Timothy Collins, Tim Collins

I am currently reading the book "Saving the Sun" about the
story of the revival of Shinshei Bank. Part Two of the book
focused on Timothy Collins. After reading it, I am liking this
man more.
I first heard of Timothy Collins when Marty Whitman told me about him
in his Yale class, which I had the fortune of auditing. I found out
later that Third Avenue Value Fund owned shares of RHJI International. Tim
turned around Shinshei Bank, one of the biggest banks in the world.
I went to Belgium to visit with the office of RHJ International. Arnaud
Denis, RHJI's investor relations, told me about this book.
Let me put an excerpt from the book,
"In the late 1980s, Collins gave up the investing banking game to work out what he wanted to do with the rest of his life. He was a Baptist and sometimes wondered whether chasing money on Wall Street really fitted in with his Christian faith. For six weeks he worked in a Sudanese refugee camp and toyed with the idea of doing charity work full-time or even entering the church. "I don't go to church every week but I think my family's religion and my belief are an important part of my view of the world," he later explained.
His friend and fellow Christian, the financier Richard Rainwater, persuaded him otherwise. "God didn't make you a poet or an opera singer or a six-foot-eleven center," Rainwater told him. "But you are pretty good at doing this[business.]" So Collins decided instead to donate a large proportion of his earnings to charity and reemerged on Wall Street..."
Classy guy, good ethics. In my investing process, when I find good management, I feel it is my job to tell the story of this man so that the world can be a better place if capital were entrusted with him. Imagine if Warren Buffett was more well known back in 1950s and he compounded his wealth to much higher than it is now. And he donated that entire amount to charity! Now, that's value creation!

"We don't get credit for being shareholder friendly" - Eddie Lampert

I just came out of the annual meeting of Sears.
There were about 150 people in the room.
I am in the airport and will be brief.
Here are some quick notes.

First some insights and observations.

Eddie mentioned the word "focus" several times. In fact,
he recommended a book, "Crazy Busy" at the end of the meeting.
It is a book by a psychiatrist who dealt with ADD patients. The
psychiatrist's thesis is that at the end of the day, being focused
on one task is superior to multi-tasking. Eddie says he agrees with
that thesis.

Eddie struck me as somebody who is extremly balanced in his thinking.
He always offers 2 sides of the coin when explaining. For example, he
would say we are doing this not because X, but because of Y. He always offers
the is, and the what is not. This to me is a sign of wisdom -- a very self-aware, very wise person. I liken this to Lao Tzu's quote. "Knowing what you know, and knowing what you do not know. That is the way to know."

Anyway, this is my third time hearing Eddie talk. I came out very impressed with his answers and articulateness. I asked him a question about the online commerce of Sears versus Walmart.com, his answers showed he thinks about all these things a lot all the time.

Eddie said that aside from buybacks, dividends, capex spending and
acquisitions, their main focus is to invest in people. Not trying to
be soft, but he repeatedly said that the culture is extremely important
to him and the Sears team. He mentions GE, Dell, Starbucks as examples of the culture.

Eddie said no retailer should aspire for a situation where the real estate is more valuable than the business. It is a shame that they had to sell real estate to other retailers whose business model can develop a better business than themselves.

Eddie said he rarely uses EBITDA. But for Sears, since there is M&A accounting, fresh start accounting (for post bankruptcy situations) and foreseeing that in the near term, capex would be less than D&A, he uses EBITDA for Sears.

I talked to some of the associates at Sears. There was a shareholder of Sears and an employee of Sears since 1970. He said he has seen a lot of great improvement since Eddie came on board. In the past, people viewed Sears and Kmart as sinking ships, he said that the new captain is righting the course. He cited quick decisions being made. He used the example of Sears Essentials. In the past, all the bureacracy would not make a quick decision about ending a mistake.

This leads me to one of the topics Eddie frequently discussed in the meeting.
He cited that aside from buybacks, dividends, acquisitions, and capex, the best
investment for Sears now is in its people and culture. He envisions a culture
where people are comfortable with ambiguity, where people are comfortable with admitting mistakes and failures. He wants to build a company that outlives him.
He mentioned GE, Dell, Goldman Sachs as examples of this kind of culture. He specifically said GE has done a great job of transitioning from Jack Welch.

He tries not be doctrinare about anything. He says a lot of companies forcefeed to their customers. If they make a goal to remodel 100 stores and it is not working, they keep doing it. He says momentum in the right direction should be accelerated and momentum in the wrong direction should be stopped. They could increase their sales by giving away flat panel televisions for 1 dollar. But if their own employees have to use coupons to buy at Sears and would happily buy from Target at listed prices, Sears must learn from it. It's not even about disloyalty, it's about learning what Target's doing right.

Another example of not being doctrinaire was the use of debt. He said sometimes it's good to increase debt. For example, at Autozone, they increased the debt levels. He then said one can argue that Microsoft or Berkshire can benefit from some leverage. On the other hand, Google did not seem to need to raise cash with its present business model, but they raised cash probably because Microsoft has so much cash.

After the meeting, Vivian took us a tour of the new products that Sears has developed. I must say that a lot of thought went into the designs of these products.

I will write more when I get back to New York City.

Rational Prices

My job is like that of a diamond appraiser. Instead of appraising diamonds, I appraise businesses.

There are very few times in life when prices become very irrational. My job is to be patient and be ready to pounce when that happens. Patience is another word for waiting.

What is a rational price? That is an appraisal that requires knowledge and insights. You need to know accounting, economics, business, commerce, math, probabilities, history.

I love my non-job or I love what I don't do

Value investing is as much about doing nothing as it is about doing something. What I do everyday is read to expand my circle of competence. Often times, I hear people say I love my work, or I love what I do. I'd rather invert this statement because as a value investor, I love what I don't do, or I love my non-work. Value investing is about doing nothing intelligently. Being able to sit on a stock for three years watching paint dry is even more important than knowing how to decompose the ROE using the Dupont model.

RISK - the four letter word

The big four letter word in our business is RISK. Most institutions define it as the standard deviation/volatility of stock prices. For me, the only RISK that matters is business risk. It could be caused by competition or any unexpected event. The only antidote for preparing for unexpected events is Margin Of Safety.

For example, this MTA strike that is happening in New York City right now is probably unexpected by 99% of the retailers. Who would have thought this would happen, right? Basically, everyday, we see events that are unexpected by 99% of the people. That is why value investors require a margin of safety. We know there are a lot of unexpected things that can happen, and will happen.

When did you become a Value Investor?

I became a value investor when I was in junior year at UCLA. In 1989, I read a Los Angeles Times article about Warren Buffett and since then, I have become hooked. I maed my first value investment (outside of Berkshire Hathaway) in Salomon Brothers. I bought the leaps and made 5 times my capital within 3 years.

When and how did you become a value investor? Post your stories.

This is an email exchange between Patrick Byrne and his brokers. Read it and judge for yourself.

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Patrick,

Today I have been informed by Bob at XXXX, that the 50,000 shares of Ostk originally confirmed to have settled on Dec 5th and in the process of being converted from DTC shares to paper, have in actuality not settled and no shares have been received (emphasis added) by XXXX from SSSS (SSSS is selling broker, XXXX is buying broker). The $1.8mm for the purchase of the shares has been debited from your XXXX account, but XXXX has not distributed any money to SSSS and the funds are being held in a XXXX holding account. I am in contact with Bob on a daily basis and we will continue to push SSSS to deliver the shares.

Please let me know if you have any questions.

Thanks, Ted

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Subject: RE: Ostk purchase

Thanks.

Ted or Samson,

Can you confirm for me:

SSSS was the counterparty to this trade?

When the trade is done, what is the process by which the trade is "confirmed to have settled"?

Please describe this process normally works. No more than 50 words. For example:

The trade: "Ted talks to a broker on the SSSS side and agree on the deal, they each write a ticket with a trade number on it." Or... "Ted does the deal through a computer screen, which tells him that the counterparty was SSSS, and give him a trade number."

The confirmation: "Three days later the DTCC sends an electronic confirmation that 50,000 shares have been debited from SSSS's DTCC account and credited to XXXX'."

Or whatever the truth is. I just made those up, but it is what I imagine. Can you just write for me the correct sentences so i understand?

Patrick

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Patrick,

In answer to your questions below;

Yes we purchased the shares through SSSS.

I will try to explain the process as best I know and keep it short. I enter the trade when it comes in. My back office brokers pick up the trade and then call the "reps"/brokers that move the stock. In this instance they contacted SSSS. The SSSS broker then goes and tries to fill the order by breaking it down and going to the street. His back office accumulates the shares and then lets him know that the trade is now good. He then calls my back office broker to let them know the trade is good. Usually this would be an electronic confirmation. The selling broker then has three days to collect those shares from where ever he got them and deliver them to XXXX. So on the day of the trade or by the next morning we have a confirmation and a detailed report that the shares are good. That report is the same I provided to Sam (Your rep). When the stocks arrive at XXXX the money is then credited to the SSSS account and the transaction is complete.

I hope this helps or is the information that you need.

Ted
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Ted,

I have been thinking.

Doesn't this mean that SSSS sold these without having them?

If they sold it, then have to go out and "accumulate the shares"? That is, it was a short sale?

Was it identified as a short sale during the trade?

Can you buy them in?

Patrick

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Patrick,


It would seem that SSSS did not have the shares when they sold them to us. They are a market mover for overstock.com and so are both placing sells and buys throughout the day. There is no way for us to tell how short they were at what time, I don't think the broker at SSSS even knows the total position of shares when they complete the trade. It never is disclosed as a short sale, all we see is a confirmation that they accepted the trade which means that typically they will deliver the shares in three days. My understanding is that traders and brokerage houses will often on securities borrow the shares if they come up short at the end of the day. Since Overstock is a "hot" stock they are finding it just about impossible to find shares to borrow or buy (emphasis added).

As far as your question about buying them in, yes we could buy them in in this situation. However, if we try I don't know that we will be successful. Talking with my traders they feel that we will run into the same problem, no one seems to have enough of the shares to deliver (emphasis added).

I have talked with SSSS again today and they are at the same position right now.

-----------------

Thanks Ted.

I assume you mean "market maker" and not "market mover"? (Freudian slip?)

Can you do me a favor and ask SSSS: "Whom did SSSS buy the short sold stock from?"

Patrick
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Patrick,

I talked with SSSS and they said that as far as where they get the shares they execute the buy for us knowing that typically for stocks they can get the shares with in the three days. With Overstock shares they were not able.

They have, as of the 13th, issued buy ins on all shares owed them and are pursuing those shares to complete our purchase.

Ted