Because of my work situation I am faced with a limited amount of time to analyze my investments.This precipitates the need for efficiency and a focus on the questions that matter most.
Thus I spend a good deal of time thinking before I spend any time analyzing. This is particularly true when I am just introducing myself to an opportunity. I think about how I can distill it down to one or two questions that I can focus on. Rather than taking the approach that I need to understand every aspect of the company (something that I simply don’t have the time to do) I look for the lynch pins and focus on understanding their mechanics in great detail.
To give a few examples; this was my strategy for the mortgage insurers, where I focused strictly on whether or not they would pushed into run-off or bankruptcy by the regulators. With Arkansas Best I focused on what the upside might be if the company negotiates a union contract similar to that of YRC Worldwide. With YRC Worldwide I focused on their leverage to the upside. When I initially bought PHH I focused strictly on the value of Fleet, which allowed me to view the mortgage operations as an upside option.
With Yellow Media, I narrowed it down to two questions. They are:
- When and at what level is the online business going to grow enough to offset the declines in the print business.
- What assumptions should be used to answer question 1 Read more
See the end of the post for Portfolio Composition and weekly trades.
A week of Significant Gains from RDN, MTG, MBIA
The last seven days have been extremely good ones for my portfolio. This has been primarily due to the price appreciation of MGIC, Radian Group and MBIA. As regards MGIC and Radian, I have written so much about these two names, done so much work trying to understand the business (and trying to understand how other people were trying to understand the business), that it is quite rewarding to see it play out the way that it has.
It is amazing to me that MGIC has more than doubled (from a $2.40 low to a $6.10 high) during 5 days when the only notable disclosure was that the company had the ability to raise capital. Someone with an interest in market psychology should really write a piece on MGIC – you could call it the Existential Security.
I reduced my position in both Radian and MGIC by a little more than half during the early part of this week. My sales of MGIC occurred around $5.20 while those with Radian were at a little over $10. I don’t have plans on selling any more of either.
I sold the positions down because they were getting very large (particularly in the case of MGIC) and because my thesis, that these companies would be able to survive, has now played out. What is going to drive the stocks going forward is the long-term potential of the mortgage insurance business and how well each company can capitalize on it. Read more
Early last year I warmed up to the idea that housing was in the early stages of recovery and this single idea generated a number of successful investments for me (NCT, NSM, IMH, MTG, RDN, HOV…). With many of these housing investments having now played out I have been trying to think of what big idea might drive my strategy in the next 9-12 months.
What occurred to me rather suddenly this week was that perhaps I had already figured that out, had even been acting on the idea, though I had not articulated it consciously.
Companies with excessive leverage have been shunned for the past 5 years. Many have lagged as questions about their ability to continue as a going-concern have superseded any potential out-performance to the upside if things take off.
I think that this might be the year that changes. Read more
Over the last couple of weeks I have been reading “Ideas have Consequences” by Richard Weaver, a somewhat well known and from what I understand quite well respected philosopher of conservative thought. The book, in which Weaver critiques the ills of our age and conveys the forgotten values of conservatism that have led to them, was written in 1948, and thus in retrospect it can be seen to have been quite prescient, having anticipated the spirit, if not an eerie amount of the details, that have come to characterize our culture. I would recommend it to any one interested in the subject of how we (as a society) have come to do as we do.
What I wanted to touch on here was a particular passage that I found striking, and also quite right.
In addition, the disappearance of the heroic ideal is always accompanied by the growth of commercialism. There is a cause-and-effect relation here, for the man of commerce is by the nature of things a relativist; his mind is constantly on the fluctuating values of the market place, and there is no surer way for him to fail than to dogmatize and moralize about things. Read more