“BAUPOST GROUP’S SETH KLARMAN “IT’S A GREAT TIME TO BE A VALUE INVESTOR.
THE COMPETITION SEEMS TO HAVE GONE AWAY.” Re-reading Seth Klarman’s annual letter from a year ago, it’s remarkable just how many of his warnings turned out to be tomorrow’s headlines. Among those warnings were that the subprime mortgage debacle and housing contraction were likely to be “the first failure in a broader reckoning,” that  increased risk aversion would lead to tighter lending”

Click here for the OID excerpt

HOLDINGS from Value Plays

News Corp”A” (NWSA) shares up from 16 million to 27 million shares
RHI Entertainment (RHIE) from 3.6 to 4.9 million shares
Domtar (UFS) from 33 million to 40 million shares
Linn Energy (LINE) from 7.9 million to 4 million shares

Seth Klarman is known as an investor who keeps a low profile while heading the Boston based  Baupost Group. When the Baupost Group establishes a sizeable position, one has to take notice. It is no coincidence the firm has averaged 20% annual returns since 1983. According to this 13G filing, Baupost Group bought 2,255,318 shares of Centerplate (CVP). I haven’t looked at Centerplate’s latest SEC Filings but I am assuming the position has to do with Centerplate looking for a buyer. I wouldn’t bet on Centerplate (CVP) without further due dilligence as Seth Klarman’s picks are tough to figure out without spending significant time on them, then again that’s why they have impressive returns.

The fact that Bruce Greenwald is a professor at the Robert Heilbrunn Professorship of Finance and Asset Management at Columbia Business School is a must read. I stumbled across this book about four years ago when I was buying everything that was related to value investing. Even though I re-sold most of the value investing books, I kept the must reads like The Intelligent Investor, All of the David Dreman books, Joel Greenblatt’s Little Book, and a few others. I kept this book because it has its own little niche in the value investing arena, its truly a modern approach to Ben Graham and Warren Buffett. Bruce Greenwald’s 3-Step approach to valuing a company is one that a) makes sense and b) does not put too much emphasis on future growth. For those individuals that have not had a chance to read the book, Greenwald advocates a 3 step approach to valuing a company.

1. Value the assets
2. Find the company’s Earnings Power Value (EPV = Adjusted Earnings x 1/R, where R is the current cost of capital or rate of return
3. Only when the company displays a franchise can we incorporate growth into the equation

Especially during the dot-com boom, #1 (Assets) was highly ignored. Companies that had little to no assets were valued greater than a stalwart like Proctor and Gamble (PG). The beauty about investing in companies with hard assets is, if the company disappoints on in the earnings front, one can sleep conferable at night knowing the assets are there (like a safety net). Dot-com companies never had this safety net and the stock price experienced catastrophic declines when earnings disappointed. #2 can be applied to just about any company but I highly suggest looking at companies who have a history of consistency. Third on the list is factoring growth where a franchise is in place. Greenwald defines a franchise as when the firms EPV exceed the company’s Asset Value (43). Another way to think about this is what Warren Buffett calls a moat. Companies with a moat tend not to require additional investment, but can still increase its earnings (think See’s Candies, Burlington Northern). Now, Greenwald and Co. do a tremendous job in walking the reader on how to analyze a company and valuing the company using his 3 step approach ( he values WD-40 Co (WDFC) and Intel (INTC)) but the second half of the book is devoted to value investors and some of the techniques they employ.

The second half of the book profiles value investors that have outperformed the market. Greenwald devotes the most attention to Warren Buffett 9bug surprise there right?) and highlights some of Warren Buffett’s shareholder letters. Below are the value investors highlighted and the chapter title

• Warren Buffett :Investing Is Allocating Capital
• Mario Gabelli : Discovering and Unlocking the Private Market Value
• Glenn Greenberg : Investigate, Concentrate and -Watch that Basket
• Robert H. Heilbrunn : Investing In Investors
• Seth Klarman: Distressed Sellers, Absent Buyers
• Michael Price: Discipline, Patience, Focus, and Power
• Walter and Edwin Schloss: Keep It Simple, and Cheap
• Paul D. Sonkin: Small Is Beautiful, Especially When It’s Ugly

I have read this book twice, and each time I re-read the book I pick up a nugget or two. I have taken this book out of my library and have set it aside to re-read. Finally, the book is selling for 8.99 on Amazon.com and I highly reccommend it. As stated above, its definately not the easiest read, but its definately not the hardest either.

* Warren Buffett added 400,000 shares to UNH or an increase of 6%
* Bruce Berkowitz has 6% of portfolio in WLP or 11.015 million shares
* Seth Klarman has 11.6% of portfolio in WLP or 4.45 million shares

In addition, Morningstar.com recently mentioned they have estimated UnitedHealth’s fair value to be a “conservative” $60, providing a 50% margin of safety at current levels. I am pretty confident the margin of safety is the same for Wellpoint as both stocks have been equally beaten down with several gurus establishing big positions.

After posting my thoughts on United Healthcare(UNH) and Wellpoint (WLP), I headed over at Gurufocus.com to check out their forum/site and found several gurus loading up on WLP and UNH. First, as posted in the previous post, noted value investor Seth Klarman invested 11% of his portfolio in WellPoint. Now, it looks as if Gurufocus.com is being updated as first quarter holdings come out. Next, Bruce Burkowitz invested 6% of his portfolio also in WellPoint (WLP). Finally,Glenn Greenberg, who runs a very concentrated portfolio invested little less than 3% in UNH. Not bad,again Gurufocus is still updating portfolios and it will be interesting what other gurus jump on board. I guess its trues, great minds think alike. =)
Thanks to Gurufocus.com for the updates

Disclaimer: I own UNH

Value Investors were left disappointed as they felt the last edition of Security Analysis, authored by Cottle, Murray, and Block, had very little “Graham and Dodd” left in it. Even the first edition of Security Analysis receives criticism for being published in an era where bargain were plentiful due to the Great Depression. Thus, Value Investor’s are left with the 2nd,3rd and 4th editions of Security Analysis to satisfy their Graham and Doddism. Nevertheless, I am impressed with the lineup McGraw-Hill has selected for the 75th Anniversary edition which will include a forward by Warren Buffett. This lineup might rival that of the 1927 New York Yankees, arguably the greatest baseball team ever assembled which included names like Ruth, Gehrig, Cobs, Koenig, Meusel, Lazzeri. So who will step up to the plate? (pun intended)……

• Seth Klarman, presindent of Boston’s The Baupost Group and author of a really expensive book.
• Bruce Greenwald, Professor of Finance and Asset Management at Colombia’s Business School and author of Value Investing: From Graham to Buffett and Beyond
• J. Ezra Merkin, Gabriel Capital Group
• Bruce Berkowitz, Fairholme Capital Management
  
• Glenn Greenberg, Chieftain Capital Management
• David Abrams, Abrams Capital Management
• Thomas Russo, Gardner Russo & Gardner, will write about global value investing

One of the criticisms of Security Analysis has always been that the style of writing is very vague. I agree. But, included in the list of authors and is not mentioned above is Roger Lowenstein author of Buffett: The Making of an American Capitalist, which in my opinion is the best Warren Buffett biography around.

Many value investors already have a copy of Security Analysis on their library. I think this edition will not be disappointed based on the lineup McGraw-Hill has assigned to update the book. The names listed above, and those not listed, are well known in their respected fields and bring years of practice to the table. I am especially looking forward to the forward by Warren Buffett. His introduction in The Intelligent Investor is a classic in my opinion and has set the bar high for his introduction in Security Analysis.