Sunday, November 13, 2005

Warren Buffett's Wealth

Notes from Robert P. Miles presentation in October to an audience at the National University of Singapore

"Warren Buffett's Wealth: Principles and Practical Methods used by the World's Greatest Investor"

Robert Miles is a critically acclaimed author of three books on Warren Buffett. He has also spoken extensively on the billionaire to international audiences. Miles is currently working on his next book. It will yet again be on the man who transformed US$100 to US$100 billion. The book will be titled "E = mc2". The title is a play on what Miles believes are key tenets of Buffett's investments: (i) E is earnings (ii) m is management (iii) c is character raised to the power of 2 to signify its weightage.

He started by speaking about the importance of character - one's inner moral compass and reputation - it takes years to build a reputation but minutes to ruin it. These are attributes which he believes Buffett will cover when he talks to a young audience.

Miles says Buffett thinks of a share to represent an ownership of business. One must also make "Mr Market" your servant, not your master. He adds that intrinsic value of a business is the present value of future earnings discounted back to today.

He also reiterated two important aspects which Buffett says that a student of investment must know: (i) How to value a business; (ii) How to think about market prices.

Unlike conventional finance theory which defines the measure of risk as volatility of prices, Miles offered that risk is not knowing what one is doing. He stressed that it is pertinent to know what you own and ignore the madness of crowds.

Criteria supposedly important to Buffett:

  • Earnings;
  • ROE;
  • No debt;
  • Management;
  • Simple.

It was noted that Buffett's holding period is forever.

Miles also touched on the five investment principles of Lou Simpson. Lou is the chief investment officer at GEICO and is reportedly the heir apparent to the Berkshire's investment portfolio after Buffett. As disclosed in Berkshire's annual report, Lou's current track record tops even that of Buffett.
Principles of Lou Simpson:

  • Think independently;
  • Buy high return business run for the benefit of shareholders;
  • Pay a reasonable price even for an outstanding business;
  • Invest long term; and
  • Do not diversify excessively.


Sunday, November 06, 2005

Bargain technology VC

Hotung Investment [HIH SP, 1 Nov: US$0.09, listed on Singapore Exchange (SGX)]

HIH SP is a Taiwanese company involved in the business of venture capital investments, securites and fund management. The venture capital business is a high risk - high return model. The management of HIH had a very credible track record in the 1990s but its recent record has been patchy. With a market capitalisation of US$114 mil, it is a penny stock by any standards.

Even though HIH reported rather dismal results in 2Q05 in August [Losses in 1Q05: NT$163 mil and 2Q05: NT$333 mil.], it may be poised to make a number of divestments in the upcoming months. Some of the companies in its venture capital portfolio which it could divest include: (a) Nanya - a IC substrate supplier for Intel's central processing unit, (b) Genius Optical - one of the largest maker of lens for cameras fitted in mobile phones, (c) Himax - Taiwan's largest driver integrated circuit company. We expect value of HIH to be unlocked when a profitable divestment is made by listing one of these technology companies. This may take place when sentiment towards technology stocks in Taiwan improves.

According to filings with the exchange, US deep value house, Third Avenue Management LLC holds a substantial stake in HIH. The stake is likely to be purchased by Amit Wadhwaney who pulls the strings for Third Avenue's International Value Fund. Once dubbed by the media to be "one that shuns the crowds", Amit appeared to have quietly built up its stake in HIH from half a globe away. As an acolyte of value guru Martin Whitman, Amit's fund has racked up about 26% return in the 12 months ending April 2005. Since the fund's birth about 3.5 years ago, its annualised returns is a most encouraging 22.5%. Will HIH prove to be another gem in the bag for Amit?

Attractiveness: The P/BV ratio is 0.5x => NTA per share is US$0.18. HIH also has US$0.038 in cash.

Substantial shareholding reporting of Third Avenue to SGX
17 Aug: 5.53% to 6.12%
26 Aug: 6.12% to 6.44%
29 Sep: 6.44% to 6.81%
06 Oct: 6.81% to 7.06%
31 Oct: 7.06% to 7.98%