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Marty Whitman on Value Investing

I recently re-read Marty Whitman's book - Value Investing, A Balanced Approach. Whitman's writing is a bit academic sounding and hard to understand, but his insights are amazing. I find that his ideas on creating wealth and resource conversions provide an investment edge because these ideas don't screen well. Whitman says that earnings are not the only form of wealth. A quick way to understand this is Paul Graham's example of creating wealth by fixing a beat-up old car. There are no earnings if this car is not sold, but wealth or economic value has been created. Similarly, Whitman explains how companies can create wealth in tax efficient manners.

Here are some key points from the book:

1. Focus on what the numbers mean, not what the numbers are 

Whitman says that GAAP earning is a starting point and is an accounting tool, and is not meant to capture economic reality. His advice: Start with earnings and make adjustments to account for economic reality. Whitman is NOT adv…

$AINC - middleman company with growth levers

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Lately, I’ve been thinking about middlemen businesses. The Private Investment Brief wrote this thought provoking article on middlemen and why they exist. I've made several investments in middlemen companies - $LNG (toll operator for liquified natural gas), $EVI (distributor of laundry equipment with rollup strategy, $YTRA (#2 OTA in India). LNG and EVI thesis have played out well, while YTRA has been plagued by baffling capital raising decisions by management (25% dilution at $5.5/share. My cost basis ~$7.5/share). This post focuses on investment initiated last week -  AINC - middleman / asset manager for AHT and BHR.
I think middle men definitely provide value, and they charge fees for that. But sometimes middlemen can also extract value from the ecosystem, which can be a good or bad thing depending on where you stand. An example: Warren Buffett recently commented that real estate agents (middlemen) provide valuable services especially for first time home buyers. I have the oppo…

House prices: hard to believe currently, but they do go down at times

Real estate prices continues to march unabated since the the crash of 2008 - 2012. Many cities (SF Bay area, Seattle) have already crossed the pre-2007 highs (by a lot). San Francisco median price is 2x that of 2007 highs.Just the equity gains made by residents in SF bay area and Seattle are more than average full time worker salaries. Some of this looks unsustainable. Prices look inflated and there's risk off behavior that assumes that house prices continue going up. Examples such as one shown here indicate that some house prices don't cover even carrying costs (interest + property tax). Is Fear of missing out (FOMO) causing these high prices? 
I don't claim to know how or when prices might get corrected. But now would be a good time to look at prior housing crashes to remember that housing does not always go up. There's no permanent high plateau in finance, and things go in cycles. Some of the risks which caused house price drops in the past may re-appear, or they m…

$FRPH - Value in Action

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tl;dr: Bought FRPH at $39/share in July 2016. Currently, the stock is at $58/share, driven mainly by value enhancing steps taken by owner-operators, the Baker family. This article reviews how FRPH put Value in Action.


FRPH recently announced the sale of their industrial warehouse assets (41 properties) to Blackstone for $359M. The management announced that this was good time to sell given lower taxes and low cap rates. I thought this transaction provided a good opportunity to write about FRPH as "Value in Action" investment. The management doesn't promote the stock much - just look at their bare bones Investor relations website, but they have been long term owner-operators and have created significant value.


FRP Holdings ($FRPH) was formed in 1986 from spin off of real estate and transportation businesses from Florida Rock Industries. I first learned about FRPH from a stock pitch by Bill Chen of Rhizome Capital Partners. The original Florida Rock was run by the Baker fam…

Book Review (and short snippets): The Great Depression - a diary

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This book  is based on diary written by Benjamin Roth, a mid 30s lawyer in Youngstown, OH and is focused mainly on 1931 to 1941 period. The unique aspect of the book is that he captures the investment environment, opinions of "experts", stock prices, and outcomes of investments from 1930s to 1960s. There are interesting case studies involving several people making investment errors and ignoring risks during the boom of 1920s. One example below shows $180K initial investment reduced to $10K.



While statistics such as "market fell down 90% during Great Depression" are thrown often around on Twitter, reading of Roth's diary makes the impact feel more "real". It moves slowly through the market crash days and shows that it wasn't a linear drop, but many mini-busts and mini-booms and many false starts. Before reading the book, I didn't know of 1937 business slow down and stock market drop.

Youngstown was one of the boom towns of the 1920s with rapid…

How Reddit post got me thinking on speculative pricing of assets

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I recently came across this reddit post --  someone with $310K income asking about whether they should try to buy $800K condo with 1 bed, 1 bath in San Francisco. Now $800K is the asking price which probably means that people will bid it up another 10%-20% because that's the "norm".


Two things caught my eye in this post:
1. The carrying costs of this condo (interest, property taxes, HOA fees) will be ~$4K / month, which is higher than renting an equivalent apartment ($3.2K - $3.6K) in the same SOMA area in San Francisco. Clearly its cheaper to rent vs buy, but probably the fear of being priced out in the future is driving this person's actions.
2. This person has close to 14% of their net worth in cryptocurrency!

Could this Reddit posting person be recycling capital from the good ($310K combined salary, presumably from tech) into the speculative ($800K for 1 bed / 1 bath condo, $45K in cyptocurrency)? Probably they're trying to get "fast appreciation of ass…

Drive Shack - Asymmetric risk reward situation with this TopGolf competitor

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Drive Shack, formerly Newcastle Investment (NCT), is a golf management company. The original thesis for Drive Shack (DS) and valuation is here . When I first bought it ~$3/share, the thesis was that there were forced sellers due to cancellation of dividend and REIT status. Add to it the headline risk of "Golf is declining". I was happy to buy from these forced sellers. 
Since then, the stock price has gone up ~70% after Wes Edens increased his ownership to 9%, buying $2.5M of stock at $6 / share. While Wes Eden's buy is a good sign, there are several other developments which require a revision to the original thesis. As announced in Q417 earnings call, the company is transitioning away from being owner of traditional golf courses to development of Topgolf like golf entertainment sites. So I want to look at it as a development company and an example of balance sheet to income statement investment.

Some key recent developments are: 


Internalized managementProgress on Wind dow…