happened after 9/11 – al-though, I think that wasmore psychologically driven.You had this huge exogenousevent, which introduced ahuge amount of uncertaintyin both cases.
Continued on page 2
Paul Sonkin is managing mem-ber of the Hummingbird ValueFund. He has worked at theSEC, Goldman Sachs, RoyceFunds, and First ManhattanCompany. He holds an MBAfrom Columbia, where heteaches courses on applied value investing.
GD: What is your take onthe market right now? Thereseems to be some diver-gence of opinion among in-vestors currently aboutwhere we are in the cycle.PS: What’s going on now isthat many of the people I amtalking to – many smart,savvy investors – think thatthe second and third shoe isgoing to drop. For that rea-son, I think there is a tre-mendous amount of moneysitting on the sidelines. And,because people expect it, Ithink it’s not going to hap-pen. An example that I wastalking about the other day is9/11. I think that there are alot of commonalities be-tween Lehman and 9/11.Basically, what happened isthat Lehman set off a chainreaction – sort of a negativefeedback loop. I think it wasa Thursday morning, Octo-ber 11
th
when the ReserveFund announced that theyhad a lot of exposure andthey broke the buck. I re-member that we were think-ing, “Our cash may not besafe.” Wachovia had failedand you were having thesehuge bank failures and theworld became a very, veryscary place. Everybodypulled back. The country just shut down for a quarter,which is very similar to what
“Fish Deeper, Fish Alone”—Paul SonkinWelcome Back to Graham & Doddsville
We are pleased to presentyou with the third edition of
Graham & Doddsville
, Colum-bia Business School’s student-led investment newsletterco-sponsored by the Heil-brunn Center for Graham &Dodd Investing and the Co-lumbia Investment Manage-ment Association.The tumultuous market overthe last year has only furtherreinforced the merits of asound, long-term orientedinvestment philosophy, andat Graham & Doddsville, webelieve that there is no bet-ter way to study investingthan directly from successfulindustry practitioners. Withthis objective, our currentissue contains four inter-views with leading invest-ment professionals.First, the issue features aninterview with Paul Sonkin,managing member of Hum-mingbird Value Fund andvalue investing professor atColumbia. Paul gives us histhoughts on the currentmarket environment andapplying Graham & Doddprinciples to a microcapstrategy.Since the application of valueinvesting goes far beyondcommon stocks, SteveMoyer, author of DistressedDebt Investing, sits downwith us to discuss opportuni-
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Summer 2009Volume III, Issue II
Editors:
Charles Murphy
MBA 2009
David Silverman
MBA 2009
Matthew Martinek
MBA 2010
Clayton Williams
MBA2010
Inside this issue:
Berkshire AnnualMeeting & HeilbrunnCenter Receptionp. 3Precision Castparts p. 16Apollo Group p. 18Focused on Essentials-Brown BrothersHarrimanp. 20The Mother of Dis-tressed Cycles-SteveMoyerp. 11A Quant Among Us- Jim Scottp. 26Michael van Biema atNYSSAp. 36Pershing SquareChallengeP. 34
Paul Sonkin - Managing Mem-ber, Hummingbird ValueFund.Contact us at:
newsletter@grahamanddodd.com
Visit us at:
www.grahamanddodd.com
www0.gsb.columbia.edu/students/
Graham & Doddsville
An investment newsletter from the students of Columbia Business School
ties in the current dis-tressed cycle, and their im-plications for value inves-tors.Next, Timothy Hartch andMichael Keller of BrownBrothers Harriman CoreSelect Fund discuss theirphilosophy of focusing onessential services in a valueframework.Finally, we talk with JimScott, director of researchat the Heilbrunn Center,about applying quantitativetools to value investing. Mr.Scott is also a Managing
(Continued from page 1)
Welcome to
Graham & Doddsville
(continued from page 1)
Paul Sonkin
(continued from page 1)
money when they need tospend money.What we are seeing with alot of our companies is thatpeople are making necessaryexpenditures, but they arerevisiting all of their otherexpenses. You are still go-ing to go out to dinner, butmaybe you go out to theless fancy place. In ourportfolio companies, I think that one big beneficiary of that is a company calledAvantair that does fractionalplanes at basically half thecost of NetJets. It has actu-ally been taking a lot of share from NetJets. I think this happens at every level.People want to downsize alittle bit, but they don’twant to be eating cat foodwhen they’ve been eatingcaviar. They’re not going togo from one extreme toanother. You have intelli-gent people making intelli-gent decisions about spend-ing and there are companiesthat are going to be benefi-ciaries of that.Getting back to the 9/11analogy, the “next 9/11” isnot going to be as much of ashock. If you have anotherhorrific incident where2,000 people were killed insay, San Francisco, thecountry would just reactdifferently because it hasalready happened once, andI think that when it happensthe first time there is thishuge reaction. When ithappens the second time,people become desensitized
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When people are faced withuncertainty, they reallydon’t know how to react sowhatever they are doing,they just stop. They go intoconservation mode. I am abig proponent of evolution-ary psychology. It is sort of like the fight or flight reflex.If you are faced with a hugeshock, you get this hugeadrenaline bump and it iskind of like an automaticresponse. I think that iswhat happened in the fourthquarter. What I am startingto see now in the press andin anecdotal evidence com-ing out of these companieson a grass roots level is thatpeople are starting to spendmoney again. They aren’tgoing to spend as frivolouslyas they did in the past, butthey are going to spend
“
When peopleare faced withuncertainty, they really don’t know how to react sowhatever they are doing, they just stop.”
Page 2
Director of General Mo-tors Asset Managementand a former ColumbiaBusiness School professor.Along with providing ourreaders with insightful andtimeless content, we alsoaim to provide specificinvestment ideas that arerelevant today. Inside aretwo condensed studentinvestment recommenda-tions. The first recom-mendation is PrecisionCastparts (PCP), winner of this year’s Sonkin Prize.The second recommenda-tion is the short-sale of Apollo Group (APOL),winner of the second annualPershing Square Challenge.Finally, this issue containsarticles detailing the numer-ous opportunities in invest-ment education available toCBS students, including thisyear’s trip to the BerkshireHathaway Annual Meetingand the Second Annual Per-shing Square Challenge.Please feel free to contact usif you have comments orideas about the newsletter,as we continue to refine thispublication for future edi-tions. Enjoy!
“There is no‘hedge fund’ industry thatexistsseparately from the‘money management’ industry.”
Page 3Volume III, Issue II
Berkshire Annual Meeting
generations. The grand-mother’s father had beenapproached by Warren Buf-fett in the 1950s to contrib-ute $10,000 to his originalpartnership and had de-clined the offer. The familywe were visiting had a simi-lar story. Her father wasapproached by Warren Buf-fett too. He told Warrento come back when he wasdriving a nicer car than him.The irony is that Warren isprobably
still
driving a worsecar (he drove a LincolnTown Car until 2001, andthen replaced it with aCadillac DTS). I wonderedhow many others had simi-lar stories.After the Borsheim’s recep-tion, we ventured over tothe local Dairy Queen (alsoowned by Berkshire). Itwas hosting a book-signingwith authors who had writ-ten books on Warren Buf-fett. A BBC film crew wasthere filming a documentary.After indulging my child-hood sweet-tooth with myfavorite DQ Blizzard, I satdown and spoke with BillChild about his book:“How to build a businessWarren Buffett would buy.”Bill Child built RC Willeyinto Utah’s largest furniturestore and sold the companyto Berkshire for $175 mil-lion in 1995 after being in-troduced to Buffett by theowners of the NebraskaFurniture mart (as you canguess, also owned by Berk-shire).I asked Bill how Warren hadassessed his company.Warren asked him why hewas selling the company,what he intended to do af-ter the sale, and then tosend over three years of financial reports and a brief history of the company.Within three days, Bill had aresponse. The offer wassignificantly lower than the$200 million he had beenoffered by investment bank-ers and other furniture re-tailers, but ultimately Billaccepted Warren’s loweroffer. I was amazed that ittook Buffett only three daysto feel comfortable purchas-ing this company.Waking up the next morn-ing at 5am was remarkablyeasy. I jumped out of bedlike a kid on Christmasmorning. We arrived out-side the Qwest stadium by6am. After claiming ourseats, we decided to go ex-plore the exhibition hall.Two friends stayed behindto guard our prized seats.The hall was filled with com-panies Berkshire owned,including Borsheim’s, Fruitof the Loom, Dairy Queen,NetJets, Justin Boots, See’sCandy and more. We hadour pictures taken with theFruit of the Loom “fruit”and the Dairy Queen mas-cot. Add in a “Wall St.”roller-coaster ride to par-ody the ups and downs of “Mr. Market” and the annualmeeting would have been across between a DisneyLand for investors and aStar Trek convention, ex-cept instead of speaking inKlingon, people used wordslike “margin of safety,”“intrinsic value,” and“moats.”
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I could have sworn I was ata rock show, not an annualmeeting. Yet there I stoodoutside the Qwest Stadiumin Omaha, Nebraska on aSaturday morning at 6amwith 35,000 other excitedfans waiting in anticipationfor the doors to open forthe 2009 Berkshire Hatha-way Annual Meeting.This year, the annual meet-ing had a cowboy theme,which couldn’t have beenmore appropriate. Ourtickets branded us as“partners,” not sharehold-ers. And when the doorsfinally opened, the stampedefor the best seats in thestadium began. Never did Ianticipate that I’d be com-peting in a foot race againstagile seniors at 7am on aSaturday morning for achance to listen to a pair of octogenarians speak for 6hours.Fortunately, I was travelingwith another student whohad attended before. Heled the way as we weavedour way through the crowdinto seats 10 rows off theleft side of the stage; a per-fect line of sight for theOracle. It was 7:15am.The night before, we at-tended a shareholders re-ception at Borsheim’s, oneof North America’s largest jewelers which Berkshirepurchased in 1989. Thestore overflowed with part-ners proudly bearing theirshareholder passes aroundtheir necks.At the reception, I met afamily represented by three
Ajit Jain, Adam Weiss ‘96,and Bruce Greenwald at theHeilbrunn Reception inOmaha following theBerkshire Annual Meeting
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