Tuesday, March 27, 2012

A Snapshot of Buffett's Early Years

This a wonderful account by Warren Buffett given to Forbes magazine about his decision to form his original investment partnership in 1956 (a partnership model replicated by Gad Capital Management and Gad Partners Funds), a fateful decision that ultimately led to the genesis of what Berkshire Hathaway is today.

Titled "Warren Buffett's $50 Billion Decision" the story is below. Yet visit the link for great pictures of Buffett in his early years.

Warren Buffett's $50 Billion Decision
by Warren Buffett

Benjamin Graham had been my idol ever since I read hisbook The Intelligent Investor.I had wanted to go to Columbia Business Schoolbecause he was a professor there, and after I got out of Columbia, returned to Omaha, and startedselling securities, I didn’t forget about him. Between 1951 and 1954, I made apest of myself, sending him frequent securities ideas. Then I got a letterback: “Next time you’re in New York, come and see me.”

So there I went, and he offered me a job atGraham-Newman Corp., which he ran with Jerry Newman. Everyone says that A.W.Jones started the hedge fund industry, but Graham-Newman’s sister partnership,Newman and Graham, was actually an earlier fund. I moved to White Plains, NewYork, with my wife, Susie, who was four months pregnant, and my daughter. Everymorning, I got on a train to Grand Central and went to work.

It was a short-lived position: The next year, when Iwas 25, Mr. Graham—that’s what I called him then—gave me a heads-up that he wasgoing to retire. Actually, he did more than that: He offered me the chance toreplace him, with Jerry’s son Mickey as the new senior partner and me as thenew junior partner. It was a very tiny fund—$6 million or $7 million—but it wasa famous fund.

This was a traumatic decision. Here was my chance to stepinto the shoes of my hero—I even named my first son Howard Graham Buffett.(Howard was for my father.) But I also wanted to come back to Omaha. I probablywent to work for a month thinking every morning that I would tell Mr. Graham Iwas going to leave. But it was hard to do.

The thing is, when I got out of college, I had $9,800,but by the end of 1955, I was up to $127,000. I thought, I’ll go back to Omaha,take some college classes, and read a lot—I was going to retire! I figured wecould live on $12,000 a year, and off my $127,000 asset base, I could easilymake that. I told my wife, “Compound interest guarantees I’m going to getrich.”

My wife and kids went back to Omaha just ahead of me.I got in the car, and on my way west checked out companies I was interested ininvesting in. It was due diligence. I stopped in Hazleton, Pennsylvania, tovisit the Jeddo-Highland Coal Company. I visited the Kalamazoo Stove &Furnace Company in Michigan, which was being liquidated. I went to see what thebuilding looked like, what they had for sale. I went to Delaware, Ohio, tocheck out Greif Bros. Cooperage. (Who knows anything about cooperage anymore?)Its chairman met with me. I didn’t have appointments; I would just drop in. Ifound that people always talked to me. All these people helped me.

In Omaha, I rented a house at 5202 Underwood for $175a month. I told my wife, “I’d be glad to buy a house, but that’s like acarpenter selling his toolkit.” I didn’t want to use up my capital.

I had no plans to start a partnership, or even have ajob. I had no worries as long as I could operate on my own. I certainly did notwant to sell securities to other people again. But by pure accident, sevenpeople, including a few of my relatives, said to me, “You used to sell stocks,and we want you to tell us what to do with our money.” I replied, “I’m notgoing to do that again, but I’ll form a partnership like Ben and Jerry had, andif you want to join me, you can.” My father-in-law, my college roommate, hismother, my aunt Alice, my sister, my brother-in-law, and my lawyer all signedon. I also had my hundred dollars. That was the beginning—totally accidental.

When I formed that partnership, we had dinner, theseven of them plus me—I’m 99 percent sure it was at the Omaha Club. I bought aledger for 49 cents, and they brought their checks. Before I took their money,I gave them a half sheet of paper that I had made carbons of—something I calledthe ground rules. I said, “There are two or four pages of partnership legaldocuments. Don’t worry about that. I’ll tell you what’s in it, and you won’tget any surprises.
“But these ground rules are the philosophy. If you are in tune with me, thenlet’s go. If you aren’t, I understand. I’m not going to tell you what we own oranything like that. I want to get bouquets when I deserve bouquets, and I wantto get soft fruit thrown at me when I deserve it. But I don’t want fruit thrownat me if I’m down 5 percent, and the market’s down 15 percent—I’m going tothink I deserve a bouquet for that.” We made everything clear, and they gave metheir checks.

I did no solicitation, but more checks began comingfrom people I didn’t know. Back in New York, Graham-Newman was beingliquidated. There was a college president up in Vermont, Homer Dodge, who had beeninvested with Graham, and he asked, “Ben, what should I do with my money?” Bensaid, “Well, there’s this kid who used to work for me.…” So Dodge drove out toOmaha, to this rented house I lived in. I was 25, looked about 17, and actedlike 12. He said, “What are you doing?” I said, “Here’s what I’m doing with myfamily, and I’ll do it with you.”

Although I had no idea, age 25 was a turning point. Iwas changing my life, setting up something that would turn into a fairlygood-size partnership called Berkshire Hathaway. I wasn’t scared. I was doingsomething I liked, and I’m still doing it.


Tuesday, March 20, 2012

The Special Situation Case for Rentech

Not one to usually share ideas (solely so that I can take ownership for Gad Capital's, Gad Partners Funds, and the Sham Gad Family successes and failures), here's is an idea that will appear intriguing to some while dismissed by others. It's simple in concept.

Rentech (RTK), trades at $2 a share or a market cap of $450 million. Rentech's marketable assets are worth nearly $600 million, 33% above the company's current market cap. Add in another $ million or so in net cash on the balance sheet and you have a business that aside from operations should be worth more than $800 million, or a 70% upside, if the company announced a liquidation, although there are no immediate plans to do that.

Rentech provides clean energy solutions through the production of synthetic fuels, a business is not yet commercially viable for Rentech. Management appears to "get it" and plans to reduce capital expenditures by 85% in fiscal 2012 along with a 50% reduction in R&D. Without this decision, I would have argued that the business was eroding value.

The not so hidden gem is the nitrogen fertilizer business, Rentech Nitrogen Partners (RNF) spun out last November. Rentech received around $140 million in cash from the IPO and maintained a 61% equity interest, or 23.25 units in Rentech Nitrogen.

Today, Rentech Nitrogen trades for a market valuation of $990 million, which places Rentech's 61% stake at a value of around $600 million. As an MLP, Rentech Nitrogen plans to distribute out all its available cash flows which according to company guidance, will be $2.34 a unit in 2012. Given the slowdown in the fertilizer industry, it's possible that this initial distribution will come in lower than expected although I should note that nitrogen fertilizer prices continue to hold up along with the fact that RNF has a majority of its production hedged at prices that would support the implied distribution.

In short, Rentech owns 61% of a very attractive cash-generating business and will collect a nice dividend with each payout (over $50 million at the implied distribution). Rentech's balance sheet consists of $240 million in cash (around $40 million at Nitrogen) and $50 million in debt, or a net cash position of about $190 million. Add in the current market value of Rentech Nitrogen stake, $600 million, and you get a value of $790 million.

I assume that the energy business is value destroying; however, one should note that the energy segment sits on $90 million in federal net operating loss carry-forwards which can be used to offset taxable income, including any distributions from income from Rentech Nitrogen. Rentech is a cash- and asset-rich investment play that should be conservatively worth between $600 million and $750 million, or $2.70 to $3.50 a share.

There you have it, enough information to wet your whistle. There's more to the story, but better to teach a man to fish than give him one.

Disclosure: Long RTK

Monday, March 12, 2012

Berkshire Hathaway Analysis: Still Relevant Today

by Sham Gad

It's widely known that very few analysts attempt to follow or analyze Berkshire Hathaway. That's perfectly alright with Warren Buffett. Here at Gad Capital and the Gad Partners Funds, it is more than satisfactory to rely on the company's annual reports and Buffett's annual letter. Rarely does a CEO devote dozens on pages each year educating his shareholders are about how to value a business, including Berkshire Hathaway.

But one analyst report back in 1999 earned Buffett's stamp of approval. It was written by none other than Alice Schroeder, whom Buffett picked several years ago to pen his biography. Despite being penned in 1999, the analysis is as relevant as ever because the report does a magnificent job of educating the reader on how value Berkshire from four perspectives. Those perspectives are the same ones Buffett applies today and always.

The report in its entirety can be read by clicking here. It's a must read for anyone interested in investing.