Interview with Bill Miller

Money Magazine interviews Bill Miller.

Let's go back to the first one, though, and the 60/40 end of a proposition. There's three sources of competitive advantage in investing: informational, analytical and behavioral.

Informational is - well, let's say you manage money for a Middle Eastern government, and you go over there and the oil minister tells you that they're going to double oil production in the next three months, you know something other people don't know.

But informational advantages are very difficult to get. They're difficult for two independent reasons. Number one, the [U.S.] government tries to keep you from getting them, because they want a level playing field. There are rules against inside information and acting on it. People know when companies are going to release their earnings, and there's supposed to be equal access to that information. And then the hedge funds are the other independent reason. Many of them are trying to get an informational advantage. With so many of them out there doing this full time, it's very difficult for people to get an informational advantage - even other professionals such as ourselves.

The second category is analytical advantages. This is where you know the same things that other people know, but you weight them differently, you give them different probabilities. And that can happen a lot. If you've owned the company over a long period of time, you can get a sense of how their business is evolving, how their capital allocation is going to work, that other people aren't thinking about. And you might have a different sense of their risk, the risk in assessing the investment. So the analytical advantage involves different probabilistic weights on the same information that other people have.

And then the third one is behavioral. And that's the most enduring, because behavioral advantages arise out of the manifest tendencies of large numbers of people to react in predictable ways to certain kinds of situations. So we know that people are risk averse. We know that their coefficient of loss is about two to one - which means that they feel the pain of losing a dollar twice as intensely as they feel the pleasure of gaining a dollar.

Question: Correct.

Answer: People overweight the most recent information. They overreact to dramatic information, or dramatic circumstances. They tend to have what's called outcome bias, which is they judge things on their outcome, and not on their process. So a lot of these behavioral elements are things that you can actually identify and exploit to your advantage if you are aware of them - and aware also that no matter how much you're aware of them, you're not immune to them yourself. You really have to have a sense of discipline and patience, and understanding in that.

Bear Stearns Hedge Fund Loses All the Money

Bear Stearns informed investors in two of its hedge-funds, they lost all or most of their money, but they will work hard every day to continue to earn their trust and confidence. Yea, right. You can't make this stuff up. (Link from Pmarca)

Let me take this opportunity to provide you with an update on the status of the High-Grade Structured Credit Strategies and High-Grade Structured Credit Strategies Enhanced Leveraged Funds managed by Bear Stearns Asset Management...

The preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for the investors in the High-Grade Fund...

This is a difficult development for investors in these Funds...

We will work to continue to provide you with the high quality products and services you have come to expect from Bear Stearns.

The World Needs more Chris Hohns

Chris Hohn, master of the European hedge-fund universe, with sick 40%+ annual returns in last 5 years on massive amounts of capital (currently over $10 billion in assets) is simply THE MAN. He is now reported to give away $460 million last year and has given $1.4 BILLION to his charity in the last few years. The world needs more Chris Hohns.

TCI chief donates £230m to his charity
By James Mackintosh in London
Published: July 1 2007 22:02

Chris Hohn gave £230m ($460m) to his charitable foundation last year, making the activist hedge fund manager one of Britain’s most generous philanthropists, with even more expected to be given this year.

Mr Hohn, founder of The Children’s Investment Fund, told investors in New York two weeks ago that the foundation – run by his wife Jamie Cooper-Hohn – had passed $1bn, less than five years after it was set up.

Mr Hohn’s donations put him at the forefront of venture philanthropy, which has seen financiers and businessmen bring entrepreneurial skills and hedge fund-style activism to charities.

His philanthropy contrasts with the aggressive activism of TCI, which helped block Deutsche Börse’s bid for the London Stock Exchange and led to the downfall of Werner Seifert, the Börse’s chief executive. Mr Hohn is credited with forcing Dutch bank ABN Amro to put itself up for sale, although last week his attempt to make Japan’s J-Power triple its dividend was rejected by shareholders.

Last year’s donation is one of the biggest single acts of charity by a Briton but pales in comparison with donations by US billionaires, with Warren Buffett last year pledging $31bn to the Bill & Melinda Gates Foundation, which already has $35bn from Mr Gates, founder of Microsoft.

The Children’s Investment Fund Foundation is understood to be worth about $1.4bn. CIFF finances projects for children in the developing world, with a focus on HIV.

The size of the donations is a result of the phenomenal returns Mr Hohn has generated for investors in TCI, which has more than $10bn under management. Last year he made more than 40 per cent, while in 2005 TCI returned more than 50 per cent.

TCI automatically gives 0.5 per cent of its funds under management to the CIFF, a third of its annual fee. Investors pay an extra 0.5 per cent to CIFF if it produces returns above 11 per cent a year, a level it has far outstripped since it was set up in 2002. In addition, Mr Hohn voluntarily donates the majority of the profits earned by TCI after paying staff.

According to documents to be filed with charity regulators on Monday, CIFF and its US affiliate were given £230m in the year to last August, and the foundation made investment gains of £94m on its investments, which are run by TCI.

Feared fund turns to business of charity
By James Mackintosh in London
Published: July 2 2007 03:00

When Chris Hohn and Jamie Cooper-Hohn set up hedge fund The Children's Investment Fund (TCI) and its linked charity, the Children's Investment Fund Foundation, they hoped to make a difference to children in the developing world.

Mrs Cooper-Hohn told recipients of aid that the foundation may one day be able to give out $5m-$10m a year.

Last year, five years after starting up, they passed that mark, while the success of Mr Hohn's hedge fund has pushed assets in the CIFF to about $1.4bn (€1bn, £700m), enough to give out far more than the original target every year forever.

But the foundation does not just give out money. It has adopted the "venture philanthropy" model, pioneered by New York's Robin Hood charity, set up by legendary hedge fund manager Paul Tudor Jones.

"I was very eager that if we did this we would do it very much in the way Chris invests, making long-term, well-researched investments," Mrs Cooper-Hohn says, "bringing business rigour and a private sector approach into development."

This extends to the language used: the charity hires "portfolio managers" to keep an eye on its "investments", and is willing to step in and make suggestions when it believes a recipient of aid needs help.

"They want to know that you are efficient and effective," says Bill Clinton, former US president, whose Clinton Foundation charity is given money by CIFF. "But in general they are quite tolerant if you try something that doesn't work, as long as you stop. They are used to taking reasonable risks - that's how they make money."

Mr Hohn and Mrs Cooper-Hohn are part of a growing trend towards venture philanthropy, and are rapidly becoming one of the biggest British foundations to push business practices into the charity world.

The growth is beyond anything they expected, thanks to the success of TCI. It now has $10bn under management, making it one of Europe's biggest hedge funds less than five years after Mr Hohn left as manager of US hedge fund Perry Capital's European fund to start up on his own.

Last year TCI's concentrated portfolio returned more than 40 per cent, after 50 per cent in 2005 and 40 per cent in 2004, making it one of the world's best-performing big hedge funds. It is also one of the most feared in boardrooms, particularly in Europe: TCI is credited with killing Deutsche Börse's bid for the London Stock Exchange, and its appearance on a share register is closely watched by other investors.

But Mr Hohn, a bespec-tacled graduate of Southampton University whomet his wife while doing graduate work at Harvard,is deeply moved by the plight of children in the developed world, say people who know him.

Mrs Cooper-Hohn says that in the early days of the charity, her husband would ask every day whether the fund had generated enough to provide food aid to a particular village he had come across.

"Chris is truly passionate about kids in developing countries," she said. "His first job was in the Philippines and he saw kids scouring the rubbish dumps and I think he was deeply moved."

The extra money means CIFF can now move into areas in which it had previously decided it was too small to make a difference, such as water and hygiene. But its "portfolio" will remain concentrated, to allow it to be closely involved in each project. After intensive research it has decided not to fund some areas, including those aimed at ending sexual exploitation of children.

Some critics claim it is just a marketing gimmick to promote the hedge fund, pointing to presentations to investors about the work of the charity, including one last year by Mr Clinton. But if it was the plan, it has not worked. Almost no one invests in the fund because of the charity, Mrs Cooper-Hohn says.

So far, CIFF has spent relatively little money. However, it is now scaling up significantly but takes a conservative approach to the hedge fund's long-term potential. "We are in this phase where our assets are rapidly accumulating," Mrs Cooper-Hohn says. "You can't expect that to last for ever."

Warren Buffett on his Lunch Auction for Charity

Bloomberg has an interview with Warren Buffett talking about his lunch auction for the Glide charity. Class act as usual.

Video Link

Eddie Lampert Speech

Eddie is one the great ones. Here's a talk he gave in 2003.

I started my firm in 1988 and began investing. I was inspired by Warren Buffett’s letters while still working on the Arbitrage desk at Goldman Sachs. We consider ourselves “Aggressive Conservative” investors

In investing, we seek to do a few things well, namely
1) Understand the Business
2) Understand the People Running the Business and
3) Get safety from the price that we pay

Lee Ainslie Interview - PM of Maverick Capital

Pension and Investments interviews one of the original Tiger Cubs, Lee Ainslie.

What was the most important lesson you learned from Mr. Robertson? Julian always stressed the importance of integrity in your personal conduct, in how you represented the firm and in evaluating management teams (of companies you were considering investing in) is critically important. At Maverick, the importance of integrity is constantly stressed. As we grow, our biggest risk is bringing on someone new … we don’t know them as well as the people we’ve worked with for years and years. We invest a lot of time in making sure everyone at the firm understands how important our reputation is.

Joel Greenblatt Lecture: 2006 Columbia Reunion

-Value works. Buffett: good AND cheap
-Good companies have high returns on capital: defined as operating profit divided by net working capital plus net fixed assets
-Cheap stocks have high earnings yields: defined as pre-tax operating earnings divided by enterprise value
-50/50 algorithm of good and cheap: Magic Formula!

Video

Source: David Lau

Bill Miller is Outperforming Himself

It turns out Bill Miller runs a smaller fund that gives him more flexibility to be more concentrated and invest outside of equities. It's called the Legg Mason Value Trust Opportunity Prime Trust fund and it is only available to Smith Barney clients. Over the last 5 years it is up 100% vs. 60% in the main Value Trust fund.

Opportunity, on the other hand, is completely flexible: Miller is free to invest overseas as well as in the U.S., and in "convertible securities, private placement securities, debt securities, options, etc.," Athridge explains. The fund can also be more heavily concentrated if Miller wants to make a few big bets.

Carl Icahn Profile

Fortune has a cover story on the most famous corporate raider of our time, Carl Icahn.

When Zander arrived, the 71-year-old Icahn ushered him into his immense suite, a paneled aerie overlooking Central Park festooned with museum-quality antiques, portraits of European gentry, and an exquisite portrait by French master Camille Corot. It resembles the drawing room of a British aristocrat, exuding the air of overwhelming wealth and confidence that Icahn - lord of $12 billion in investment capital - summons to bend CEOs to his will. "I told Zander the truth," recalls Icahn. "I said, 'You have a great company. Why did you screw it up?'"

Ken Heebner of CGM Funds Profile

Kiplinger calls Ken Heebner the savviest stock picker in America. Yes this is the guy who runs the funds with the corny fencing commercials. His Focus Fund has crushed the SP500 by 13% annually in the last 10 years.

What's the common thread in your approach to stock picking? I look for fundamental developments that will cause a stock to significantly outperform the market. So I look for companies that will surprise on the upside.

Profile on Lou Simpson, Buffett's Lieutenant

Morningstar has a profile on Lou Simpson. He's been beating the SP500 by 7% each year for a few decades. Lou's core strategy is to buy "growing businesses at value prices."

Simpson repeatedly stressed the importance of understanding the negatives associated with a potential investment or, as he put it, knowing "why not to buy something." This, he felt, was one of the keys to validating a given investment idea, as it confers a much deeper understanding of the underlying businesses concerned.

Bill Gates' Money Manager

Learn how Bill Gates' money manager invests. Their target annual return is 5%. You aim low when your main goal is not to lose tens of billions of dollars.

Michael Larson, a former bond-fund manager with Putnam Investments, is the financial engineer and stock picker behind that historic undertaking. As head of Bill Gates Investments, the 46-year-old Larson oversees Gates' personal wealth, which is housed within Cascade outside Seattle. At the same time, BGI is also responsible for the $32 billion Bill & Melinda Gates Foundation.

Motley Fool Interviews Mohnish Pabrai

Motley Fool interviews Mohnish Pabrai, a value fund manager who likes the Buffett style of investing. He says his fund has been up 28.6% annually for last 7 years. Not so shabby.

The No. 1 skill that a successful investor needs is patience. You need to let the game come to you. My steady-state modus operandi is to assume that I'm just a gentleman of leisure, and that I'm not in the investment business. If something looks so compelling that it screams out at me, saying "Buy me!!," I then do a drill-down. Otherwise, I'm just reading for reading's sake.

Part 1
Part 2

Berkshire Hathaway 2007 Annual Meeting Transcript

Matt at BankStocks.com does a fantastic transcript of the annual Woodstock for Capitalists.

Q: What’s a good way to become a better investor?

WB: Read everything you can. I read every book on investing in the Omaha Public Library. Fill up your mind with competing thoughts and decide what makes sense. Then jump in the water and start investing real money, rather than a paper portfolio. The difference between investing real money and is the same as reading a romance novel and actually dating. There’s nothing like experience. The earlier you start, the better.

Glenn Greenberg of Chieftain Capital Lecture

Listen to Glenn Greenberg of Chieftain Capital give a lecture to Columbia Business School students on March 28th, 2006. He's an investing legend.

Real Media Video Stream [You need a player that can play Real Media Videos]

Some basic learnings:

-You need an approach that over long-term will win and not utterly fail even during 100 year hurricane. If you have a strategy that can make explosive money, but blow up in any given year, it doesn't matter. Buffett likes to say: 100% X 100% X 0% still equals 0%.
-Only one approach that makes sense to him: Buy good businesses, reasonably predictable, necessary businesses, don't have high rate of change, figure out paying a under-valued price given the long-term prospects.
-Was an English major. Was a teacher during Vietnam War. Went to Columbia Business school. Then worked JP Morgan - 2 years in research as money "mis-manager". 150 growth stocks in the portfolio. Left to work for family office, Central National, for 5 years. Learned how to look at companies and how to take them apart.
-Don't trust other people's research is a mistake. Best thing to learn is "to do your own work."
-After 10 years in the business started Chieftain Capital with $40 million (about $26 from family and friends). Will never market again. Will never ask Wall Street to call them up with their investment ideas. Told clients we don't have time to meet with you. Maybe meet once a year. Spend time "doing research."
-Early on 100% invested. 3-4 ideas. Last 8 years, 30% in cash. Hedge-funds used get you 25-30% after fees. Today people invest 2/20 to get 8-10% after fees.
-Occasionally come across a business that was "wildly mis-priced." Is it a great business at a cheap price?
-Chieftain owns 6-12 stocks. Normally fewer than 10 stocks. Focus on U.S. stocks.
-We don't do relative valuations. Look for 14-15% rate of return. Buffett even looks at 13% EBIT return or 7-8Xs pre-tax (but he has low cost of capital due to insurance companies).
-Study company carefully, be confident in your analysis. Many of his stocks imploded after they bought it, but bought more lower and made more money.
-Huge fan of periodicals, read 4-5 newspapers a day, magazines, and trade magazines. Most information comes from reading and talking to smart people. However journalism standards have gotten worse, point of view has to be "punchy" and take an extreme stand.

Warren Buffett Investment Strategy - The Simplified Version

I've read a ton of Buffett related books, interviews, annual reports, original partnership letters, etc. Here's his strategy boiled down to the basics:

1. Do you understand the business? Stick to your "Circle of Competence". If you don't know what your "edge" is, you don't have an "edge".
2. Does it have "durable competitive advantage" or in other words "a moat"? Companies in this camp have a great brand, a franchise, high returns on equity and returns on invested capital, and pricing power. Buffett likes to ask if someone spent $1 billion on trying to build a competitor, would it make a "dent" on the business? If no, it has a good "moat".
3. Do we like the people that run it? Honest and able management. Life is too short to deal with bad people.
4. Does it sell for a price that is attractive? He bought See's Candies for 6Xs earnings. He bought Korean stocks a few years ago at 2Xs earnings. He bought Connoco Phillips at 6Xs earnings. He bought PetroChina at 5Xs earnings and a 10% dividend yield.

The above is his primary core strategy these days. In the past he did more micro-cap "cigar butt", arbitrage, and activist type things.

Warren Buffett MBA Talk

We're huge fans of Warren Buffett. Here's a talk he gave to some MBA students. Lots of wise vignettes in there.

Video Link

Wall Strip Video Blog

Wall Strip video blog is hip, funny, and informative. Every day they talk about a stock that has hit a 52-week high and why it's there. It may not be the best investing strategy, but at least you learn about a new company each day. The show just got bought by CBS. Nifty move big media!

Warren Buffett on Charlie Rose

More classic Buffett videos for your viewing pleasure [Source: Dah Lui Lau]

Video Link 1 - May 10th, 2007
Video Link 2 - June 26th, 2007