Approximately two months ago Hank Greenberg( former CEO of AIG) came out with some nasty comments regarding Goldman Sachs. I was immediately inspired to write an article on Seeking Alpha about the hypocrisy of Hank Greenberg attacking Goldman Sachs(the article is here. My basic argument was that AIG had no moral high ground from which to criticize Goldman Sachs. The article was extremely popular on Seeking Alpha. However, most readers had such a blind hatred of Goldman Sachs that they were highly critical of my article. Some of the readers accused Goldman Sachs of being behind everything evil under the sun. The readers missed my argument and thought I was defending Goldman Sachs’ actions. I was merely pointing out that Hank Greenberg was a hypocrite and I stated clearly I thought no investment bank including Goldman Sachs was ethical.
I loved Warren Buffett’s recent quote stating “I mean, they’re going to rewrite Genesis and have Goldman Sachs offering the apple, I mean, pretty soon.” That basically summed up my feelings regarding the recent populist hatred against the company.
One of the readers who read my column on Seeking Aplha commented that Goldman Sachs was responsible for Lehman Brothers’ collapse ( This is not the first time I have heard the claim many Goldman Sachs haters have claimed this). In response to this comment I wrote
I do not in any way consider myself to be an expert on the financial crisis. However, readers who have been following my columns know I have read over a dozen books on the financial crisis. In addition I have read many articles on the topic, as it is one that interests me. From all accounts I had read Dick Fuld (Former CEO) and Joe Greogry’s( Former President) arrogance were the main cause of the collapse of Lehman Brothers.
When it came down to the final few weeks of Lehman Brothers’ existence, a lack of confidence helped bring down the mess that the Fuld and Gregory created. Fuld of course denied wrong doing and blamed the firm’s collapse on short sellers spreading rumors . The final straw as I noted above was JP Morgan’s demand of more collateral from Lehman Brothers. This was the nail in the coffin that finished off Lehman Brothers. JP Morgan was similarly responsible for nailing the coffin on Bear Sterns. According to the article I linked above JP Morgan “froze $17 billion of cash and securities belonging to Lehman on the Friday night before its failure.” This created a liquidity crisis that caused the demise of Lehman. Where Goldman comes into the picture boggles me.
A report spanning over 2,200 was recently released regarding the causes of Lehman Brothers’ collapse. The report was released from the bankruptcy examiner from the Manhattan Federal Court which handled the Lehman Brothers’ bankruptcy. The bankruptcy examiner referring to JP Morgan and Citigroup stated “The demands for collateral by Lehman’s lenders had direct impact on Lehman’s liquidity”.
To read the rest of my article on Guru Focus click here
Disclosure: Long GS and long JPM for some of my clients
On Friday February 26th I had the privilege of attending the Columbia Investment Management Conference. I attended the event as a seeking alpha reporter.
My journey there was quite scary. I literally almost died several times on my way there. The roads were still bad from the huge snow storm that had struck New York the previous two days. Had I known that the roads were still so bad I would not have attended. However, I gained a lot of valuable information from the conference. I also saw some colleagues of mine who I had not seen in a while.
For people in the value investing world this conference is like the pillgramage to Mecca. The only event that can compare to the Conference is the yearly pillgramage to Omaha for the Berkshire Hathaway meeting. The conference is run annually in the winter by Columbia’s Business School. Columbia is the home of value investing. Some of the greatest value investors/ thinkers teach there including Joel Greenblatt, Bruce Greenwald, Paul Sonkin and others. Some prestigious investors have graduated from there including Warren Buffett and Mario Gabelli.
The conference always has an all star line up. Not only are the speakers great but even some famous investors are in the audience. Paul Sonkin and Whitney Tilson were both in attendance as is where many other prominent value investors.
The key note speakers this year were legendary investors David Dreman and Martin Whitman. In addition there were three panels, however they were off the record and I cannot report on them. However there was an all star line up for all three panels. The morning panel discussed Lessons Learned: Investing Through a Financial Crisis and was moderated by Bruce Greenwald. Black Doll of Black Rock for the panel but unfortunately he could not make it due to the snow storm that had struck New York the previous day. I was supposed to interview him after the panel but since he did not make that obviously did not end up happening.
The second panel discussed Distressed Investing: Maximizing Returns with a Margin of Safety. I only wish Marty Whitman was there for this panel since he is an expert in distress investing. The third panel discussed Mental Models in Investing – A Discussion of Investment Philosophies with Practical Examples. It was a big disappointment for me that Bruce Berkowitz of Fairholme Fund could not make it for the third panel due to the weather. However, there were other notable investors on the panel including William Browne of Tweedy Browne & Co. and Michael Mauboussin ofLegg Mason Capital Management.
Let me get into some of the specifics of the parts of the conference I am allowed to report on. As I noted above Martin Whitman of Third Avenue Funds was one of the key note speakers. Martin Whitman discussed the importance of balance sheets in the field of security analysis. Whitman noted( as he does in several of his books) that a stock is not a good buy just because it is “cheap”, a stock must be backed by a strong balance sheet. A stock could have a low P/E, or trade at a low value relative to its free cash flow however without a strong balance sheet it might not be a prudent investment.
David Dreman gave a presentation on the financial crisis. He detailed the causes of the crisis starting from the mid 90s and reaching a peak in late 2008/ early 2009. One point he really stressed was how dangerous leverage is. I have heard this many times but Dreman really struck the point home. Most of the investment banks had a ratio of around 35:1. Dreman presented a chart( I wish I could obtain a copy of the chart) demonstrating that with leverage at these ratios, if housing prices fell by only a tiny amount it would wipe out the entire equity of the company. If it fell by 30-40% then it would be an absolute disaster.This is exactly what happened as the case shiller home index declined 32% from May 2006. Of course all the “experts” predicted housing prices would never drop so all these numbers did not matter.The rating agencies were earning 35-40% of their revenue from rating CDOs. And the risk models of both the banks and the rating agencies were absurd.
I was lucky enough to conduct short interviews with David Dreman and Bruce Greenwald. I will be posting the interviews shortly. Below are pictures that I took with David Dreman and Bruce Greenwald.
Paul D. Sonkin is the Portfolio Manager of The Hummingbird Value Fund and the Tarsier Nanocap Value Fund. Paul is currently an adjunct professor at Columbia University Graduate School of Business, where he teaches courses on security analysis and value investing. He is a member of the board of several public companies including Meade Instruments Corp. He was previously a senior analyst at First Manhattan & Co., a firm that specializes in mid and large cap value investing. Before that he was an analyst and portfolio manager at Royce & Associates, the investment advisor to the Royce Funds. Royce & Associates practice small and micro cap value investing. Prior to receiving an MBA from Columbia University, he worked at Goldman Sachs & Co. and at the U.S. Securities and Exchange Commission. He is a co-author of Value Investing: From Graham to Buffett and Beyond (Wiley Finance)
Mr. Sonkin was nice enough to offer over an hour of his time for our interview. In fact he was prepared to offer even more time if I had more questions for him. It was a pleasure conducting the interview with Mr. Sonkin.
Below is our conversation:
Jacob Wolinsky: I always love asking this question to value investors. Value investing is contrary to human nature. Every value investor has a story how they got started in value investing. What was your catalyst?
Paul Sonkin: I was in the Columbia Business School and I knew I wanted to get into money management. And there was this class by someone of the name of Bruce Greenwald and they only taught it for a year and it was called Value Investing. And it must have been the first or second class where a Bruce Greenwald quoted a study that had come in 1993 by Eugene Fama and Kenneth French that small cap outperformed over time and value outperformed over time. And it was a really eppithany for me that if that is where the money is I should do small cap value.
Jacob Wolinsky: I am just curious if Fama and French are strong believers in the efficient market theory and value stocks have lower beta and are therefore “less risky” how does this conform with their theory?
Paul Sonkin: I don’t remember exactly what is, but I think there is basically a liquidity premium and you are paid to take on that risk.
Jacob Wolinsky: So basically they changed their definition of risk just to make it fit with their theory?
Paul Sonkin: Exactly, and I don’t remember if it was in that study I don’t remember exactly what the specifics were. But that is really what got my start.
There was an article in Barron’s titled The Most Patient Man on Wall Street and The Second Most Patient Man on Wall Street and they interviewed someone from First Chicago. He did a lot of pink sheet investing. The second guy was a person by the name of Ed Mcgoocklin who also did a lot of pink sheet investing. He spoke about a company called Park Lexington Corporation they owned about three buildings in New York City. I did an analysis on the company and it turned out it was cheap. I called up Ed Mcgoocklin and sent him my report and told him I had some questions for management. He flew up to New York City to meet me.
On Wednesday I went to listen to Mario Gabielli but I got the flu and I could barely walk out to get home. The meeting with Ed was on Friday and I had 104 fever but we had our meeting. He presented my report to the company and six months later the company went private at a pretty rich premium.
So I thought this is pretty cool. You can look at a company, talk to the management pretty easily and have an influence on the outcome.
I got a job working for Royce and Associates and I was on the microcap team and I was doing what I really loved doing. They were a lot smaller back then they had about $2 billion under management. Today they have something like $20 billion under management.
Jacob Wolinsky: There are many different styles in value investing ranging from Benjamin Graham’s net-nets to Warren Buffett’s purchase of companies with wide moats? What style do you must subscribe to? I assume you will have more of a Benjamin Graham style net-net approach due to the size of companies you invest in?
Paul Sonkin: If you read the book Value Investing: From Benjamin Graham to Benjamin Graham I talk about three different types of value investors: traditional value investors, value investors with a mixed approach and contemporary value investors. I consider myself to be much more of a traditional value investor looking at Benjamin Graham’s net-nets and things of that nature.
Jacob Wolinsky: So what else do you look for besides net-nets? Would that be your ideal investment?
Paul Sonkin: In the book Bruce Greenwald talks about the three traunches of value you have your asset value, your earnings value, and earnings power with growth. So we do the first two which is look at buying companies below their asset value, below book value, net-net value, working capital value etc. What your buying mostly is companies that is low priced to book stocks, companies that aren’t earning a lot of money but have a lot of assets. So they are asset rich but earnings poor. What we do is find out what is wrong with the company and understanding why their earnings are done and if they might recover.
The second company we buy is a company that is at a discount to its earnings power value. Those are the low P/E stocks. Those are companies that are trading at 5x, 7x or 10x earnings. These companies might be trading low because of a perception that their earnings will decline further in the future. What you are trying to do there is prove why the earnings will not decline in the future.
Jacob Wolinsky: You invest in micro-cap stocks. Can you give me a number of the average market capitalization of a stock you invest in?
Paul Sonkin: According to the classic definition micro cap stocks are stocks below $500 million or $250 million. We operate our Hummingbird fund with an average market cap of $40 million and our Tarsier fund with an average market cap of like $8 million.
Jacob Wolinsky: Can you clarify for the readers regarding the two funds you run?
Paul Sonkin: We have two funds; the Hummingbird Value Fund and the Tarsier nano-cap value fund.
Jacob Wolinsky: I assume due to the tiny size of the companies you invest in you are forced to take a large stake in the company?
Paul Sonkin: Yeah sometimes we own 5 to 10% of a company. In one case we own over 20% of shares outstanding and 65% of the float.
Jacob Wolinsky: Are you forced to take an activist role due to this?
We have taken an activist role in the past but it is something I shy away from. We focus on companies that are shareholder friendly. Being an activist investor takes up an enormous amount of time.
If you look at Bill Ackman and Michael Price who I both know and think are phenomenal investors what they do when they take an activist role is they will take a very large position. Like Bill Ackman had his Target Target fund, so they have much more concentrated portfolio.
Jacob Wolinsky: And in general you have a more diversified portfolio?
Paul Sonkin: Yes we have a diversified portfolio.
Jacob Wolinsky: Is that due to the forces of circumstance or do you prefer having a diversified portfolio?
Paul Sonkin: Its really both. By default I don’t like positions more than 5% of the portfolio. And in both funds around 10-20 positions will be about 50% of the portfolio while another 100 stocks will make up the remainder. But we have quite a few 5% positions.
Jacob Wolinsky: You are a professor at Columbia University and you run a limited partnership. Do you see your future as more of a value investor or a value thinker like Bruce Greenwald and Roger Lowenstein? Or both?
Paul Sonkin: I would say both. What I really enjoy about teaching it gives me time to research on the research process. A lot of the materials I have start as lecture. It is hard to know where the money manager starts and the teacher begins. I really try to integrate them both and I really try to bring a lot of live theses into my class.
Jacob Wolinsky: A lot of the current value investors are stepping back from their roles or will be in the future due to their age. Charlie Munger, Warren Buffett, Martin Whitman and David Dreman are all getting older. Other than yourself, who do you see as the current rising stars of value investing to lead the next generation?
Paul Sonkin: I see a lot of great money managers who all run small funds now. I don’t think these investors will come from big organizations. I think it will be small guys you never heard of, and they will remain below the radar screen for a long time. So I don’t know if that old guard is really going to be replaced.
You do have people like Bill Ackman, Rich Rubin of Hawkeye, David Einhorn, maybe Dan Loeb. I don’t really know. I think in doing what I do it is not going to make you rich and a lot of guys want to get rich. Because in the small cap world you can only get so big. There are very few people in the micro cap and small cap world making millions of dollars.
The new issue of the Graham & Doddsville Newsletter for winter just came out several days ago. The newsletter is compiled quarterly by the students of Columbia Business School. This new issue features Mason Hawkins of Southeastern Asset Management. Mason Hawkins is a noted value investor who manages over $30 billion in assets currently. Hawkins also manages the Long Leaf Partners Fund. Another value fund that has produced market beating results for many years.
His top ten holdings in his domestic equity fund are
The newsletter also contains an interview from some of the managers of Tweedy Browne, One of the original value funds that traces its roots back to the days of Benjamin Graham
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