Allan Mecham Interview

From The Manual of Ideas on April 21, 2010:

About his investors:
His investors act and think like owners rather than traders. This will allow him to focus on long term. Such an investor base really adds value when you go through periods of distress and under-performance; precisely the time when you need confidence and stability is apt to be the time when investors are rushing for the exits and questioning the approach.

About good business
- understand biz like an owner
- biz should have staying power
- I have to be confident about the general nature of the biz and industry landscape on a long term basis
- I'm big on track record. Stay away from unproven companies with short operating histories.
- I believe a heavy dose of humility and intellectual honesty. Don't fool yourself, and remember you are the easiest person to fool. from Richard Feynman
- think barriers to entry, competitive landscape/threats, the ongoing capital needs, overall economics, durability of biz
- Stress test: what happens under 7-10% unemployment ( if it is 4-5% now) and 6-8% interest rate? Is the biz overly reliant on loose credit extension and frivolous spending?
- I've built up a base of companies that I understand well and would like to own at the right price.
( This is the beauty of the public markets: if you can be patient, there is a good chance the volatility of the marketplace will give you the chance to own companies on your watch list. )
- Think downside before think upside.

Books to read:
- enjoy all the behavior psychology stuffs.
- recommend, predictably irrational - Ariely, nudge - Thaler, how we decide - Lehrer, think twice - Mauboussin
- also The Big Short, The end of the wall street, The relentless Revolution -Appleby

Get ready to buy great business at bargain prices

Dow Waves Goodbye to 2012 Gains WSJ 6-1-2012

Jobs Slowdown Adds to Global Fears

Wall Street sinks on U.S. jobs data, Dow negative for 2012

The stock market dropped 275 points on last Friday and dropped more today. It has dropped close to 10% within the last 2 months. With possible worse situation in Europe, investor sentiment can go further down. 

I strongly suggest all of you to get your cash ready now. Since excellent opportunities in buying good properties or excellent business will arrive.

For the record, I have taken several positions in past week but still 60%+ in cash position. 

"Be fearful when others are greedy and be greedy when others are fearful." Warren Buffett

Cheers,

Josh

Allan Mecham: The 400% Man

SmartMoney Magazine recently profiled Allan Mecham, a 34-year old college drop-out turned value investor at Arlington Value Management, who returned a cumulative 400% return over the twelve years ending December 31, 2011 (including  the astonishing 11% in 2008 and 59% in 2009 when the market was cratering). Rather than investing in unknown microcaps that soar after being “discovered” by the mainstream financial community, much of Mecham’s returns have been earned from large caps.

Read the rest of the article here.

You can then read the follow-up article called The 400% Man's New Big Bet

[L]ast year he levered up the fund and has invested half the money in Warren Buffett’s Berkshire Hathaway. 
“Able to borrow at around 1.5%, we levered (Berkshire) into a 50%+ position,” he wrote in his annual letter to shareholders. “Though not advocates of leverage, we believe the low cost and modest amount, combined with [Berkshire's] iron-clad safety and cheap price, makes our action sensible.”
There is some method to the madness. Mecham, a long-term Buffett disciple, argues that Berkshire Hathaway stock, on its own, “provides ample diversity, with exposure to disparate businesses (more than 70), sectors, and asset allocations.” Berkshire’s assets include a ton of cash-generative businesses, a book of blue-chip public stocks valued at more than $75 billion, and nearly $40 billion in cash, he says.

He was also interviewed by The Manual of Ideas starting from p7. Check here.

Overprepared for the Next Storm

This is from Barrons article on 6/2/2012. 

Though some market experts claimed that the repeat of 2008 is likely. Do they mean more than 50 - 70% ? I say it is unlikely, less than 20%. This means to take advantages of any sizable dip such as 10% to 20% decline to buy up good business.   

Josh
---------------------------------------------------------

A lot of the market's "de-risking" process has already unfolded.

 

A New York Times headline Wednesday proclaimed "Windows Are Ready for the Big Storm (the One from Last August)." The article was about the curious abundance of Manhattan apartment windows still taped in ineffectual and belated protection against Hurricane Irene. But it could well have been alluding to the financial markets' bracing for a rerun of last summer's gale of dangerous economic conditions.

The global selloff in risk assets during May, mostly prompted by the gradual but steady weakening in Europe's debt levees and sharp slowing in China's economy, was barely tallied by the time the lousy May employment report arrived Friday morning.

The meager net increase of 69,000 jobs was the poorest reading since—you guessed it—last August, as the 2011 Europe debt drama was peaking. And gold prices, so long in an ebb phase, had their largest one-day rise since August, too, as expectations of more central-bank money-conjuring surged. Big U.S. stocks had held up better than nearly every other risk-asset class for the year but succumbed Friday to more aggressive selling, the Dow industrials losing 274 points and surrendering all gains for the year.

With the Dow at 12,118, and the Standard & Poor's 500 at 1278—just about where they were sitting one year ago—the burden of proof falls upon those who have been suggesting, here and elsewhere, that 2012 need not hew so closely to the 2011 macro-panic-and-policy-rescue script.

The case for avoiding last year's fate, or worse, rests on somewhat larger fundamental cushions—and on the simple observation that traumas so fresh in mind don't usually allow for a hazardous complacency to rebuild so quickly. Corporate earnings, total employment, retail sales, housing activity and bank lending are all significantly higher than they were a year ago, while stock-market valuations at this year's market peak were less lofty than at the first-quarter 2011 peak. Further, there is now a new European Central Bank chairman who has shown more willingness to marshal monetary powers to head off banking collapse.

WITH STOCK MARKETS OUTSIDE the U.S. having lost 20% in the past 12 months and twice as much in May as American stocks, it wouldn't be much of a shock for the S&P 500 to sag another couple of percent back to that old familiar 1250 level, or a bit lower.

For reasons that may include sheer coincidence, this level is a frequent fulcrum for the index. The 1250 mark immediately preceded the Lehman Brothers collapse, was roughly where 2011 started and ended, and has been crossed during 10 separate weeks in the past year and at least 50 times since the index first got there 13 years ago.

Chartists already are on alert, with the S&P 500 breaking below the market's 200-day average, a measure the market also toggled above and below for parts of 2011. Now, as then, the evidence can support either a painful correction after a 30% rally, or the foreboding overture to a bear market.

Stocks are close to probing valuation levels that have tended to arrest declines in the past couple of years. The S&P 500 is trading below 13 times earnings for the past 12 months and less than 12 times forecast earnings, though it's a fair bet that those profit forecasts are vulnerable to downward pressure.

ONE THING ABOUT THIS YEAR'S market downturn is that it was preceded by a distinctly defensive tone, the majority hunkered against "expected shocks." Even before the overall market had shed 10%, the areas that call out loudest for punishment in a growth-and-credit scare had been pummeled, with financial, commodity, emerging markets and lower-quality tech names badly underperforming. Bespoke Investment Group notes that its log of the frequency of financial headlines on the virally popular online news aggregator Drudge Report is again approaching peak levels previously coinciding with tradable market lows.

This suggests a lot of the "de-risking" process has already unfolded, and that the merest of upbeat stimuli—with ECB policy makers meeting this week, and the Fed convening and Greece voting soon thereafter—would touch off a quicksilver rally, with the tape so oversold and the investor mood dour.

Investors already lucky or smart enough to be in a defensive crouch who are looking to take on some "upside risk" protection in the event of such a rally should consider trounced, high-volatility cyclical names, in small doses. These might include Cliffs Natural Resources (ticker: CLF), the Market Vectors Coal ETF (KOL),Halliburton (HAL), SanDisk (SNDK) and Hess (HES).

Exxon's big bet on shale gas

America's most profitable company now produces about as much natural gas as it does oil. CEO Rex Tillerson thinks the fracking party has just begun.


See the whole story here. 


1999: $88B mega-merger with Mobil orchestrated by Lee Raymond
2009 Dec: XOM announced XTO all stock acquisition of $41B
Today Exxon, the prototypical oil giant, gets about 50% of its production from, and has 50% of its reserves in, natural gas.



This shale gas boom has turned assumptions about the future of the U.S. and global energy picture upside down. Less than a decade ago the consensus was that America was beginning to run out of economically recoverable natural gas and that the country would need to import vast quantities of it from overseas. Now we're awash in natural gas. U.S. production has increased 28% since 2005. In 2011 about a third of that production was from shale gas, up from just 11% in 2008. By 2035, according to a study by the research firm IHS Global Insight, shale gas will account for 60% of U.S. production.

It is widely thought that the U.S. now has 100 years or more of domestic gas supply at current consumption rates. Already there has been a frenzy of exploration.

Large shale deposits in South America, China, and Europe mean that it should eventually be a global trend as well. The International Energy Agency estimates that the world currently has a 250-year supply of natural gas. "In my 50 years of following the energy business, this is by far the biggest event that I've seen," says John Deutch, an MIT professor and a former CIA director who last year chaired a Department of Energy subcommittee on shale gas.

Gasland, a 2010 Oscar-nominated documentary about the dangers of shale drilling, caught the public's attention with its footage of contaminated tap water that could be lit on fire, though the veracity of some of the film's content was later challenged.

In the early 1980s a visionary, independent natural-gas driller named George Mitchell began experimenting with ways to get gas out of the Barnett Shale, which ranges all across the Dallas-Fort Worth area -- even under Exxon's headquarters in Irving, Texas. Geologists have always known that shale contains trapped gas and oil. In fact, shale is the deep layer of rock where much of the traditional natural-gas supply was "cooked." But extracting hydrocarbons from the rock was thought to be too difficult and expensive to justify.

Mitchell, however, was convinced it could work. After nearly 20 years of trial and error, Mitchell Energy developed a formula for fracking with water and sand that worked spectacularly well. The company's production of natural gas in the Barnett soon spiked. In 2002, Mitchell, then 82, sold his company to Devon Energy (DVN) for $3.2 billion.

Cash Rich Companies

Show Us the Money on Barron's 5/26/2012

Top 50 Annuities

An article on Barrons on 5/26/2012.