Davy V. Bui

Buffett Is Not a Leader, Just a Great Investor

Laughable indeed...

"Ben Graham's career [at Graham-Newman] was coming to an end...Graham gave notice to his partners. But first he offered Warren [Buffett] the opportunity to become a general partner in the firm...Even though Warren was flattered, he had gone to Graham-Newman to work for Ben. It wasn't worth it to him to stay...He turned the offer down." -pg 199, Snowball

Walter Schloss also worked at the same firm but according to Schroeder, was treated poorly by the other main partner, Jerry Newman. Obviously, both Graham and Buffett can spot talent -- one was much better at developing talent (or more willing to) than the other, no matter how you want to slice it.

Buffett Is Not a Leader, Just a Great Investor

Perhaps I'm not the one who needs to do more research. By nearly all accounts, Buffett would be utterly repelled by the thought of bequeathing his wealth to his family. And he can't take it with him, so what else is he going to do but donate it? The fact he gave it to the Gates charity instead of his own is just another demonstration of Buffett's calculating nature -- he allocated the capital to the charity which would maximize the investment. Since Buffett has never spent much time on philanthropy, his own foundation is nowhere near as effective as Gates'.

A person can do whatever he/she wishes and if Buffett only wanted to be an investor, it doesn't make him a bad person. However, he is CEO (i.e. a leader) of a $140B public corporation. True leaders care about the organization they lead and want to see it flourish even after their time has passed. That's why the final test of leadership is the legacy you leave behind you. It may be gratifying to think that you're so indispensible that everything would fall apart if you left but that's selfish and egotistical. Can you imagine running your family that way and hoping they fall apart after you're gone?

Anyway, Buffett reportedly considers Berkshire to be his "baby" and I'm sure he cares a great deal about it. I'm not so sure if he's spent enough time to ensure it will thrive after he's gone. After all, Berkshire's greatest strength was the human capital (i.e. Buffett) and like the first commenter said, it looks like he never made time to develop new human capital for Berkshire. It'll be interesting to see who he poaches.

Oil Won't Stay Down for Long

Really, I welcome constructive criticism and disagreement but much of the time, it seems comments are more personal attacks like "delusional" or implicitly attacking my integrity.

First, I am completely 100% transparent. I post all my trades online (this is my real money portfolio excluding cash + interest):

enlightened-american.c.../

I hold myself publicly accountable on a monthly basis. "Following my advice over the last year" has not cost anyone (least of all me!) 65% over the last 6 months. I went from up 18.8% in June to down roughly the same percentage now. Don't be a jackass and misrepresent or distort my record. Minus 20% on the year sucks ass but it's better than what you're letting on or the S&P500.

Anyone who's "following [anyone's] advice" based on SA should probably not be handling money. Let your spouse handle it. Or learn to think for yourself, take in different viewpoints and make up your own mind.

Readers looking for further explanation can either email me (see my bio page) or comment on the original posts they have issue with at my blog (not SA), where I answer promptly.

BTW, I agree w/ txpenguin -- minimize leverage or use it safely (like options). It seems like just yesterday when I was being insulted for suggesting readers invest with a margin of safety and not rely on oil prices going up. Now I'm being insulted for basically not selling out before the global economy collapsed.

I try not to predict where markets are going over the short-term. My posts regarding commodities have always been eyeing the long term. The SA editors changed the original title of my post, which was "Oil @ $25? Accumulate for the Long Term." I think the new title may be slightly misleading as I don't pretend to know how long oil prices will stay down. I just think the global economy will eventually recover. Any "normal" level of economic activity will renew pressure on energy prices, especially now with capacity being shut in, rigs stacked, etc. I just want to be sure to pick plays that can allow me to hold over a long downturn, if need be. That's why I made the moves I talked about in the post.

Mmmarrk, different services handle preferreds different. google has chk-d for the Prfd D shares (-e for E shares).

Penn West Energy: More Questions Than Answers

A couple of points:

1) Maybe I'm too long-winded so people don't read to the end, but as I state above, I am still long the stock. If I have an axe to grind, it is most assuredly not to lose money. My beef with management would be to improve unitholder value, pure and simple.

2) Georealist -- If you think my posts are so inept, why waste time reading/commenting on them? There are plenty of authors on SeekingAlpha that I skip over. But thanks for at least providing some analysis behind your trolling insults this time. In response, I would say that, as an investor, it is disappointing to get "peak oil" right but not make much money on it. I'm not sure why this is hard to understand.

Here is a chart of USO (the oil futures ETF), PWE (both NYE & TSX), & CHK, another stock that I follow closely. It is dated near my entry points for both positions (around Feb 2007):

www.enlightened-americ...

I think USO may have some tracking error but it is still up over 100%. The spot price for WTI was hovering around $50 - $60 at the time and I don't remember where nat gas was -- probably around $6-$8 on Henry Hub. USO is +114%, CHK is +84%, PWE is +14.5% and PWT.UN is -4.5%, not including dividends. From this, it's obvious that Penn West has badly lagged the oil bull, even if you include 15% for dividends. It's also obvious that all of the capital appreciation was due solely to the Canadian dollar strength, as shown by the 19% spread between the US and Can listed stocks for Penn West. If you did the work, you'd also see that PWE lagged other energy trusts like PGH, AAV and even PDS. So if you want to criticize me for picking a lousy stock when I could have just bought the commodity and saved myself the trouble, that's valid and something I'm already asking myself. But I'm not sure where you're coming from -- the facts are the facts.

Now I guess there's a chance that PWE could catch up, which would mean big returns from here and that leads me to Jack Yetiv.

Jack, I don't listen to conference calls live. In fact, I prefer to read transcripts whenever possible as it saves me time. I also try to find companies with good management so I don't have to worry about listening to conference calls live. For example, I still haven't reviewed the results from Agnico-Eagle (AEM) yet.

You can find my previous research, including my entry write-up, on PWE here:

www.enlightened-americ...

As you'll see, I've had many positive things to say about PWE. My original premise was based on a few main positives, all of which are weaker now:

1) The company was covering its dividend solely from free cash flow, which is sustainable.
2) While the company was fairly valued at the time based on its booked reserves, we were getting Peace River, Pembina for free with a massive 1B barrels recovery potential.
3) The management was solid and had a good track record.

As you can see from the quarterly updates, management's performance was poor. And contrary to your statement, I don't care about hedges (or the income statement) all that much so I didn't knock them for poor earnings or the big tax hit but I do care about missing production targets, poor exploration results, etc. After all, management has no control over the price of commodities but much control over operations and that's how I try to judge them. I think we have difference of opinion here. I read your 2 write-ups of PWE and it's clear to me that we approach it very differently.

You seem to be betting on commodities prices. While I think that prices are headed higher long-term, I haven't a clue where the oil price is headed over the next month, 6 months, year and everytime I try to guess, I get it wrong. For example, I thought that oil would pull back heading into winter, as it traditionally has, but then the dollar tanked and we went to $100 oil in the off-season.

I'm looking for fundamentally undervalued companies, where if the price of oil falls back to $80, the stock is still a good value. For instance, Talisman Energy a few months ago (yes, I wrote that one up too) was a good value at $16 because its assets were undervalued even if the price of oil dropped some. Obviously, if oil goes up, the stock is better value.

Also, I think you may be missing something important with your focus on the next few quarters' earnings. The market cares more about future growth, not today's results. For resource companies, that means replacing reserves and keeping costs down. Take a look at ExxonMobil which has reported record earnings and the market doesn't care. Why? Because they can't replace reserves faster than depletion. If you are investing in an oil/gas company, one of the primary concerns should be reserves replacement, especially with peak oil.

As I detailed, PWE's reserve replacement was piss-poor in 2007. They are basically buying reserve replacement. As you mention, oil prices are high so buying oil is very expensive. When PWE buys Endev Energy to replace production, they are buying oil at a high price. That isn't creating value, IMO. The company's implicit admission that Peace River isn't happening anytime soon was a big blow to growth plans.

Finally, FCF in Q1 2008 covered 24% of the dividend, which is worse than last quarter. FCF, by definition, is the cash left over after you've paid out what's needed to keep the business going (not growing, going). You can't keep paying unitholders 2-4x more money than you have indefinitely. You can see this by the big increase in debt.

I haven't a clue about funds flow because I honestly don't know what it represents or what it's good for. So you tell me why funds flow is a better representation of PWE's financial reality than OCF/FCF. Cash is king and there's a reason why. If I didn't make it clear previously, I think this switch to funds flow is fishy and suggests they are trying to paper over deteriorating results. They never used it before and not all trusts use it (take a look at PGH). But if you decide to change your metrics, at least be upfront about it and not sneak it in and hope no one notices.

I gotta wrap this up but keep in mind, I'm still long the stock. I hope I'm wrong. In fact, I'm still betting that management will clean up their house a bit -- just a little less confident than before. If I was bearish on the stock, I would sell my whole position. But as an investor, I try to be informed about all of the risks I'm exposed to and PWE's risks have climbed a bit.

Penn West Energy Needs to Show Investors Its Worth

Thanks for the comments. BTW, I respond much faster if comments are posted to my blog as I check that more often. A few responses:

1. No significant updates on Pembina or Peace River. Management did say that Peace River needs a lot more infrastructure build-out. Sounded like it'll be awhile before unitholders see anything, especially with the shift away from the long-term projects.

2. As for the outlook on nat gas + oil, I'm as bullish as anyone else -- just read some of my other posts on my blog or here on SA. However, investing in stocks exposes one to management and execution risk. To ignore this risk is foolish and dangerous; at the very least, you have opportunity cost.

3. Steve, please don't bring up Crescent Point! That was my preferred trust but for some reason or other, I didn't open a brokerage account at Interactive Brokers and I steer away from pink sheets so I get to kick myself now as CP doubles. PWE hasn't performed horribly relative to the broader market or even to some of the major integrateds, once distributions are included but opportunity cost does hurt.

4. Jack, according to their 2007 year-end report, the majority of 2008 hedges have ceilings @ ~$79 WTI and ~$7.50 AECO. As for future prices, I expect higher prices in the long-term but anything can happen in the short-term. The summer season usually means some weakness in nat gas prices but who knows these days?

Management's projections do leave room on the upside if prices stay at current levels but don't forget that CEO Andrews lowered guidance across the board just from Q3 2007 despite record prices. What if production lags or operating costs spike which has been more norm than exception for at least the past year? Nevertheless, they should meet current guidance (easily, you suggest). If they don't, unitholders, at least this one, may wonder if management can deliver and I think the distribution may be considered at that point if they keep having to use debt to cover some of the distribution.

I'm long the stock so I'm hoping Andrews & co. will make it happen. Let's see what they say next month.

Cement 75% Gains With Cemex - Barron's

I'll probably thumb through the Barron's story later this week but I'd be curious to see if they discuss operating income as opposed to sales in the article. I posted my research report on Cemex sometime last year (you can find it here).

Cemex has major operating leverage in its domestic and US markets. When I did my report, Mexico & the US accounted for 20% and 23% of revenues, respectively but the two combined for 67% of total operating income, with Mexico at 38% of that total.

I admit that those figures may be slightly outdated now but it seems unlikely that they could have shifted their operating income mix that much this fast so the numbers above probably aren't too far off.

I also mentioned in a separate post some of the headwinds the Mexican economy may face as it becomes a net oil importer. Pemex tax revenues accounts for 40% of Mexican GDP. That's a crazy number. As the money flow from Pemex slows, government may not be able to fund the housing and infrastructure programs currently on the books, which would due to their operating leverage in Mexico could really hit the Cemex bottom line.

That was my last line of thinking on this stock. I'd be interested to read what insights others may have on it.

Selling Teck Cominco - I've Lost Confidence in Management

Jonathan: My completely subjective, non-scientific opinion would be that downside risk is probably low (though not low enough for my standards). I guess the risk:reward ratio is positive but not extremely favorable. Long-term, I'm skeptical management can build exceptional long-term value in their oil sands or gold assets. Galore Creek was a blow and now Petaquilla looks ominous. Red Dog is a world-class asset but even there, they face increasing royalties and questions abound about a possible water permit problem, with a remote chance that further development may have to be shelved. The company also has a dual-class shareholder structure along with a relatively small $17B market cap which makes TCK a likely buyer of smaller companies rather than getting a premium from one of the big boys.

All that said, I had made a mental note to sell at $40. But once I reviewed last quarter's results, I sold out. In the end, TCK is heavily exposed to copper & zinc so you're basically riding the commodities price but with a capped upside while adding operational downside risk. In my mind, there are probably better companies to leverage the metals or else, consider an index like RJZ.

Blah: @$28, downside would be pretty limited -- I almost doubled down when TCK hit $27 a month ago but doubts about management stopped me. I guess that would have been a winner but I try to view it more like a poker game: just because the money card hit on the river doesn't make it a good bet!

CryptoLogic's Future Too Uncertain

Thanks for your comments. Analyzing a prospect from all sides is great for making investment decisions. As such, you've given the bull case and a clarification of my bear case follows. I'm paranoid by nature and always try to focus on what may go wrong.

I did list Holland Casino as one of their licensees. Keep in mind that management mentioned that the Holland Casino does compete with some of their other clients.

As for your analysis, it looks good if you're willing to grant assumptions that you've made (20% revenue growth, 20+% margins, etc.). My main point is I'm not convinced CRYP will return back to previous levels of profitability, which makes your income projections moot.

I base this possibility on a) the loss of the US market is a structural industry change, b) more companies now fighting for smaller pie and CRYP is not the strongest of these competitors, c) comparing their 1st quarter operating results to the industry leader, Playtech and d) they have a new CEO.

Reviewing Playtech's results from 1Q 2007, it's clear to me that Playtech's competitive position is getting stronger. Just based on numbers taken out of CRYP's investor presentation, Playtech is the better company, generating more net income on half ot CRYP's revenues. And now everyone's squeezed into the same market (mainly Europe), fighting for a smaller pie. CRYP has fixed costs around $18M so they need to hit a certain threshold or else find new markets. China is not going to be an easy market to crack open. Playtech has already beaten Cryptologic there, and are running Mahjong and other games with limited success. As any heavy downloader will tell you, Chinese internet connections are painfullly slow so that could hinder any online gaming growth there.

As for numbers, CRYP had $19.5M in revenue in Q1 2007. They've said that Q1 & Q4 are their strongest quarters, since the better weather draws players away from their computers. So you can't assume $80M in revenue by multiplying Q1 by 4. I would also say that you can't assume they won't lose market share. As a side note, interest income was substantial and accounted for 100+% of Q1 net income and without it, they would have posted a loss.

So if I'm looking at the bear case, what is CRYP worth if things go wrong? Taking total assets and dividing by shares outstanding ($188M / 14 M shares) = $13 /share. If we break it down, here's my liquidation value for the company, listing the recovery factor for each asset:

cash 100% $77,312
security 0 $-
short-term inv 90% $22,500
Acct receiv. 90% $13,644
Prepaid Ex 25% $2,654
user dep 0 -
PPE (applying year-end 2006 ratios to $20.3M)
computer 35% $2,221
furniture 50% $783
software 25% $970
R&D 40% $2,062
leasehold 30% $1,000
intang asset 85% $9,858
goodwill 0% $-

Total ass $133,004
per share: $9.50

If you wanted to value it as a going concern, I don't know if the numbers would jump up all that much. The only barriers to entry are hiring the right people (payroll) and developing customer relationships, so you could probably capitalize some arbitrary percentage of operating costs for marketing but it wouldn't make a huge difference and might just get you back to total assets / shares outstanding.

Finally, I don't necessarily assume that a company won't waste its cash. So if we got to the worst case scenario, would all that cash still be there? That's why management is such a strong factor in my investment decisions and CRYP's management is a big unknown to me.

Please note I'm not saying people should short the stock. It's very possible that they will perform as you expect. I'm trying to assess the probability of CRYP returning to previous levels of profitability and looking at the downside if they miss.

All that said, based on what I know now, I'd look at it again in the $18-$20 range, when the floor is closer.

- Davy Bui