from the company's balance sheet. Equity stands at 27 million CAD. With the 63 millions shares currently trading, that makes for a book value per share of 0.39$ and the stock is trading at 0.07$ that makes for over a possible 450% return for investors willing to be patient enough for a favourable event to happen to the company. At current prices, the company can't issue many shares for fear of massively diluting current shareholders.

Another interesting fact is that insiders of the company have been exercising options over the last couple of months to acquire about 4.4 million shares in the company when the company's stock was trading at around 0.05$ per share. This might be good news for the stock.

This is a very risky position but the reward might justify the risk. Keep in mind however that investing in penny stocks is extremely risky.

Disclosure: The author is long MES.V

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.