Archive for June, 2010

Seahawk Drilling, Inc. (NASDAQ:HAWK), which I’ve posted about before, has taken a pounding over the last few days, down over 11% just yesterday to close at $9.61. It seems crazy to me. HAWK is cheap as a going concern, but with its market capitalization at $113M, it’s now at a hefty discount to its liquidation value. Here’s how I figure it:

Here’s a list of HAWK’s rigs and their operating status from the June 9 Drilling Fleet Status Report:

There are two possible liquidation values for HAWK rigs. In the slightly more optimistic scenario, HAWK’s rigs are sold off as operating rigs to other drillers in the Gulf of Mexico. In the other more dour scenario, some of HAWK’s rigs are sold for scrap. HAWK is trading at a discount to both values.

Rig resale values

In March and April this year, ENSCO Plc (NYSE:ESV) sold three 300′ ILC rigs from the same vintage as HAWK’s rigs for ~$48M a piece (see press releases here and here). These are clearly higher specification and therefore more valuable than HAWK’s rigs, but the sales do provide some insight into recent market conditions. Here’s a chart from HAWK’s presentation (.pdf) to the Macquarie Securities Small and Mid-Cap Conference on June 15 and 16 showing comparable sales since 2004:

When 300′ ILCs have sold in the past for ~$48M, rigs comparable to HAWK’s have sold for around $15M each. HAWK is presently trading as if its rigs are worth only $6M each. Retired rigs have sold recently for between $5M and more. Hercules Offshore, Inc.’s (NASDAQ:HERO) 31 December, 2009 10K is illustrative:

Additionally, the Company recently entered into an agreement to sell our retired jackups Hercules 191 and Hercules 255 for $5.0 million each.

In June 2009, the Company entered into an agreement to sell its Hercules 100 and Hercules 110 jackup drilling rigs for a total purchase price of $12.0 million. The Hercules 100 was classified as “retired” and was stacked in Sabine Pass, Texas, and the Hercules 110 was cold-stacked in Trinidad. The closing of the sale of the Hercules 100 and Hercules 110 occurred in August 2009 and the net proceeds of $11.8 million from the sale were used to repay a portion of the Company’s term loan facility. The Company realized approximately $26.9 million ($13.1 million, net of tax) of impairment charges related to the write-down of the Hercules 110 to fair value less costs to sell during the second quarter of 2009 (See Note 12). The financial information for the Hercules 100 has historically been reported as part of the Domestic Offshore Segment and the Hercules 110 financial information has been reported as part of the International Offshore Segment. In addition, the assets associated with the Hercules 100 and Hercules 110 are included in Assets Held for Sale on the Consolidated Balance Sheet at December 31, 2008.

During the second quarter of 2008, the Company sold Hercules 256 for gross proceeds of $8.5 million, which approximated the carrying value of this asset.

The rigs have a resale value well beyond the price implied by the company’s stock. Not convinced they can all be sold as operating rigs? How about as scrap?

Scrap value

In this audio of the presentation to the Macquarie Securities Small and Mid-Cap Conference, Randy Stilley, the President and CEO of HAWK, says in relation to the slide below, that the value of the scrap steel and equipment on HAWK’s rigs is worth roughly $8M to $9M each:

Randy Stilley (at about 21 minutes into the presentation):

This is something that is just kind of amazing in a way. If you look at the underlying asset value of our rigs: five million dollars. The scrap value of a jackup is about eight or nine [million dollars], and that’s assuming that you get almost nothing for the steel and you just start taking stuff off of there; mud pumps, engines, top drives, cranes, draw works. If you start adding all that up, that alone is worth more than our current asset values based on our equity.

Now you can also say, “Well, if they’re not working, they’re not worth much,” and we’re not likely to just start cutting them up for scrap, but I think that’s kind of an interesting reference point that you don’t want to forget about because we’re trading at a very low value today.


If the ten cold stacked rigs are worth $80M in scrap, and the ten other operating rigs are worth $150M ($15M each), HAWK has $230M in rig value. Add HAWK’s $88M in cash and receivables, and deduct HAWK’s $164M in total liabilities, and HAWK is worth $154M in the most dour liquidation scenario. With a market capitalization of $113m, HAWK is trading at a hefty discount to this value, and HAWK is too cheap. It’s burning cash, it’s got a chunky payable to Pride and some Mexican tax issues, but subliquidation value never materializes without hair.

Hat tip BB.

[Full Disclosure: I hold HAWK. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]


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Further to my post yesterday on The St. Joe Company (NYSE:JOE) Chris Pavese of Broyhill Asset Management has submitted to Zero Hedge a comprehensive take on JOE:

Baron Rothschild, an 18th century British nobleman, is credited with saying, “The time to buy is when there’s blood in the streets.” Fast forward to today, and one might suggest that, “The time to buy is when there’s oil in the water.” Crisis creates opportunity for the disciplined investor, and the unfortunate disaster caused by the BP Blunder has produced one of the most compelling long term values we have ever come across. As they say, “ever” is quite a long time.

We recently watched a certain TV personality jumping up and down, like Jo-Jo The Idiot Circus Boy with a pretty new pet, and yelling at his viewers to “Sell, Sell, Sell” The St. Joe Company (JOE) after the stock had lost nearly half of its market capitalization in under two months. Viewers were told, “I know it’s got a strong balance sheet. SO WHAT! It may have acquired 477,000 acres of land in North West Florida at a very low cost. SO WHAT! . . . The risk from the oil spill is no longer a question of if, it’s not even a question of when. Now the only question is how much is this going to hurt? Could it wipe out the company??”

We’ll spare the suspense here and answer that one right up front – not a chance. The St. Joe Company has $39.5MM in debt, $27.1MM of which is offset by pledged treasury securities, and $30.6MM in maturities after 2014. The company has total liquidity of $286MM comprised of $164MM and $122MM of cash and credit facilities, respectively. A strong balance sheet may not be of much importance to speculators, but it provides long term investors with a comfortable security blanket. Not to mention, the company has 577,000 acres of land, but what’s a 100,000 acres if you’re not interested in the assets a company holds anyhow?

Later in the segment, the audience is told that, “I am not saying this company is going to go bankrupt. It’s probably not. That’s what I’m saying about BP.” We thought that last comment was particularly interesting, considering that on May 3rd, with BP trading over $50, our favorite TV personality explained that “BP’s debt to capital is really incredible” and on May 10, he told viewers that he was purchasing shares of BP for his charitable trust at just under $50. “If you get any good news at all, you’re at the bottom.”

Which leads us to our next question – why doesn’t the same hold true for JOE, a stock that is already selling at half the price it was trading at less than two months ago, with ZERO responsibility for the spill? Instead, viewers are told, “We cannot quantify the downside.” While this is certainly the case for BP, who’s costs and liabilities are rising by the day, anyone remotely interested in buying discounted Florida property, and willing to take the time to actually analyze the company’s assets, can “quantify the downside” in JOE pretty easily. At a minimum, we can get a sense for what the stock is currently pricing in. To help us determine the risk of a permanent loss of capital, we ask ourselves a few straightforward questions when considering any investment opportunity:

  1. Is the investment within our Circle of Confidence? Can we describe our thesis in one paragraph?
  2. Can we confidently estimate value in relation to price? What is an appropriate Margin of Safety?
  3. Does the business have a moat? What is the firm’s competitive advantage?
  4. Is the business run by honest and able people? Is management an efficient steward of capital?
  5. What can go wrong? How much do we stand to lose?
  6. Are we willing to invest a large part of our capital in the business?

These questions form the foundation of our investment thesis in The St. Joe Company, which is outlined below:

Buy When There’s Oil in the Water (Jun-10)

[Full Disclosure:  I hold JOE. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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The St. Joe Company (NYSE:JOE) owns approximately 577,000 acres of land concentrated primarily in northwest Florida, as well as approximately 405,000 acres in the coast of the Gulf of Mexico. The stock has been pummelled by the downturn in Florida real estate and the ongoing oil spill in the Gulf of Mexico. The stock is a perennial favorite of value investors, but opinion is not uniformly positive. Bruce Berkowitz’s Fairholme is the largest shareholder. Marty Whitman’s Third Avenue is a large, long-term holder. Sham Gad is long and Jon Heller held it in the past, which lead to a fantastic back-and-forth with David Einhorn, who was short in 2007 (and may still be short). Cramer is short (or selling, at least). Why the wide divergence in opinion? A valuation of JOE turns on the value of its real estate, and arriving at a sensible estimate of value of JOE’s real estate holdings is a difficult task. Further, the damage to the coastline from the oil spill is unquantified.

The long thesis

Berkowitz, Gad and Heller’s long theses are essentially the same. JOE owns huge tracts of undeveloped land in Florida. Access to JOE’s land holdings is via an international airport, the Northwest Florida Beaches International Airport, which opened on May 23 this year. JOE donated the land for the airport and owns over 71,000 acres in the surrounding area. JOE’s 172,000 inland acres have sold for around 1,500 per acre, indicating they are collectively worth around $260M. With $150M in cash and long-term debt of $38M, after backing out the inland acres, JOE’s ~$2B enterprise value implies that the remaining 405,000 acres within 15 miles of the coastline are worth only around $5,000 per acre. Berkowitz, Gad and Heller believe that land is worth more.

For more, see Bruce Berkowitz’s thesis, Sham Gad’s thesis, and Jon Heller’s posts, which provides a link to Marty Whitman’s shareholder letter (Third Avenue has held JOE since 1990).

The short thesis

Cheap Stocks sets out David Einhorn’s August 2007 short thesis when the stock was trading at around $40:

The per acre analyses used by most St. Joe bulls exclude selling expenses and taxes. I believe that the equivalent gross value to the $9,000 an acre used in your analysis is the equivalent of $18,000 an acre, when taking expenses and taxes into account.

As it was, I did not quantify any amount of swampland at the Ira Sohn conference. I simply noted that some of the land is swampland. The weather is much worse than South Florida (just as hot in the summer and cooler in the winter), there are a lot of mosquitoes, there is not a lot to do, and the demographics are poor. I noted that I thought St. Joe overplayed the value of land within ten miles of the ocean and noted that I thought that vacationers would prefer to be “on the ocean.” More than a mile is too far for many families to walk to the beach. Finally, I thought the airport development is the type of story often seen in promotional stocks designed to buy years of time to encourage the market to ignore current financial results. The current airport does not operate near capacity. Airports in Jacksonville an Ft. Myers did not spur a lot of development next to their airports and it is odd the St. Joe seems to believe that a lot of people will want to live near the airport, as if that is a residential attraction.

As I pointed out in my speech, since 2001, St. Joe has sold 268,000 acres at an average price of under $2,000 an acre. Since my speech, St. Joe announced another quarter where they sold over 30,000 additional acres at $1,500 an acre. As such, I don’t see that it is very challenging to determine a value for most of St. Joe’s land. Assuming they haven’t sold the most salable stuff first, it appears that undeveloped land is worth on average sub $2,000 an acre before expenses.

I believe that about 680,000 of the remaining 739,000 acres are similarly undeveloped. Assuming St. Joe has no un-salable tracts of swampland and all the undeveloped land could be sold for $2,000 an acre, it would be worth $1.36 billion gross or about $700 million after selling expenses and taxes.

St Joe has just under 20,000 acres in development (some of which has already been sold). They have an additional 21,000 acres “In Pre-Development”, meaning they have land use entitlements, but they are still evaluating the development or need additional permits. They have another 10,000 acres they are planning to entitle.

The developed projects have a book value of $800 million. St. Joe is not making good margins on selling developed property. Residential and commercial land sales have not covered its overhead in any quarter since 2005, when it was still in the homebuilding business. St. Joe is one of very few companies that has spent large amounts on residential development and has not taken any impairment in the current environment. To give St. Joe the benefit of the doubt, let’s say the developments could be worth 1.5x book or $1.2 billion.

On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.

Cramer’s short or sell thesis is as follows:

With oil continuing to gush in the Gulf of Mexico, one obvious stock to put on the Sell Block is St. Joe, a property developer in Florida, 70% of whose properties sit on the “now imperiled coastline.” The positives just don’t matter; the company bought 577.000 acres of land at a rock bottom price, is expanding beyond luxury properties into commercial real estate and is suing BP (BP) for damages. If tar balls show up on beachfront property no one will want to buy.

If this is such a clear sell, why is Cramer singling JOE out? Because three analysts rate the stock as “neutral” and one says it is “undervalued.” Cramer has three words for that analyst: “Sell, sell, sell.”

“St. Joe down 40% off the oil spill isn’t an opportunity,” Cramer said, “it’s a falling knife and it will be able to cut you unless we get some certainty, some clarity about the scale of the damage.”

Why I am long

There are good reasons to be out of this stock. Florida real estate is synonymous with “Tulip bulb”, David Einhorn has been or is short, and JOE is, apparently, a falling knife, which sounds dangerous. Further, no one has a good bead on the value of JOE’s real estate. Einhorn is an exceptionally smart investor and, at his most charitable, valued JOE’s entire real estate holdings at $3,000 per acre. Einhorn’s short thesis is more dour. The most saleable property is worth $1,500 per acre before expenses and taxes, and a great deal of the rest is swampland. Cramer says the tar balls will push the value down further. The long thesis is simply that JOE’s real estate is worth more than $3,600 per acre (blending the inland real estate and the coastline corridor).

I’ve got no real view on the value of the real estate. I think it’s sensible to adopt Einhorn’s downside valuation as the downside valuation. Importantly, from my perspective, the downside valuation is not zero. In 2008, JOE raised $580M at $35 per share to pay down debt. Even in the worst case scenario – that the most saleable land has been sold and a great deal of the rest is swampland – JOE probably still has some value, which I’ve pencilled in at $5 (land is worth $1,500 per acre, two-thirds of it is unsaleable swampland) to $10 per share (land is worth $1,500 per acre, one-third of it is unsaleable swampland). The best case scenario is unknowable, but, because JOE has no net debt, and modest cash burn, we can hold the stock long enough to find out. The oil spill is a small concern, but BP is responsible for any clean up, either via the $20B fund or through the courts. For me, JOE represents two things: The first is a cheap bet on some longer term mean reversion in the prices for Florida real estate. The second is some shorter term mean reversion in the stock once the panic selling from the oil spill subsides. If I’m wrong, I think I’ll still get back 20% to 50% of my investment at these prices. JOE closed Friday at $22.87.

Hat tip BB.

[Full Disclosure:  I hold JOE. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Primus Telecommunications (OTC:PMUG) is an interesting post-reorganization equity. Both Farukh Farooqi at Oozing Alpha and Wally the Tiger at Zero Hedge have written about it recently.

Here’s Farukh Farooqi’s take (via Oozing Alpha):

Last week, Primus Telecom announced Q110 results which handsomely exceeded my expectations and Plan Projections. In my opinion, Primus is one of the most attractively priced post-reorg equities from the current bankruptcy cycle.

As a reminder, Primus Telecom emerged from Chapter 11 on July 1, 2009 after restructuring its debt down to $255 mm from $316 mm pre-bankruptcy. It is an integrated telecommunications company which provides voice, VOIP, Internet, wireless, data and hosting services to business and residential customers.

The Co has 9.7 mm shares and its equity market cap is $65 mm. It has total debt of $254 mm, cash of $63 mm. Its enterprise value is $256 mm. The stock currently trades at an EV/LTM EBITDA of 3x, Price/Free Cash Flow of 2x and an EV/Free Cash Flow of 7x.

Over the past four quarters, it has generated EBITDA of $87 mm of which 54% was from Canada, 41% from Australia and ROW accounted for 5%. U.S. and Europe are meaningless to Primus’s profitability.

On May 17, it reported Q110 adjusted EBITDA of $23.4 mm and EBITDA is now at an annualized run rate of $90+ mm compared to its projected 2010 EBITDA of $67 mm per Plan of Reorganization.

In Q110, it generated free cash flow of $12.8 mm, paid down $3.4 mm of capital leases and retired $9.5 mm of its 14.25% notes.

Revenues from VoIP, Broadband and Data Centers over the past four quarters totaled $220 mm. Datacenters is currently a $38 mm business with 42% EBTIDA margin compared to the Company’s overall margin of 11%. According to management, this business can grow 40%-50% within Primus’ existing footprint and become a significant contributor to future profitability.

Primus’ Net Debt/LTM EBITDA ratio is at 2.2x which, in my opinion, is quite manageable.

Comp EV/EBITDA multiples range between 5x-6x. For Primus, a 4x EV/EBITDA multiple would imply a $16 price for the common stock.

So in summary, Primus is inexpensive, undiscovered and has been growing EBITDA for the past four quarters. It is a levered equity so with this improving profitability and debt pay down, the stock could benefit meaningfully.

The bear case on the story is that Primus’s traditional voice revenues continue to decline due to product substitution (wireless/internet for fixed line voice). This is an industry issue, not Primus-specific. Primus contends that over the years, it has grown its VoIP/Data/Internet business and its reliance on Voice, while significant, continues to decline. Voice accounted for 54%, 52% and 48% of revenues in 2007, 2008 and 2009, respectively.

It is important to note that this slowly fading voice business is the cash engine for the Co (requires little R&D and capital expenditure). The key to Primus’s success, in my view, will be to manage this transition effectively and allocate capital to higher growth businesses with a keen eye on return on invested capital.

Says Wally the Tiger at Zero Hedge:

Primus Telecommunications Group Inc. (Ticker: PMUG.OB) provides integrated telecommunications services primarily in the United States, Australia, Canada, Brazil, the United Kingdom, and western Europe. Primus’ stock trades on the over-the-counter bulletin board, as the company emerged from bankruptcy on July 1, 2009 and has not yet relisted on a major exchange. The company has substantial size, with LTM revenue and EBITDA of $826 million and $86 million, respectively. Importantly, Primus’ management estimates that the company will generate $23-28 million of annual free cash flow, or $2.38-2.89/share of FCF, representing a 34-41% FCF yield at its current $7.00 share price. On a multiple basis, it also trades very inexpensively, at 3.1x EV/EBITDA and 0.3x EV/Revenue (as of June 15, 2010). Potential catalysts may include: (i) listing on major exchange; (ii) continued use of FCF to retire debt; and (iii) potential sale of entire company. The company’s exposure to Canada and Australia are large positives given their relative stability. Per the proxy, as of May 1, 2010, Primus’ top eight shareholders collectively owned 45.3% of the company’s stock.

The stock bounces around on low volume, so it might be worth watching.

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Join us for the 6th Annual New York Value Investing Congress, taking place October 12 & 13, 2010 in New York City, to learn and profit from some of the world’s most extraordinary money managers.

You’ll (L)EARN with:

  • David Einhorn, Greenlight Capital Management
  • Lee Ainslie, Maverick Capital
  • John Burbank, Passport Capital
  • J Kyle Bass, Hayman Capital
  • Mohnish Pabrai, Pabrai Investment Funds
  • Amitabh Singhi, Surefin Investments
  • J. Carlo Cannell, Cannell Capital
  • Zeke Ashton, Centaur Capital Partners
  • Whitney Tilson & Glenn Tongue, T2 Partners

…with many more to come!

The price will increase substantially as the event nears. Avoid disappointment – register today!


Regular Price
Your Price
Value Investing Congress
October 12-13, 2010
$4,395 $2,495 $1,900
Value Investing Congress &
An Advanced Seminar on
Value Investing
October 11-13, 2010
$6,795 $4,095 $2,700

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Andrew Shapiro, President of Lawndale Capital Management, has provided an update on Reading International Inc (NASDAQ:RDI) (see the RDI post archive here. Andrew has also responded to commenters in the first post.):

Reading International: Index Fund Selling Presents Unique Liquidity Opportunity

As previously reported in mid-May, movie exhibitor and real estate developer Reading International (NASDAQ: RDI) announced what should be a major near-term catalyst for unlocking substantial embedded value in one of its most highly appreciated real estate development projects, Burwood Square, located in Melbourne, Australia. A unique major liquidity opportunity for buyers is being presented over the next week as substantial RDI shares (approx 1.3 million) are to be sold by Russell index funds. Such funds are completely indifferent to Reading’s value-unlocking activity, but are forced to sell at the end of this week when RDI is deleted from the Russell 2000 index, because it missed this year’s market capitalization cut-off.

Burwood Sale is a Catalyst
A May 16, 2010 article on SeekingAlpha.com, discusses the property and provides URL links to the parcel’s up-zoning and present development plans. A follow-up SeekingAlpha article on May 27, 2010 makes the argument that Burwood’s sale would convert difficult-to-value real estate and sizable hidden unrealized appreciation into easily valued cash, and that if Reading’s real estate value were removed from Reading’s present enterprise valuation, investors get a large geographically diverse movie exhibition business for “free”. (Note, alternatively, monetizing the movie theater business would create long-held and highly appreciated real estate for “free” as well.) That article concludes that, as Reading monetizes Burwood, investors ought to more easily price, via a higher stock price, the intrinsic value of both of Reading’s cinema and real estate segments.

Catalyst realization is in the Near term

A detailed Information Memorandum (a sales “teaser”) on the Burwood Square parcel posted on Reading’s website not only includes some some compelling photos and information illustrating the parcel’s substantial value, but it also sets a near term timeline for the sales process. Submissions of expression of interest and buyer qualifications are due next week on June 28th. Selection of short-listed candidates to participate in the next round of bidding will take place July 5th.

RDI being deleted from Russell 2000 Index on Friday June, 25

On Friday, June 25th, the Russell indices will be recomposed for the coming June 2010-June 2011 year with new members added and some old members deleted. The composition of the Russell 2000 index (a subset of the Russell 3000E) is purely based on market capitalization size on Russell’s cut-off date (May 28, 2010), not any fundamental business assessment of value or prospects. Reading’s closing market capitalization on May 28 placed the company about 40-60 slots below the 3000th ranking company, and thus, Reading has been listed by Russell as one of over 200 companies being deleted from the Russell 2000 index. Note, RDI will remain in the less followed Russell Micro Cap index.

Index fund selling presents unique liquidity opportunity for RDI buyers
It is important to note that RDI’s upcoming deletion from the Russell 2000 index was not qualitative based and index funds can’t consider whether Reading is monetizing its Burwood Square parcel or not. They MUST sell their shares on or around the Friday June 25, 2010 recomposition date. RDI’s average daily trading volume is about 50K shares, a modest and respectable number for a company that lacks any sell-side analyst coverage whatsoever. However, this amount is dwarfed by the estimated 1.3 million or more RDI shares held by index funds connected to the Russell 2000 index that must be sold.

Given the substantial surge over the last several months in RDI shares held short to approximately 780K shares on May 28, I feel some RDI shares to be sold by index funds are already spoken for. However, a substantial block of RDI stock liquidity remaining to be sold by index funds will enter the market in the coming week and, once sold, won’t be available to interested buyers under similar circumstances again. The next index participation in RDI likely won’t be till next year, after Burwood and possibly other real estate parcels are monetized or built out. That scenario would be index funds buying RDI shares, when the company likely gets added back into the Russell 2000 index.

Disclosure: At time of writing, funds author manages hold a long position in RDI. The funds may buy or sell shares at anytime.

[Full Disclosure:  I hold RDI. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

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Slate has a superb interview with Victor Niederhoffer, who I think is one of the most interesting people in finance (or elsewhere, for that matter). A friend gave me his book The Education of a Speculator when I was about 19. It’s a wonderful window into an eclectic, humble intellect, and a great read. Slate introduces Niederhoffer thus:

Niederhoffer is a hedge fund manager, a former partner of George Soros, a five-time U.S. Nationals squash champion, and the best-selling author of The Education of a Speculator and Practical Speculation. Those successes notwithstanding, Niederhoffer is best known for two spectacular financial blow-ups. In 1997, a risky investment in Thai bank stocks combined with a dramatic one-day drop in the Dow Jones to permanently close the doors of Niederhoffer Investments. Ten years later, having recouped his losses, Niederhoffer saw his Matador Fund, buffeted by the 2007 credit crunch, self-destruct.

Niederhoffer’s e-mails suggested a man already obsessed with wrongness. In them, he referenced the statistical concept of path dependence; shared a series of proverbs about the game of checkers (of 5,000 such proverbs, he hazarded, about 250 concerned error); meditated on the difference between Type One mistakes (excessive credulity) and Type Two mistakes (excessive skepticism) (he himself is much more prone to Type One, he says: “I’m tremendously gullible”); observed that “one should be careful of multitasking or multiromancing”; sent me the citations for hoodoo in the Oxford English Dictionary (a hoodoo is something or someone that brings bad luck); and noted that the harpooner in Moby Dick would have made a great interview subject for this series. Finally, he pointed out that the word error has no antonym. “In retrospect,” he wrote, “I know much too much about errors and much too little about the opposite, whatever it is.”

Here Niederhoffer comments on the rumor that Soros, among others, cautioned him on his Thai investment:

Why didn’t you listen to the naysayers?

Well, Soros would be the first to tell you that his predictions are completely random. He never says anything that doesn’t jibe with his current position or his hoped-for outcome. And he’s chronically bearish. He’s chronically thinking that the world needs a central planner to put it to rights and that the market itself is too prone to disaster.

I think a much better view is that the stock market never rises unless there’s a wall of fear it has to climb. When the public is most frightened, only the strong are left, and that’s when the market is in the best possible hands. I call it taking out the canes. Whenever disaster strikes, the very sagacious wealthy people take their canes, and they hobble down from their stately mansions on Fifth Avenue, and they buy stocks to the extent of their bank balances, and then a week or two later, the market rises, they deposit the overplus in their accounts, invest it in blue-chip real estate, and retire back to their stately mansions. That’s probably the best way of making money, to be a specialist in panics. Whenever there’s panic hanging in the air, that’s a great time to invest.

And discussing Soros’s attitude to wives, and, presumably, speculation:

One last thing from your e-mails: I love this checkers saying, “The popular player loses without an alibi.” I think most people are pretty bad at that. It’s like, “Well, if it hadn’t been for X, I would’ve won.”

I hope you don’t feel like I’ve alibi-ed too much. But a person likes to have a certain amount of self-respect even after disasters. Still, it’s terrible to be a bad loser. I like Soros’s proverb that you should never marry a woman you wouldn’t want to divorce.

Click here for the full interview.

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Forbes has released Forbes on Buffett, a compendium of articles on Warren Buffett, beginning with a November 1969 article on his early investment partnership:

…Buffett is what is usually called a Wall Streeter, a Money Man. For the last 12 years he has been running one of the most spectacular investment portfolios in the country.

Download a .pdf copy here (hat tip to Market Folly).

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Whitney Tilson has received some criticism for his apparent lack of “analysis” on his position in BP Plc (ADR) (NYSE:BP). I think the criticism is a little unwarranted. Here Tilson and his partner Glenn Tongue discuss T2’s take on BP  (Jacob Wolinsky’s Scribd via Zero Hedge):

We recently established (and disclosed publicly on CBNC; see here and here) a modest (4-5% of our funds) position in BP, and the blowback has been unlike anything we’ve encountered in our careers – and being value investors, we’ve owned a lot of unpopular stocks over the years! This blowback, combined with hysterical headlines, rumors and speculation, have not shaken our confidence, but rather reinforced it, as we love buying when other investors are panicking.

And panic there is: even with the rebound of the past two days, the stock is down 44% since the Deepwater Horizon accident, the credit-default swap spreads have widened to all-time highs, seven analysts have cut their rating this week alone, and well-known energy investment banker Matt Simmons said on Wednesday that “I don’t think BP is going to last as a company for more than a matter of months.” Politicians at all levels are engaged in ever-more-heated tough-sounding rhetoric, including President Obama saying that he would fire BP’s CEO, Tony Hayward, if Hayward was his employee. Finally, while BP has said it will pay for the clean-up and direct damages to those affected by the spill, the Obama Administration is going a step further and threatening to force BP to cut its dividend and “repay the salaries of any workers laid off because of the six-month moratorium on deepwater exploratory drilling imposed by the U.S. government after the spill.”

So why on earth would we own the stock of this pariah company? And if we think it’s cheap, why don’t we wait for the dust to settle, the panic selling to stop, and for the outlook to become more clear, and then buy it when it’s safer to do so? The second question is easy: because by the time the outlook is clear, the stock will be at least 50% higher. The former is a tougher question, which we discuss at length below, but in short we own the stock for two simple reasons: 1) BP is not going bankrupt. It is the 4th most profitable company in the world, which means it’s highly likely that it will be able to cover the clean-up costs plus all damages/fines/lawsuits, especially since these costs will be spread out over many years; and 2) the stock is extraordinarily cheap, currently trading 5.4x this year’s estimated earnings (it’s also yielding 9.9% at today’s closing price of $33.97, but the dividend may be suspended temporarily, as discussed below).

Note that in owning the stock, we are not defending the company or its CEO. BP appears to have an atrocious safety record, and it wouldn’t surprise us if regulators and the legal system determine that it cut corners on the Deepwater Horizon rig, leading to the tragedy. Compounding this, BP so far has botched both the clean-up and the public relations. We think the company should have to pay for all of the damages it has caused, plus a huge fine. Thank goodness BP is so profitable that it should be able to pay for all of this.

Here are the key questions about which we’re thinking:

1) How big is the spill today and how bad could it get? How much could the clean-up cost, and what might legal liabilities be – and, critically, over what time period might BP have to pay? Are there any relevant precedents?

2) How profitable is BP? What do its balance sheet and free cash flows look like? Does BP have the liquidity to handle this crisis?

3) How much might future profits be impacted? What would be the impact of a permanent ban on offshore drilling in the Gulf of Mexico? How tarnished are BP’s brand and reputation, and what might be the impact of this?

4) What if BP cuts its dividend? If need be, could it raise cash in other ways?

5) Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning it, in light of the company’s bad behavior?

We address all of these questions in Appendix A (below), but in summary, we think what’s happening to BP right now is similar to the overall market in March 2009: the near-term fundamentals are terrible, nobody knows when they will improve, and fear-mongers dominate the headlines. But for investors with courage, conviction, and an outlook longer than a few months, we think this market overreaction is a wonderful buying opportunity.

Appendix A

Question 1: How big is the spill today and how bad could it get? How much could the clean-up cost, and what might legal liabilities be – and, critically, over what time period might BP have to pay? Are there any relevant precedents?

These are the most important questions, and the lack of clear answers has caused investors to sell first and wait for answers later. The fear is that, regardless of BP’s profitability, the company will be swamped by astronomical liabilities associated with untold environmental damage.

Given that these liabilities can’t be known with any degree of certainty, how can we get comfortable owning the stock? The answer is that we think we can make some reasonable guesses, based on numerous precedents, and while we can’t rule out a disaster scenario entirely, we think that the expected value among many different possible outcomes makes this an attractive risk-reward situation.

Wall Street analysts are scrambling to come up with loss scenarios – for example, here’s what J.P. Morgan Cazenove analysts write: “BP’s loss of relative value has overshot a worst case. The sum of clean up costs ($5bn), a fine under the Clean Water Act ($8.1bn) and litigation ($16bn) is around $29bn.” Other analysts are in the $30 billion range as well. (Note that BP has paid roughly $1.4 billion to date.)

$30 billion is less than one year of operating income for BP. Even if the total amount is double or triple this, keep in mind that the payout on these liabilities will be over many, many years, allowing BP to earn its way out of trouble (similar to what the nation’s big banks are doing right now). This is a critical point that isn’t being discussed: everyone is focused on what the total costs to BP might be, without asking the equally important question of when BP might have to make these payments. The clean-up costs will be spread out over the next few years, and the legal liabilities and fines over a much longer period. In the case of the Exxon Valdez oil spill, for example, the Supreme Court didn’t make a final ruling until 2008, 19 years after the spill.

But what if the liabilities are much larger? What if the spill permanently destroys the ecosystem and tourist industry in the Gulf of Mexico? In this case, BP’s shareholders will likely get wiped out. But is it likely? We think not.

Pretty much the only good news about this spill is that the Gulf of Mexico is huge, covering 615,000 square miles of surface area and containing 660 quadrillion gallons of water. Let’s compare this to the amount of oil spilled, where one team of scientists just estimated that “the Deepwater Horizon well is most likely spewing at least 25,000 barrels of oil a day, and may be producing 40,000 or even 50,000 barrels a day” – more than double the high end of current estimates.

Let’s take the high end of 50,000 barrels per day and also assume that the well isn’t capped until mid-August, four months after the accident. Let’s also assume that the cap captures no oil (the latest reports are that it may be capturing most of the oil, but let’s be conservative). 50,000 barrels/day x 120 days x 42 gallons/barrel = 252 million gallons of oil released.

252 million divided by 660 quadrillion is one gallon of oil for every 2.6 billion gallons of water in the Gulf of Mexico. That’s equal to roughly one ounce of oil spread over 300,000 bathtubs full of water.

Of course the oil from the Deepwater Horizon spill isn’t spread out evenly throughout the Gulf of Mexico, and we’re certainly not minimizing the severe environmental damage. We’re simply pointing out that – while it may not be politically correct to do so in this emotionally charged environment, with scenes of dead oil-covered birds – the Gulf of Mexico (and the beaches, tourist and seafood industries, etc.) will likely recover from this spill.

Our belief that, eventually, this too shall pass is rooted in five precedents, all of which bode well for the Gulf of Mexico (and BP).

1) Though almost nobody has heard of it, the second largest oil spill ever was in the Gulf of Mexico in 1979. Ixtoc I, an oil well owned by Pemex, Mexico’s state-owned oil company, suffered a blowout and spewed an estimated 30,000 barrels of oil per day into the Gulf for nearly 10 months. An oil slick covered about half of Texas’s 370-mile gulf shoreline, devastating tourism. Did this bankrupt Pemex? Hardly. It spent $100 million to clean up the spill, avoided paying compensation by asserting sovereign immunity, and Texas beaches recovered quickly.

Here’s an excerpt on it from a recent Newsweek article, Four Environmental Disasters Worse Than the Deepwater Horizon Spill:

Ixtoc Blowout, 1979

News reports on the 1979 blowout of an undersea oil well off the Gulf of Mexico seem all too familiar today. There was a failure of the “blowout preventer,” an undersea fail-safe device that is supposed to close off a gushing pipe. There were frustrated reports about the Mexican government vastly underestimating the volume of oil gushing from the seabed, much like the lowball guesses from BP in April.

Day after day for a span of 10 months, a torrent of oil rushed into the Gulf of Mexico after the initial explosion near the Yucatan Peninsula. The spill was checked only in part by a cap that was lowered over the leak to siphon off a portion of the flow. After four months an oil slick had covered about half of Texas’s 370-mile gulf shoreline, devastating tourism. Only by drilling two relief wells to connect to the initial hole, then pumping mud and concrete into the gushing pipe could Petroleos Mexicanos, or PeMex, Mexico’s national oil company, stop the leak.

“The accident does suggest that blowout prevention equipment is not designed to handle the worst emergencies,” The New York Times wrote in an April 1980 editorial after the leak was finally capped. “Could a blowout in American waters be quickly capped and cleaned up?”

By the easiest measure—volume of oil spilled—PeMex’s Ixtoc I oil well was far worse than the Deepwater Horizon well: 140 million gallons of oil poured out of the Mexican well, compared to the estimated 94.2 million gallons that could escape from the well near Louisiana by mid-August, when a relief well is expected to be complete. (The worst oil spill in history occurred in 1991, when the Iraqi army ripped apart Kuwait’s oil infrastructure and released more than 252 million gallons during the Persian Gulf War. The Exxon Valdez crash in 1989 released 10.9 million gallons.)

2) Consider the Gulf War oil spill in 1991, the largest ever, when Iraqi forces, to foil a potential landing by U.S. Marines, deliberately released an estimated 11 million barrels of oil into the Persian Gulf, creating a slick that reached a maximum size of 101 by 42 miles and was 5 inches thick in some areas. Roughly 10 times the amount of oil than has been spilled in the Gulf of Mexico so far was released into a much smaller body of water (the Persian Gulf is less than 1/6th the size of the Gulf of Mexico by surface area and has an average depth of only 160 feet and a maximum depth of a mere 300 feet vs. a maximum depth in the Gulf of Mexico of 14,383 feet).

There is some dispute about the long-term environmental damage, but according to an article in the NY Times, “a 1993 study sponsored by UNESCO, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates and the United States found the spill did ‘little long-term damage’…About half the oil evaporated, a million barrels were recovered and 2 million to 3 million barrels washed ashore, mainly in Saudi Arabia.”

3) In 1989 the Exxon Valdez tanker hit a reef and dumped 250,000 barrels of oil into Alaska’s pristine Prince William Sound. The spill covered 1,300 miles of coastline, 11,000 square miles of ocean, and killed thousands of animals. BP’s spill is much larger and is in a more populated, economically sensitive area, but it’s worth noting that the total cost to Exxon was only $3.5 billion (after multiple appeals courts and finally the Supreme Court knocked a $5+ billion judgment down to $507.5 million).

4) A recent New York Times article speculating on a BP bankruptcy filing mentioned Texaco’s 1987 bankruptcy filing, but failed to include a critical piece of information: that Texaco’s shareholders, far from being wiped out, in fact weren’t harmed at all. Here’s an excerpt from the NY Times article:

This outcome might seem far-fetched right now. But on Wall Street bankers have already coined a term for it: “the Texaco scenario.”

In 1987, Texaco was forced to file for Chapter 11 because it could not afford to pay a jury award worth $1 billion to Pennzoil. That award had been knocked down by a judge from a whopping $10.53 billion. (Pennzoil successfully sued Texaco for “jumping” its planned merger with Getty Oil, in part, by moving the case to local court near its headquarters. The jury awarded triple damages.)

And here’s an excerpt from a 1987 Time Magazine article, explaining what really happened:

The $10 billion legal battle royal between Texaco and Pennzoil clearly entered a new and murky phase after the country’s third-ranking oil company (1986 sales: $32.6 billion) made its bombshell decision on Sunday, April 12, to file for Chapter 11 protection. Whichever side was right in the dispute, the horrendous legal tangle surrounding the two firms vastly increased — along with the business uncertainty.

Nonetheless, as New York Bankruptcy Judge Howard Schwartzberg assumed his overseeing duties with Texaco, it seemed to many analysts that the company had suddenly gained the upper hand in the high-stakes brawl it had appeared to be losing. Said Sanford Margoshes, an oil analyst at the Shearson Lehman Bros. investment firm: “Texaco has bought time. Its prospects are not as bleak.” Wall Street seemed to agree. When the New York Stock Exchange opened trading after Texaco’s bankruptcy filing, the company’s stock dropped from 31 7/8 to 28 1/2 a share. Then the holdings rebounded, closing last week at 31 1/4. Pennzoil shares, which had surged from 79 3/4 to 92 1/4 during the previous week, plunged by more than 15 points the day after the Chapter 11 action and closed the week at 78.

The Big Board seemed to judge that Pennzoil’s combative chairman, J. Hugh Liedtke, 65, had overreached himself in the dispute.

5) But what about the precedents for tobacco, asbestos or breast implants? The latter two bankrupted numerous companies, so why won’t this happen to BP? In large part because the legal environment has changed: it’s much more hostile to mass tort actions, thanks in large part to a conservative majority on the Supreme Court. If the asbestos or breast implant class action cases occurred today, the outcomes would likely be very different – witness, for example, the outcomes of the lead paint cases against Mattel and paint manufacturers.

The closest analogy to today’s situation with BP is, we believe, the Vioxx crisis in late 2004 when Merck withdrew one of the most prescribed drugs in history from the market due to an increased risk of heart attacks – a risk Merck had known about years earlier, but had not disclosed. Based on speculation that Merck’s liability could be as high as $50 billion, the stock tanked from $45 to $26 in less than two months in late 2004. Here’s what Jim Cramer wrote at the time:

Please don’t read the articles that tell you that Merck will come through this whole because, after all, it’s a great American company, and great American companies always come back if you just buy and hold ’em.

Close your eyes and ears to the Merck sirens, because they don’t know what they are talking about. They are naïve. All of them. Because they don’t recognize that with the Vioxx debacle, Merck, overnight, has become the trial lawyers’ next big score, the next big bankruptable company out there. The Merck lovers don’t understand the vast powers of the mass-tort bar. They underestimate the power of the American judicial system to wipe out companies, innocent or guilty, for fatal mistakes. They don’t get that the plaintiffs have all the cards in these lawsuits and management has none. In fact, if I were the New York Stock Exchange, I would put a big skull-and-bones warning label on Merck’s stock that would say: “Warning—the security you are purchasing may end up worthless to you. All Merck stock bought after the recall of Vioxx might soon belong to those class-action plaintiffs who used Vioxx after the time when Merck knew that Vioxx may be lethal.”

So what happened to Merck? It has settled nearly all of the claims for around $5 billion, has won nearly all of the cases that reached juries (with relatively small awards in the losses), and the stock rallied to over $60 in the subsequent three years.

Question 2: How profitable is BP? What do its balance sheet and free cash flows look like? Does BP have the liquidity to handle this crisis?

According to the Fortune 500, BP has the 4th highest revenues of any company in the world, and also earns the 4th highest profits, trailing only Gazprom, Exxon Mobil and Royal Dutch Shell. Profits were depressed in 2009 due to the global economic crisis, but analysts are projecting (and robust Q1 results affirm) operating profits of around $34 billion ($93 million per day) in 2010 and net income of around $22 billion, consistent with the 2005-2008 average. (These estimates are before Deepwater Horizon costs are factored in.)

BP has an exceptionally strong balance sheet, that has been getting stronger over the past few years, as this table shows:

According to CA Cheuvreux, “BP has over $5 billion of accessible cash on its balance sheet, $5 billion in banking facilities, and $5 billion on standby alliance. BP has thus got considerable fire power to deal with the costs as they accrue.”

BP’s cash flow statement is also healthy, as this table shows:

Very simply, BP takes its $30 billion of operating cash flow (it’s averaged $29.7 billion over the past four full years) and reinvests two-thirds of it into the business and pays the rest out as a dividend to shareholders.

In summary, by any measure BP has extraordinary financial strength.

Question 3: How much might future profits be impacted? What would be the impact of a permanent ban on offshore drilling in the Gulf of Mexico? How tarnished are BP’s brand and reputation, and what might be the impact of this?

A key pillar of our investment thesis on BP is that the earnings power of the business remains intact. We’ve heard two contrary arguments: the first is that BP’s entire offshore Gulf of Mexico operation, the largest of any company in the region, could be shut down permanently. While we think this is unlikely, BP could weather this hit as it accounted for only 15.3% of BP total oil production and 3.6% of natural gas production in 2009.

To consider an even more extreme scenario, what if BP stopped (or was forced to stop) doing business in the U.S.? Even then, BP would survive: in total, the US accounted for 33.3% of BP’s exploration and production profits in Q1 2010 (E&P was 93.2% of BP’s total operating profit).

The second argument is that BP’s brand and reputation have been so tarnished, or the rumors about BP filing for bankruptcy have so spooked folks, that drivers will shun BP’s gas stations and BP’s counterparties won’t do business with BP or demand onerous terms like cash prepayment. It’s an interesting theory, but we can find no evidence for it – and we’ve looked.

Our best guess is that when all is said and done, BP’s normalized profits might be a few percent lower due to this crisis. There will surely be expensive new safety regulations (which will apply to all offshore drillers) and BP may lose some business with the U.S. government (it’s currently the “top supplier of refined fuel, including jet fuel, to the Department of Defense last year. It was also one of the top suppliers of gasoline, diesel and other fuels to the federal government.”).

Question 4: What if BP cuts its dividend? If need be, could it raise cash in other ways?

There’s a great deal of speculation that BP might be forced to cut or even suspend its dividend (currently 9.9%) due to the costs of the cleanup and/or political pressure (the Obama administration is pressuring BP on this front and recent reports are that the company will indeed do so).

From an investment perspective, we don’t really care, as we don’t own the stock for the dividend. In the short term, a dividend cut would likely lead to a drop in the share price, but it might be wise for the company to retain its earnings and strengthen its balance sheet.

From a financial perspective, it doesn’t appear that BP will be forced to cut its dividend unless clean-up costs rise dramatically (the vast majority of the legal liabilities, which will likely exceed clean-up costs, won’t be paid for many years). Costs to date have been $1.4 billion, BP has plenty of cash and liquidity, and in the seven weeks since the accident, it has earned nearly $5 billion in operating profits.

The political question is trickier. It’s not clear cut that the U.S. can (or should) force BP to cut or suspend its dividend, and this could become a testy issue between the U.S. and one of its closest allies, as this article notes:

Almost every pension fund in the U.K. owns shares in the energy giant, raising serious questions about the impact the firm’s plummeting value will have on the retirement plans for millions of Britons. President Barack Obama’s threat to block a BP dividend payment in order to ensure victims of the spill get compensation has also sparked widespread alarm.

“Obama’s boot on the throat of British pensioners” read the front-page headline in Thursday’s Daily Telegraph, which added that the president’s “attacks on BP were blamed for wiping billions off the company’s value.”

“U.K. alarm over attack on BP” was the Financial Times’ take on the crisis, which it suggested could damage transatlantic relations. The newspaper accused President Barack Obama of employing “increasingly aggressive rhetoric” against BP.

And this Financial Times article notes that BP pays 12% of the total dividend income of the UK market. Finally, according to BP’s web site, U.S. investors own 39% of BP’s stock (almost as much at the 40% by UK shareholders), and the company has over 430,000 small shareholders (less than 10,000 shares).

In a worst-case scenario, BP could of course suspend the dividend, but what if it needed more cash? The obvious next step would be to cut cap ex, a far bigger expense than the dividend (the dividend is currently a bit under $11 billion annually vs. an average of $21.7 billion in cap ex annually over the last two years). In its Q1 2010 earnings release, BP gave the following guidance for cap ex: “For 2010 as a whole, we continue to expect organic capital expenditure of around $20 billion and disposal proceeds of $2-3 billion.”

It’s hard to know how quickly and by how much BP could cut cap ex, but one clue is that “Depreciation, depletion and amortization and exploration expenditure written off” – often a reasonably proxy for maintenance cap ex – was $12.7 billion last year.

Finally, BP has valuable assets all over the world – property, plant and equipment on the balance sheet is worth $108 billion – but of course it would take time to sell.

Question 5: Regardless of how cheap BP’s stock is, is it immoral to try to profit from owning it, in light of the company’s bad behavior?

As noted earlier, BP appears to have an atrocious safety record. In owning the stock, we are not endorsing its behavior, either before or after the Deepwater Horizon accident. But as value investors, we sometimes have to hold our noses when we invest because the cheapest stocks are often the ones of companies that have behaved badly or are otherwise tainted. Example include McDonald’s, which many believe bears responsibility for the obesity epidemic in this country (see Fast Food Nation and Super Size Me), and Goldman Sachs, which many blame for the global financial crisis (see The Great American Bubble Machine).

That said, we would have a problem owning stock in a company if we believed that’s its core business harmed people – most subprime lenders at the peak of the housing bubble, certain multi-level marketing firms and tobacco companies come to mind. BP certainly doesn’t fall into this category.

As for BP’s safety record, we don’t defend it, but we don’t think BP is deliberately blowing up its own rigs and refineries and killing its employees. If an email emerged that the CEO or board of BP were warned that the Deepwater Horizon rig was likely to explode and failed to act, we would certainly rethink the morality of holding the stock.

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Distressed Debt Investing has a first-class interview with the Greenstone Value Opportunity Fund. The story of the launch of Greenstone is worth the price of admission alone:

Talk a little bit about your background. How did the two of you come together to launch Greenstone?

Tim has worked his entire career in the financial services industry. He spent over 11 years on the sell-side at a boutique investment bank helping raise capital for small and micro-cap public companies. During that time, he helped raise over $300 million in almost 50 different transactions. The great thing about being at a single-office boutique was the amazing breadth of experience he received while there. At some point during his tenure, he was an analyst, investment banker, institutional salesman, trader, compliance officer, and head bottle washer. More recently, prior to joining me to launch Greenstone, Tim was with a buy-side hedge fund with around $75 million in assets. Again here, the breadth of experience included all aspects of running a small fund: portfolio management, trading, CFO, investor relations, etc. In addition to the operational expertise that he brings to the table, he has essentially spent the last 15 years or so analyzing capital structures, negotiating deals with management, and investing and trading micro, small and medium-cap stocks. I was born and raised in New Zealand, and started investing as a 16 year old after reading my first Warren Buffett book. It was from that point on I knew I would be an investor in public markets. It was my dream to come to the United States, and work on Wall Street. Originally I thought Wall Street was the place to be, until I took a job offer in Dallas, and spent 7 years on the buy and sell side, investing and raising money for public companies. The story of how I actually got from New Zealand to Dallas is humorous to some. . When I arrived stateside I had a total of $400 on me, so I negotiated to buy a car and a mattress for $175. I still remember driving that Mazda 323 down the road with a mattress strapped to the roof and no air conditioning. I eventually sold that car two years later for more than $175. I still remember those lean times, and it keeps me motivated.

Our careers eventually overlapped for about 2 years at the small investment bank I mentioned earlier, and we became great friends. Not only did we become friends, but we spent a great deal of time, both during our tenure together and after Tim left to move over to the buy-side, discussing investment outlooks, philosophy, trading styles, etc. We came to realize that we shared two things in common: similar personalities and similar investment styles. We are both highly competitive, brutally honest people who are motivated to succeed. We know we can trust each other to do the right thing, and you may as well not go into business with someone if there isn’t 100% trust. There will be ups and downs, times of pressure, and you have to know that your partner is there completely there for you. It’s also about humility and intellectual honesty. As we constantly reevaluate our positions, say when a position moves against us, we ask ourselves: Are we early, or are we wrong? Is this conviction or pigheadedness? We are not afraid to say we made a mistake.

Click here to read the remainder of the interview.

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