Download An Introduction to Value Investing Slides-Whitney Tilson-11!5!08 PDF

TitleAn Introduction to Value Investing Slides-Whitney Tilson-11!5!08
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Total Pages95
Table of Contents
                            Berkshire Hathaway: A High-Quality, Rapidly Growing 75-Cent Dollar
	The Berkshire Hathaway Empire Today
	The Basics
	Recent Performance of Key Business UnitsBy Year:
	Recent Performance of Key Business UnitsBy Quarter:
	The Earnings of Berkshire’s Operating Businesses Have Grown at a Very High Rate – And Growth is Accelerating
	Berkshire Is One of the Fastest GrowingLarge Companies in the World
	Valuing Berkshire
	Buffett’s Comments on Berkshire’s Valuation Leadto an Implied Multiplier of Approximately 12
	Applying the 12 Multiple: 2001 – 2007
	Berkshire Is At Least 25% Below Intrinsic Value, Near the Most Undervalued It’s Been in the Past 12 Years
	Valuation Approach #2: Pro-Forma Earnings
	Buffett Is Putting Berkshire’s Money to Work Rapidly
	12-Month Investment Return
	Fairfax Is a Diversified Insurance Holding Company
	Fairfax Over the Past Five Years
	Fairfax and Its Primary Subsidiaries Had a Great 2007 and Growth and Underwriting Trends Have Been Strong for Many Years
	Fairfax Has Made Enormous Strides Over the Past Year
	Fairfax’s Financial Strength Has Improved Dramatically
	Fairfax’s CDS Portfolio Has Paid Off In a Big Way – And We Think There’s More Upside As the Credit Crunch Worsens
	Hamblin Watsa’s Investment Performance Has Been Spectacular
	Fairfax Has an Extraordinary Long-TermTrack Record of Value Creation
	Fairfax Is Trading At a Low Multiple of Book Value, Even If the Entire CDS Portfolio is Excluded
	Who Are the Bond Insurers?
	Growing Structured Finance Exposure
	Growing Structured Finance Exposure
	MBIA Compared to Citigroup
	Minimal Losses Will Impair MBIA’s Capital Base
	MBIA Is One of the Most Profitable US Companies?
	Decreasing Unallocated Reserves
		MBIA Has Enormous Exposure to CDOsand Risky Mortgages
		MBIA’s Structured Finance Insured Portfolio Poses Many Problems, Given That MBIA Has a Mere $4 Billion in Equity
		An Analysis of One CDO and One RMBSThat MBIA Is Exposed To
		A Closer Look at MBIA’s Multi-Sector CDO Exposure
		A Closer Look at One CDO Whose Senior Tranche Is Guaranteed by MBIA
		A Closer Look at the Longshore 2007-III CDO
		A Look at 35 of the 90 RMBS’sUnderlying the Longshore CDO
		1 of the 90 RMBS Tranches Underlying the Longshore CDO: The M5 Tranche of the ABFC 2006-OPT2 Trust
		The ABFC 2006-OPT2 Trust is in Big Trouble
		Characteristics of the ABFC 2006-OPT2 Trust
		Distribution of the Remaining, Performing Loans in the ABFC 2006-OPT2 Trust
		S&P’s Projected Lifetime Delinquency Rates for Loans With Characteristics of Those Remaining in the ABFC 2006-OPT2 Trust
		Conclusions Regarding the M5 Tranche of the ABFC 2006-OPT2 Trust
		Implications for the Longshore CDO
		Implications for MBIA’s Guarantee of the Longshore CDO
		MBIA May Have Trouble Collecting on Much of Its Reinsurance
		Implications for MBIA and Ambac
Document Text Contents
Page 1

An Introduction to Value Investing

Wednesday, November 5, 2008
Instructor: Whitney Tilson


6:00–6:15 1. Welcome and Overview of Value Investing
• What is value investing?
• Three steps to evaluating stocks
• Trembling with greed
• Focus investing
• Variant perceptions
• Gaining an edge
• Traits of successful money managers
• See columns: Thoughts on Value Investing, Three Steps to Evaluating

Stocks, Trembling With Greed, Focus Investing, Go Against the Grain,
Gaining an Investment Edge and Traits of Successful Money Managers

6:15–6:20 2. Valuing Companies

• Discounted cash flow
• Public company comps, acquisition comps, historical comps
• Sum of the parts
• See columns: A Valuation Rule of Thumb, Valuation Matters and Valuation

STILL Matters

6:20–6:40 3. Common and Costly Mental Mistakes

• Behavioral finance presentation
• “Of Sound Mind” excerpts from Value Investor Insight
• Eight columns on investor irrationality

6:40-7:00 Case Study #1: Berkshire Hathaway

7:00-7:15 Case Study #2: Fairfax Financial

7:15-7:30 Case Study #3: Target

7:30-8:00 Case Study #4: MBIA

Funds managed by Mr. Tilson are long BRK, FFH, TGT and short MBI.

Page 1 of 95

Page 2


What Is Value Investing?

• Attempting to buy a stock (or other financial asset) for less than it’s worth
• Contrast with greater-fool investing
• False distinction between growth vs. value investing

o “All intelligent investing is value investing.” – Charlie Munger
• Intrinsic value
• Margin of Safety
• Does not necessarily mean buying lousy businesses at low valuation ratios

Three Steps to Evaluating Stocks

• Circle of competence
o Do we understand this company and its industry deeply?
o Can we make reasonable projections about the company’s future?
o Keep it simple. Good investment ideas can usually be explained in 30

• Company and industry evaluation

o Is this a good business? Does it have sustainable competitive advantages?
High returns on capital? Solid, steady growth? Healthy balance sheet?
Strong free cash flow?

o Often involves company visit, management and customer interviews.
o Is this a good industry? Are the trends favorable? What are the

competitive dynamics?
o Look for an informational edge, often via proprietary sources or

scuttlebutt research.

• Evaluation of management

o Are they good operators?
o Are they good capital allocators?
o Are they trustworthy and shareholder friendly?

Trembling With Greed

• Is the stock really, really cheap?
• What is your variant perception?

Focus Investing

• When you get an easy pitch, swing hard
o Owning two stocks eliminates 46% of non-market risk of just owning one

o Four stocks eliminates 72% of the risk
o Eight stocks eliminates 81% of the risk
o 16 stocks eliminates 93% of the risk
o 32 stocks eliminates 96% of the risk
o 500 stocks eliminates 99% of the risk

Page 2 of 95

Page 47

-4-T2 Partners LLC

Fairfax Has Made Enormous Strides Over the Past Year

Page 47 of 95

Page 48

-5-T2 Partners LLC

Fairfax’s Financial Strength Has Improved Dramatically

Source: Fairfax presentation, 9/08
Page 48 of 95

Page 94

-22-T2 Partners LLC

MBIA May Have Trouble Collecting on
Much of Its Reinsurance

Source: MBIA Q2 08 investor presentation – appendix.
Page 94 of 95

Page 95

-23-T2 Partners LLC

Implications for MBIA and Ambac

• MBIA has $29.5 billion of exposure to multi-sector CDOs
• Based on the analysis on the preceding pages, we believe that

the loss estimates in Pershing Square’s Open Source Model are
likely to be conservative:

Open Source Model
Summary of MBIA’s

Projected Losses
Collateral Type

Loss to Net Par

Loss to Gross Par

ABS CDOs $5,737,633,669 $6,665,622,522
Closed End Seconds * $2,809,578,386 $2,809,578,386
HELOCs * $2,948,599,126 $2,948,599,126
Direct Subprime * $8,503,314 $8,503,314
Direct Alt/A * $129,499,794 $129,499,794
Total $11,633,814,290 $12,561,803,143

Page 95 of 95

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