Whitney Tilson

Whitney Tilson the famed value investor, and author of Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger , More Mortgage Meltdown: 6 Ways to Profit in These Bad Times and Value Investing Course: Essential Strategies for Market-beating Returns was recently interviewed on CNBC.

Tilson thinks the penduleum might be swinging in favor of stocks over bonds. Tilson described the current situation as “crazy” in which investors are chasing minuscule yields on long term treasury bonds. I have noted this similar point in previous articles

Tilson commented in a recent email:

s investors fixate on the global forces whipsawing the markets, one fundamental measure of stock-market value, the price/earnings ratio, is shrinking in size and importance.

And the diminution might not stop for a while.

The P/E ratio, thrust into prominence during the 1930s by value investors Benjamin Graham and David Dodd, measures the amount of money investors are paying for a company’s earnings. Typically, companies that post strong earnings growth enjoy richer stock prices and fatter P/E ratios than those that don’t.

But while U.S. companies announced record profits during the second quarter, and beat forecasts by a comfortable 10% margin, on average, the stock market has dropped 5% this month.

The stock market’s average price/earnings ratio, meanwhile, is in free fall, having plunged about 36% during the past year, the largest 12-month decline since 2003. It now stands at about 14.9, compared with 23.1 last September, based on trailing 12-month earnings results. Based on profit expectations over the next 12 months, the P/E ratio has fallen to 12.2 from about 14.5 in May.

Needless to say this is good news for equity investors, and bad news for bond investors.

Tilson is bullish on JNJ which has a strong balance sheet, moat, and recently issued debt for a lower price than the stock’s dividend yield.

Tilson is also bullish on Dell and Berkshire Hathaway. Dell is trading at a 9.3 P/E when cash is subtracted from the market capitalization. Tilson believes that Berkshire Hathaway is at least 20% undervalued even on a conservative basis.

Warren Buffett recently purchased a roughly $200 million stake in Information-technology provider Fiserv Inc.m a provider of information technology to the financial industries. With a share price of $51.01, Fiserv stock trades at just over 15 times earnings, and has underperformed the S&P 500 over the past year.

Brave warrior advisors, the firm run by value investor Glenn Greenberg also added Fiserv to its holdings.
Fiserv is a leading provider of IT services to banks and financial institutions and helps them process transactions, and has been providing core account processing services to financial institutions for more than two decades. Major portion of revenues comes from account processing and electronic banking services and is a market leader on both fronts.

It has nearly 37% market share in account processing, and nearly 70% share of U.S internet banking transactions.
Competitve moat
Core processing is very important part of the company because it allows accounts to be managed,  it forms the backbone of the client’s back-office systems, and its mission is critical for day-to-day bank operations. Changing systems can most likely cause disruptions in the operations, and therefore there are high switching costs for core processing. This results in the company having captive customers which is a large competitive advantage. This forces clients to stick with the company which is  evident from the renewal rates of 90%+. Therefore,  90% of the company’s revenue is recurring in nature.

Risks
-Market wide consolidation in the U.S banking industry poses a threat to Fiservs prospects.
- Also its competitors have high switching costs because of the nature of operations and therefore it will be a big challenge for Fiserv to grab market share from other players in the industry. This allows less room for organic growth.

Disclosure: None

David Sokol

While word has spread that Li Lu is considered to be the next CIO for Berkshire Hathaway, there seems to be some confusion in the media. Munger mentioned that Lu will likely take over as Chief Investment Officer for Berkshire Hathaway however no mention was made of who will replace Buffett as CEO. It seems very unlikely that Li Lu would become CEO, since he has no experience running a company, and he would therefore be far better off managing Berkshire’s investments as CIO. However, the speculation is ripe that a man named David Sokol will become the next CEO of Berkshire Hathaway. Many Berkshire Hathaway experts strongly expect Sokol to be the next CEO. David Sokol is CEO of NetJets and the previous CEO of MidAmerican Energy; both companies are Berkshire Hathaway subsidiaries. Recently, CNN Money ran a lengthy article. Sokol has the track record of running two large corporations, and has proven his management skills by turning NetJets around.

FORTUNE — The day after Lehman collapsed in September 2008, David Sokol noticed that the stock of Constellation Energy, a Baltimore utility, was plummeting. He called his boss, Warren Buffett, and said, “I see an opportunity here.” Buffett, who had noticed the same thing, replied after a brief discussion: “Let’s go after it.”

Constellation (CEG, Fortune 500) held vast amounts of energy futures contracts that had gone sour, and the company appeared to be on the verge of bankruptcy. Sokol, as chairman of the Berkshire subsidiary MidAmerican Energy Holdings, knew the utility industry and saw a chance to buy solid assets at a bargain price. The deal, however, had to be done within 48 hours or the company would have to file for bankruptcy.

Sokol phoned the office of Constellation CEO Mayo Shattuck III, who was in an emergency board meeting. When his assistant answered, Sokol told her he’d like to speak to him. The secretary replied that if she interrupted the meeting, she might lose her job. Sokol replied, “If you don’t interrupt the meeting, you might lose your job.”

Sokol boarded a Falcon 50EX and sped to Baltimore. He met with Shattuck and struck a deal that evening to buy the company for $4.7 billion, staving off bankruptcy.

Within weeks, before the acquisition was completed, Constellation’s board received a competing bid from Électricité de France for about a 30% premium. The board liked the offer, and so did Sokol — who walked away with a $1.2 billion breakup fee for Berkshire.

Read the rest of the article at CNN Money

Li Lu

In a shocking article in the WSJ today, Charlie Munger announced who would take over for Buffett. “In my mind, it’s a foregone conclusion,” Mr. Munger said. Buffett, and Lu have both refused to comment.

This is not news for Value Walk readers. I have written several articles in the past few months stating that Li Lu would likely become the future Chief Investment Officer of Berkshire Hathaway. David Sokol who currently runs NetJets is likely to become Buffett’s replacement as CEO.

I will hopefully be interviewing Li Lu sometime in the coming months.

Here are some of my articles about Li Lu(including one I published today):

http://www.gurufocus.com/news.php?id=101577

http://www.valuewalk.com/articles-about-gurus/buffett-anounces-favorite-investors/

http://www.valuewalk.com/articles-about-gurus/li-lus-website/

http://www.valuewalk.com/warren-buffett-berkshire-hathaway/warren-watch-listener-learned-li-lu/

http://www.valuewalk.com/videos-with-text-summary/li-lu/

Check them all out. They all have valuable information about the man who was virtually unknown a few months ago, to now “officially” becoming Buffett’s successor.

Here is a link to the original article from the WSJ: http://online.wsj.com/article/SB10001424052748703977004575393180048272028.html

For another great article check out a column by my colleague Ravi wrote:

http://www.rationalwalk.com/?p=8720

Disclosure: No positions

Warren Buffett

Big H/T to http://warrenbuffettresource.wordpress.com/the-man/books-recommended/ for putting together this fabulous, and lengthy list.

Over Warren Buffett’s lifetime, “The Oracle of Omaha” has suggested several books that he thinks is valuable to the investor.

Below is a list of Warren Buffett’s recommended reading list. While I have not read all these books, they do not need my endorsement as the Oracle himself recommends them. The list consists of economics, political, investing, history, and even baseball books.

(This post will be a permanent page under the book tab, on the top menu bar).

1989 — Essays In Persuasion by John Maynard Keynes

1992 — The Theory of Investment Value by John Burr Williams

1994 — The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel by Benjamin Graham

1994 — The General Theory of Employment, Interest and Money by John Maynard Keynes

1994 — The People v. Clarence Darrow: The Bribery Trial of America’s Greatest Lawyer by Geoffrey Cowan

1995 — A Piece of the Action: How the Middle Class Joined the Money Class by Joseph Nocera

1996 — The Money Masters by John Train

1996 — Paths to Wealth Through Common Stocks by Philip Fisher

1997 — Science of Hitting by Ted Williams

1997 — Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company : How to Exploit the Crisis Points That Challenge Every Company by Andrew S. Grove (in OID)

1998 — The Expanded Quotable Einstein by Albert Einstein

2000 — The Farmer From Merna: by Karl Schriftgeisser

2000 — Common Stocks and Uncommon Profits and Other Writings by Philip Fisher

2000 — The Essays of Warren Buffett: Lessons for Corporate America Lessons for Corporate America by Lawrence A. Cunningham

2001 — The Warren Buffett CEO: Secrets from the Berkshire Hathaway Managers by Robert P Miles

2001 — Security Analysis by Ben Graham and Dave Dodd

2001 — Personal History by Katharine Graham

2002 — Take On the Street: What Wall Street and Corporate America Don’t Want You to Know by Arthur Levitt

2003 — First A Dream by Jim Clayton

2003 — Bull: A History of the Boom and Bust, 1982-2004 by Maggie Mahar

2003 — The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron by Bethany McLean and Peter Elkind

2003 — In an Uncertain World: Tough Choices from Wall Street to Washington by Bob Rubin

2003 — sam Walton: Made In America

2004 — Financial Times , Amercian Edition Newspaper

2004 — The General Theory of Employment, Interest and Money by John Maynard Keynes

2004 — A Short History of Nearly Everything by Bill Bryson

2004 — Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Charles T. Munger

2004 — Nuclear Terrorism: The Ultimate Preventable Catastrophe by Graham Allison

2005 —F.I.A.S.C.O.: Blood in the Water on Wall Street by Frank Partnoy

2005 — Travels with Barley: A Journey Through Beer Culture in America by Ken Wells

2006 — Seeking Wisdom: From Darwin to Munger by Peter Bevelin

2007 — Where Are the Customers’ Yachts: or A Good Hard Look at Wall Street by Fred Schwed, Jr

2007 — Supermoney by Adam Smith

2007 — The Audacity of Hope: Thoughts on Reclaiming the American Dream by Barack Obama

2007 — Warren Buffett: An Illustrated Biography of the World’s Most Successful Investorby Ayano Morio

2008 — Foods You Will Enjoy – The Story of Buffett’s Store , by Bill Buffett

2008 — Pleased But Not Satisfied by David Sokol (Note: Warren Buffett did not recommend this book, but he has written its foreword!)

More books recommended by Warren Buffett (Years Unkown):

• Benjamin Graham on Value Investing: Lessons from the Dean of Wall Street: Lessons from the Dean of Wall Street by Janet Lowe
• Do Business with People You Can Trust: Balancing Profits and Principles by L. J. Rittenhouse
• : John Bogle on Investing: The First 50 Years by John C. Bogle
• Common Sense on Mutual Funds by John C. Bogle
• The Real Warren Buffett: Managing Capital, Leading People by James O’Loughlin
• Of Permanent Value: The Story of Warren Buffett by Andrew Kilparrick
• Will America Grow up Before it Grows Old by Peter G. Peterson
• Father, Son & Co.: My Life at IBM and Beyond by Thomas, Jr. Watson
• Memos from the Chairman by Alan “Ace” C. Greenberg
• Jack Welch Speaks: Wisdom from the World’s Greatest Business Leader by Janet Lowe
• Quality Financial Reporting by Paul B. W. Miller & Paul R. Bahnson
• Jack: Straight from the Gutby Jack Welch
• Epidemic of Care: A Call for Safer, Better, and More Accountable Health Care by George C. Halvorson
• Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It” by Peter G. Peterson
• The Man Behind the Microchip: Robert Noyce and the Invention of Silicon Valleyby Leslie Berlin
• Speculative Contagion: An Antidote for Speculative Epidemics by Frank Martin
• The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle

Buffett gave Alice Schroeder access to him for her book The Snowball, which is a very in depth tale of Buffett’s life. One can assume Buffett would endorse the book.

Some other great books about Buffett include; The Warren Buffett Way by Robert Hagstrom, The Warren Buffett Way by Prem Jain, Buffettology by Mary Buffett, and Buffett: The Making of an American Capitalist by Roger Lowenstein.