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Ben Claremon: The Inoculated Investor 2011 Value Investing Congress Notes Day 1: Speaker #1: Seeing Value Through the Cloud Kian Ghazi- Hawkshaw Capital Management -

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Background (from Whitney Tilson) o Kian has been running this company for 10 years o Worked at Lehman brothers and is a Wharton MBA o Firm does some of the most extensive scuttlebutt research of anyone in this business Understanding how a manger thinks through his ideas is the most valuable part of attending the conference o As such, he is going to go really deep into a single idea Concentrated value portfolio with a focus on in-depth research Long short portfolio o Extensive primary research: calling customers and former employees to get insights into the industry o Trying to confirm or refute their variant view o They do not use paid networks o The majority of what they do is cold calls to proprietary contacts who are unpaid How do they invest? o They are value investors but their style goes beyond cheap business Look for high quality, one of a kind business. Does the business have a dominant market share, barriers to entry? Shown by return on capital (ROC) Rock solid balance sheet with excess cash and monetizable assets o Do a deep dive to try to see land mines before they step on them o Perform a pre-mortem on an investment If there is a permanent impairment to the earnings power, what might cause that? If they can think of a lot of these they will avoid investing o Invest in a business and not a stock Best Idea: Ingram Micro Inc. (IM) o Have talked to 25-30 industry contactsemployees, customers, competitors o Worlds largest IT distributor 1500 vendors and 180K value added resellers o $3B market cap, $35B in sales, trading .9x TBV and 10x EPS o Number one share worldwide

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Ben Claremon: The Inoculated Investor

http://inoculatedinvestor.blogspot.com/

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Number 1 in the US and number 2 in Europe o Bear case: Commoditized service in a highly competitive, low margin business Mediocre returns on capital and thus the stock should trade at book value Shift to the cloud is a major headwind If Microsoft, Cisco and HP are trading at 10x earnings, then the middle man should trade at a lower multiple than those companies o Subtle industry tailwinds that the market does not understand Offers a cost effective sales channel to small to medium sized businesses (SMBs) Industry competitive dynamic is shifting toward a better environment Cloud fears are overblown Oligopoly is developing o Valuation Book value is a floor to the value Appraised the business at 100% upside over 2 years Why does this opportunity exist? o Threat of the cloud Uncertainty leads to an opportunity o Large cap tech is out of favor o Margins are at peak levels o Change in the industry is subtle What is the value of 2 tier distribution o Exists because they are the primary sales channel for selling tech into SMBs 8M SMBs These firms purchase 40% of all tech products sold o 30% are sold through 2 tier distribution Other 70% is sold direct or through the 1st tier o Cost effective sales channel o What is the value to the distributor? Cost effective sales channeloutsourced sales Dont need a large sales forcecost effective Choose to use this to reach SMB than direct Outsourced credit department o All outside billing and collections o One credit worthy company Outsourced training Distributor trains the value added reseller Help with troubleshooting o Industry Quotes Comes down to efficiency, logistics and scalemany companies dont want to manage sales o What is the value to the reseller? One stop shop: one place and one bill

Ben Claremon: The Inoculated Investor

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This very important and some customers are willing to pay more for it Source of financingneed credit extended by the distributor Outsourced logistics and fulfillment Resellers do not have to hold any inventoryno warehouses If an order is placed by 5pm then the product is received the next day with labeling that says it comes from the reseller Support and expertise Conferences to help them understand trends o Realize that price is not everythingservice is very important Why is a rational oligopoly in the making? o 4 changes in the industry Key geographies have consolidatedless competition US: top 5 players have a 75% share o Top 3 do the same thing Mainly sell PCs, printers, and other computer peripherals o Next 2 are slightly different High touch, low velocity Ship to products directly to the data center o Servers Europe o Top 5 have 62% share o #2 and #4 in Germany have merged (# 1 market in Europe) Synnex is no longer a price spoiler No longer have to build share fast to achieve the scale they need to compete The CEO was the CEO at Ingram He is focused on return on tangible capital (ROTC) and profits now o Margins are trending up Lifting the weight off of the shoulders of the industry o This reduces pricing competition Focus on ROC in the entire industry Was previously focused on growth Didnt talk about ROC at all o Synnex is now talking about ROC o Same is true of Tech Data now Company wants to achieve a ROC 500bps above the cost of capital o Ingram has a chart dedicated to ROC now Targeting ROC 300-400bps above the cost of capital Each company is pursuing growth adjacencies with little overlap Better growth opportunities and better margins

Ben Claremon: The Inoculated Investor

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Ingram o Data capture and point of salebar code scanners Synnex and Tech Data are not in this market o Logistics 3rd party logistics Have inventory but dont own itget a fee for service 50% of all items distributed from WalMart.com come from an Ingram warehouse o Apple and Amazon as well Tech Data o Mobility Synnex o Outsourcing Call centers The overlap between the 3 is in the data center market o Higher margin business o Really going after other firms markets o These 4 changes can drive mid-teens returns on capital give the changes in the industry Fears of the cloud o A major headwind to this business in general is customers moving to the cloud o Cloud computing- distribution of software applications over the internet Characteristics Shared servers rather than in-house servers o Servers are in 3rd party data centers Virtualization Cheaper and broader broadband pipes make the move easier o Big growth expected 35% CAGR through 2013 o 2 impacts on the 2 tier distribution Softwaresome companies will shift to the cloud Others will leverage two tier distribution Hardware With the server not on premises anymore, they will not need certain hardware There will absolutely be an impact if companies to go to the cloud and circumvent two tier distribution However, just like not all IT services got offshored to India o Not all software/hardware is going to be going to the cloud: Bandwidth constraints Mission critical apps Service disruptions Legal/compliance

Ben Claremon: The Inoculated Investor

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Customized software o 68% of their sales will not be impacted by the cloud Peripheralsmonitors, printers PCs o At risk at to competition from the cloud is the remaining 32% Mainly software Worst case o 50% shift to the cloud n 5 years Very draconian downside scenario 16% of revenue could go away if half of the 32% exposed goes away Lose $1.1B in revenue But the other 68% of the business will still grow If it can still grow at historical growth levels, that would be $1.2B annually o Revenue would be about flat o Company is priced for an Armageddon scenario Base Case o 30% shift to the cloud in 5 years $3.3B headwind over 5 years Potential offsets Cloud is going to need 2 tier distribution as well o Value of 2 tier is not eliminated o Cloud-based service providers will need to be able to tap the SMB market They will not build out their sales forces There will be a land grab First to market will be important o The reseller will need 2 tier distribution Will aggregate a 1 stop suite for cloud customers o 50% of lost sales to the cloud could be offset Higher end data center productshigher margins POS bar codes and scanners Base case is 3% growth per year Upside case- 10% shift to the cloud (20% is his actual guess) o 5% growth projected by IDC for non-cloud IT spending None of the range of outcomes is horrible o 0-5% annual growth even if 50% goes to the cloud Valuation o Significant downside protection and 100% upside o During a 5 month period in 2008 and 2009 the company traded below tangible book value (TBV) Is credit exposure an issue? Write offs are 1% of gross profits over time Only a small uptick in 2008 and 2009

Ben Claremon: The Inoculated Investor

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Concerns were unfounded Is there inventory write down risk? 80-90% has contractual rights of returns or price protection o Very little inventory risk Gross margins actually improved during the downturn Profitable every quarter during the downturn $0 inventory write downs Managed the downturn really well Trading at .9x TBV Synnex (SNX): 1.5x TBV Tech Data (TECD): 1.3x TBV Base case 3% revenue growth, some reasonable SG&A leverage 8% EPS growth 13% return on invested capital (ROIC) o Apply a 12x forward multiple and add back cash they will use for a sizable buyback and some tuck-in valuations $35 price Upside is 90% o Thinks that ROIC will be better than before and the multiple could expand to 13-14x

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Severe downturn in global IT spending But the stock only trades at .9x TBV o Company is implementing an ERP system for the next 3 years There Inevitably will be some hiccups o HP is a huge customers and losing HP would really hurt o Ingram straying from its ROIC focus Summary o Had a bias at first and changed his mind after looking at it closer o Book value sets a floor for the valuation Q&A o How long do they propose to own Ingram? 3-5 years Appraise intrinsic value over a pretty long time frame Have a 2 year out price target o What would inspire the company to sell? He likes that it is not a play on one companys technology They are going to take part in the cloud boom IM is an arms dealer to all vendors What would cause him to sell ROIC focus went away HP changed how it was going for its distribution

Ben Claremon: The Inoculated Investor

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Not worried about a downturn in tech spending Why do the US-based companies in this sector not pay dividends? Why are the models rated differently outside of the US? Does this make a case for the electronics manufacturing services (EMS) industry as well? Cant comment on EMSdoes not know that sector Doesnt know why Ingram trades at a discount to Synnex and Tech Data He does not want to see them pay a dividend Thinks they should buy back shares instead o The best return on allocated capital is from share buybacks Not going to get any value from paying a dividend Tax inefficient How do they narrow down the investing field enough to do so much research on a single name? They used to pass on a company after 2-3 weeks of research Implemented screening technology to find a more fertile hunting ground Narrow the universe to the cheapest stocks Companies like Ingram Micro had been on his screen for a long time but he liked a lot the more he dug in Did they analyze what TBV consists of? Inventory is the biggest chunk But, you could not get that carrying value if you were liquidating that business Price protection and ability to return reduce write down risk but you cant liquidate at the value on the balance sheet Excess cash Net PP&Eworld-class distribution facilities Accounts receivable Question from Whitney Tilson of T2 Partners: Is this like Costco (COST)high velocity but low margin business that actually is great? Sales are a pass through and gross profits are like true revenue Is more like a 25% margin business if you look at it this way o 22% in 2008 and 2009 o Jumped back to 25% in 2010 Suggests a better business than it would at first glance Is there a franchise value to this business? Brand value? Hard to argue for some enduring value for the brand Dont think much about the intangibles in this case o Thinks about who will miss the company if they it is gone o Companies only want to deal with 3-5 vendors New company would find it hard to enter Need customers to attract products and vice versa No good answer to what the price they would not buy more stock back

Ben Claremon: The Inoculated Investor Speaker #2

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If it were trading a little above TBV he would still buy it 10% downside and 100% upside is a good tradeoff o If .8x TBV is the floor

The Human Side of Investing, or the Difference Between Theory and Practice Howard Marks- Oaktree Capital Management Great quote from Yogi Berra o In theory there is no difference between theory and practice. In practice there is. This applies to investing It is important to realize that there is another side of investing not taught in schools and textbooks o Professors provide a simple roadmap to investment success There is no simple formula and it is the human side that screws it up o Markets are objective, efficient and clinical and thus assets are priced accurately But markets are made up of people who have emotions and swing between extremes o Riskier assets must provide higher returns to attract capital If they could always be expected to produce higher returns then they wouldnt be riskier o Appropriate risk premium is incorporated into returns Sometimes the premium is appropriate Other times it is inadequate or excessive o Q3 2007 and Q4 2008 were on different extremes o Since markets price asset fairly, if you buy at the market price you can expect fair returns Buying at the market price cannot be counted on to produce a fair return o People want more of something at a lower price and less as a higher price Normal demand curve taught in Economics 101 Unfortunately, investors warm to investments when they rise and shun them when they fall Demand curve is actually the opposite in investing The swing of the pendulum o Constantly going between greed and fear, risk tolerance and risk aversion, and optimism and pessimism o In theory, the pendulum should be at the happy medium On average it is in the middle But it spends little time there Excesses constitute the errors of herd behavior 3 stages of a bull market Few people feel things are getting better Most people realize improvement is taking place Everyone thinks things will get better forever What the wise man does in the beginning, the fool does in the end o The last buyer pays the price

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Ben Claremon: The Inoculated Investor

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3 stages of a bear market Few people realize that things are overpriced and dangerous Most people see the decline is underway Everyone believes that things will get worse forever o Great opportunity to buy if we can behave counter-cyclically Importance of being a contrarian o Quote from Mark Twain: Whenever you find yourself on the side of the majority, is it time to reform. o A market top is coincident with extreme bullishness How do we avoid getting caught up in the mania? Approach has to be value-based and objective and we must be steadfast in our attention to the swings in the pendulum o What most people believe to be true in the investment world is often not true It is very lonely being a contrarian and as value investors we have to be fine straying from the herd Investor memory has to fail us for extremes to be reached o According to John Kenneth Galbraith one of the main factors that contributes to euphoria is the extreme brevity of the financial memory We are less likely to repeat the past and go to extremes if we can bear these past events in mind 1929 repeated in 2008had to have been born in 1908 to have experienced both events o A man is willing to believe things that will make him rich if they are true Greed can overwhelm caution Pro-cyclical behavior o One of the most frequent mistakes investors make o We were told to buy low and sell high Instead we do the opposite When the cycle is going well, media is positive, financing is available o Coincident with rising cycles o We need to be anti-cyclical when others are acting pro-cyclically Overstating knowledge of the future o Value and growth investors are different Value investors focus on the value here and now Current assets, current cash, current cash flow Growth investors are buying a piece of the dream o But these are not that different We need to understand the future in either case At the same time, we should be cautious in what we expect of our prescience o Another quote from Galbraith: There are two kinds of forecasters: those who dont know, and those who dont know they dont know. o Amos Tversky said that it is frightening to realize that you might not know something By in large the world is run by people who have faith that they know exactly what is going on

Ben Claremon: The Inoculated Investor

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Very dangerous to act as if you know the future Quote from Mark Twain It ain't what you don't know that gets you into trouble. ... It's what you know for sure that just ain't so. 2 schools of investing The I know school The I dont know school The I know school is the most prevalent school o These people tell others what will happen in the future to markets and economies o Tend to invest based on the assumption that they are right When they are proven wrong they try to invest again on their predictions o Make one outcome bets o Have concentrated portfolios o Target only maximum price gains o Lever heavily The best investors are in the I dont know school when it comes to the macro environment o So, what do they do to limit risk? Diversify No leverage Avoid losses Is as important as generating gains Hedge their bets Most people think in terms of norms and ignore outliers The I know school thinks in terms of the average Never forget about the 6 foot man who drowned in a lake that was 5 feet deep on average These people got into trouble in 2008 Leverage is what hurt people and didnt let them survive the outlier events Single scenario investors cannot account for Black Swans Believe that the event they see as most likely is the one that will happen o There are still many other events that could happen that have a higher cumulative probability Quote from Elroy Dimson Risk means more things can happen than will happen It is important to recognize the twin imposters Short term outperformance and underperformance Neither says anything about skill Events collide with an existing portfolio Events can be unforeseeable and hurt a thoughtful portfolio o Doesnt not say anything about investment ability

Ben Claremon: The Inoculated Investor

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Remember the lessons of Nassim Talebs Fooled by Randomness o Investors are right and wrong for all kinds of reasons o Good decisions fail all the time; bad decisions work sometimes o Randomness can produce just about any outcome in the short run o Alternative histories The other things that could have happened Events are part of a range of probabilities If we understand that then we reduce the significance of what actually happened Long term performance is what we should focus on If we think of the past as being as variable as the unknown future, it is very difficult to get investment timing right What should happen and what will happen are very different Folly to bet your chips on what should happen If you expect too much you get into trouble Hard to do the right thing in the investing business Impossible to do the right thing at the right time We are all going to be wrong Being too far ahead is indistinguishable from being wrong We must avoid the pitfalls of investment bureaucracy David Swenson of the Yale endowment says that active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel. Over-diversification Fear of embarrassment It is better to fail conventionally than to fail unconventionally Ultimate conundrum o We must take the chance of doing a lot of something that fails o Take the chance of being too early if we are going to be great investors Investing in things with obvious appeal and that can be understood Implies elevated prices and substantial risk Real bargains come from areas in which the herd shuns Focus on buying assets well rather than buying good assets Inefficiencies are the superior investors reason for being Mistakes of others lead smart investors to make vast sums Oaktrees philosophy and approach Understanding and controlling risk Involved in less efficient markets High degree of investment specializationleads to expertise Does not raise and lower cash levels to try to time the market No reliance on economic projects How much are they holding in cash for future opportunities given the frothy markets?

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Ben Claremon: The Inoculated Investor

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Oaktree has lots of different kinds of funds Some are 90%+ invested Some distressed debt and real estate funds are invested based on their vintage In most areas cash is high relative to normal times o Challenging today to find exceptional bargains Risk tolerance is too high Time for great selectivity, caution and discipline Question from Guy Spier of Aquamarine Funds: Why does Oaktree still run institutional money if it is so hard and the investors are so biased? Swenson has worked it out how to handle institutional investors better than most of his peers He has outperformed his peers by about 3%a year for 25 years In Oaktrees case, some of it is an historic accident Howard has been in the institutional business since he was 21 Believes Oaktree has added value to the institutional world o Not many people bring this message to the institutional world Which area(s) are they finding the most interesting? Does not know of any areas in which dollars are going for 50 cents Very hard to answer that question Oaktree is raising funds which keeps him from marketing outside the institutional meetings o Cant say exactly where but they are raising money in some areas How do you build the right temperament? How has he done it? It helps a lot to be born with a reserved and steady temperament Aloof, removed, analytical, skeptical He didnt do exercises to develop the right mentality Reading is the most important thing Read about the excesses of the market o It should strike a chord with you o If you read it and it you think it doesnt apply to youyou are in the wrong business Galbraith book A Short History of Financial Euphoria o If you get this book then this business is right for you The best investors are not artists They are analytical, introspective and not emotional Emotional investors may not be able to become value investors Need serenity, consistency and stability Many forces bear on us- envy, greed, benchmarking, fear o Forces that cause bubbles, crises, and bear markets Value investors see them for what they are and rise to the occasion rather than succumb

Ben Claremon: The Inoculated Investor

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Hard to teach yourself how to do that consciously o People who read his new book and dont get should probably be in another business Question from VIC organizer John Schwartz- Does it help to be well self-analyzed in order to counteract certain human emotions? He once wrote that the most important science is not economics or financial analyses or accounting It is psychology o People who have their psyches in control are in the best shape to be great investors A portfolio manager came to him in 1998 after LTCM crisis and was worried that the world was going to end o Howard said he understood why he was scared but told him to go back to his desk and manage his portfolio A battlefield hero is one who is afraid and does it anyway In 2008 they were impressed with the fact that they could be wrong o Were not sure if they were going to fast or two slow It was that tension that told them that they were doing the right thing But it was really hard to do at that time o Were shown by the fact that very few people didnt jump back into the markets that they were right o If you couldnt deploy money back then, you were not alone It is often hard to buy something when prices are falling if you dont own it. How do they think about position sizing and how do they scale positions? Within the areas they work, they are toward the more diversified end of the spectrum Have never had a position over 2% o When things go right, they never have enough o When you dont have big positions, you cant have big mistakes o Graham and Dodd described fixed income as a negative art What you dont own is what is most important Position sizing is forced upon them When there arent attractive new investments available they may buy more of things they already own Will take large positions of 5-6% in certain distressed situations Oaktree I still around after 30+ years because the focus has been on protecting capital and managing risk Many competitors are not around anymore

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There are old investors and bold investors. But there are not that many old and bold investors Question from Marcelo Lima- If he likes inefficient markets, then why he is Oaktree not more involved in the equity markets They are not active in mainstream equity markets But they do have funds for emerging market equities and Japanese equities Just dont invest in developed world equities How does he think about dollar depreciation risk in the long term, especially when it comes to illiquid investments? Clients are looking to Oaktree for dollar-based returns Dont have superior knowledge about dollar depreciation So, the best thing to do is try to generate high returns Clients are fully equipped to do their own hedging Oaktree offers dollar returns and they can hedge if they want Question from Ryan Morris of Meson Capital- Does he ever pay attention to external issues that are not intrinsic to the market but can still affect the market? The answer is no His son is investing now For years the 1st thing Howard says to him when he brings up an investment idea is who doesnt already know that? o Meaning, why is this not priced into the market already? For example, trade barriers are likely to go up around the world But who doesnt know that? Is that priced in or not? He doesnt know anything about the future or exogenous events that nobody else knows o Cant add value there In high yield, the formula is simple: o Buy ones that will not default and avoid those that will o Will look at macro factors on individual investments when assessing the level of risk but does not go beyond that He says Oaktree does not raise or lower cash based on market timing but has more cash now? Is there a contradiction there? Likes people to point out his contradictions They never say: we are worried about the market and we are adding 10% cash What they say is that there is a lot to sell and to little buy so cash levels float up o Their actions are the result of active portfolio management Not a conscious decision to hold cash

Ben Claremon: The Inoculated Investor Speaker #3

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Prospecting for Compounding Machines in a Minefield of Value Traps Rahul Saraogi- Atyant Capital (from Chennai India) Has been investing in India for 11 years o Long only, concentrated strategy No shorting or leverage $15M under management Ben Graham said that one of the mysteries of the business is how the price of a stock converges to intrinsic value o How do we deal with this mystery? This is something that value investors are always trying to do Munger says, always invert o So he thinks about what prevents a stock price from converging to intrinsic value Background on India o India has been discovered by value investors Some people have had good experiences and others have had bad experiences o Tailwinds Demographics 1.3B people- 3.5x the size of the US 600M people under the age of 25 85% of the people are under the age of 45 By 2020, 50% of the population will be in urban centers o This is driving significant demand 14% nominal GDP growth o 8% real growth o This is in spite of the government The government has done just about everything wrong Demand is growing 25% each year for certain products Has very deep markets o T+2 settlement o 6000 listed companies o Every sector is represented o Cost of going public is low o Developed investor base o Founded in 1875one of the oldest exchanges in the world Paradise for value investors o Very short term and top down focused Money waxes and wanes with risk on and risk off trade 80% of the total market cap of the index is made up of 15 companies Market cap weighted indices o Liquidity advantage

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Ben Claremon: The Inoculated Investor

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People often choose to invest or not invest based on volume ECN based market Liquidity is very volatile Risk off: $2B market cap company can trade 20K shares Risk on: Same company then trades 2M shares Investors refrain from trading in illiquid stocks Because they cant get out in 10 days Very happy as value investors to be in these markets o Information advantage Useful universe is top 1500-1700 companies $50M to $100B in market cap o Not much research coverage outside of the top-tier companies If you can put your feet to the ground you can have a huge advantage What prevents a stock from converging to intrinsic value? o Hurdles Eliminate companies that will never converge Corporate governance o Not just fraud and embezzlement o Many companies have dominant shareholders How do they treat minority shareholders? Violations Not securities fraud necessarily Related party transactions o Buying and selling to companies related to the dominant shareholders o Investments/loans to related companies o Exposed to risks without upside Skimming cash from the company 100% leverage in CAPEX How do you identify it? Related partiespast track record of management Fraud/syphoning o Looking at the financials Interest higher than net profits Extremely low ROE Are they paying taxes? Stewardship of capital

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ExxonMobile (XOM)- has consistently managed to keep ROE high and returns cash when there are no opportunities o Can they generate $1 in PV for $1 in retained earnings o Most companies see declines in ROE because the opportunities disappear Are they returning capital to shareholders o Empire building or vanity? Private jets, cricket teams, stadiums? o Frequent equity dilutions? o Are they raising money every opportunity they get in a bull market? Business fundamentals o Domestic demand driven? o Competition from imports? o Pricing power? o Distribution strength? o Cost competitiveness o Moats o Great brands are overpriced in India Cant have an edge in franchise businesses o Commodity businesses often have moats, but not in a way that developed market investors usually think of them Distribution Entrenched position in a market for years Financial strength Relative opportunity o Price history o Major holders o Insider transactions o Valuation relative to market o Valuation relative to industry and peers Most people focus on the last 3 aspects o 2 most important in India are the first 2 o They look for catalysts Best catalyst is if the intrinsic value is compounding continuously Framework helps them categorize firms as compounding machines Not a lot of value in net-nets in India Case Studies o Videocon Industries Ltd. (Bombay Exchange: VEDI.BO) Well-recognized brand 30% compounded growth Consumer durables Washing machines, dishwashers, and other home appliances Can compete with multinational brands

Ben Claremon: The Inoculated Investor

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Understands Indian consumers mindset Rural Indians have different needs Strong financial position Valuation P/B: .74x P/E: 7.4x Bad corporate governance and stewardship of capital Relative valuation is not attractive Dont get caught up in the brand of Videocon o Just because the business fundamentals look good does not mean that it is a good company

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Gujarat State Fertilizer and Chemicals (GSFC for short; Bombay Exchange: GSFC.NS) Large producer of complex fertilizers Lowest cost producer Advantageous port position Entrenched distribution Debt free Most fertilizer companies have a lot of debt Most of the market cap is in cash State-owned company But has great corporate governance Great steward of capital, fundamentals, financial strength and relative valuation Looks like a commodity company but it is a great business Earnings have tripled from 2007 to 2011 No earnings smoothing Do not care about pleasing the street Cash has grown substantially from $48M to $370M (2007-2011) Why do they have so much cash? o Really have a bazooka in a gun fight Competitors dont have the financial strength to compete o Reinvestment opportunities have been and will be fantastic Indian crop yields need to go up

Ben Claremon: The Inoculated Investor

http://inoculatedinvestor.blogspot.com/ Complex fertilizers is a growth business in India

How much can they make? Think that earnings can double in 3 years o If that happens and the P/E ratio re-rates to an 8x, that would lead the price being 4.4x times higher in 3 years

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Summary o India has a lot of value traps so you have to be careful what you are invest in o Sufficient universe of qualifying stocks Market is infested but their idea pipeline is full Q&A o How do they know earnings will double at GSFC? The markets that the company are in are huge agrarian markets Fertilizer growth is faster in their markets than in the rest of the country Yields really need to go up so their suite of products will do very well Natural growth and cost reductions will lead to a lot of earnings growth o What is it that allows some companies to fly straighter than other? How are they insulated from government and business? The universe of those companies is very few Not even they do it 100% straight Lots of low level corruption Public servants are not paid well o Big companies are even involved in paying charges that are not necessarily legitimate Used the example of Hyundai See this as a cost of doing business o Who is corrupt? The management red flag The company has to do things on the ground to run their businessjust the law of the land o What returns are you expecting going forward? Returns have been about 10% compounded He hopes to be a better investor in 5 years The last 5 years has been very interesting in India Since 2006 the Sensex has outperformed everything else in India o The gap between the largest and most visible companies exploded when hot money flowed into India As a result of this money going into the largest companies, small companies did not outperform the index o How do they measure their alpha? What about Indias returns given inflation and interest rates? What is his outlook for India? Alpha: Manages money with a focus on low downside and high upside opportunities Opportunities that are growing- growing capital, moats and franchises

Ben Claremon: The Inoculated Investor

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Buy companies when they do not see permanent loss of capital, a margin of safety and a potential upside greater than 0% Inflation and interest rates.- Thinks that rates have overshot on the upside Inflation is not driven by rapid growth of money or the general price level Change in relative prices is happening o Food prices are going upIndians are getting wealthy at a phenomenal rate Eating more meat and thus more grains Increase in food prices is structural Supply infrastructure is exploding due to the price increases A supply boom is 3 years away Federal government is using a loose fiscal policy o Due to democratic set up, reforms have been slow Only thing that the bank can do is reign in demand because supply response is slow India will grow 7-8% in the next decade o 13% nominal growth if there is 5-6% inflation o Things are good in India and the outlook is good o Tight money is not a bad thing Prevents capital misallocations Doesnt want the Indian banking system to become insolvent in a few years due to too loose monetary policy Does GSFC export its fertilizer? o Not, it does not export but they do import some goods

Speaker #4 Using Discipline, Patience and Cash to Realize Long-term Value Steve Leonard- Pacifica Capital Investments Founded his fund in 1998 o 2 phases of his life Commercial real estate (CRE) and then public equities CRE o Moved from LA to Denver and back to Southern California to take advantage of distressed real estate properties Moved along as the recovery became self-sufficient Provided substantial returns to investors Started his equity fund in 1998 after making money from his real estate investments o $250M in AUM now

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Its not about beating the market every time o Dont actively trade o Dont short o Dont use leverage Decision making process o Is the industry/business the type they have a chance of knowing deeply? Can/will they know it better than the competition? Is it the best company in the industry? Does it have global growth opportunities? Are there competitive advantages and are the advantages sustainable? o Does the management generate a high return? How do they allocate excess cash? o Is the price attractive? Is there a margin of safety? Is there the possibility of strong returns over time? 3 mantras o Discipline o Patience o Concentration When you find the right company you need to invest heavily Often have large cash balances o Had 50% cash in their accounts in 2007 2 years later when the market was soft, cash was very low Cash levels are building now o Do best when the market is weakest IRR since inception of about 12% Focus on the companies they own o Dont worry about the macro environment Although they do pay attention to unsustainable trends o Prefer to own American-based companies But they want favorable growth opportunities as well Developed world policies are not designed for growth India, China, Brazil exposure o Are careful regarding debt levels Dont like companies with large pension obligations Entitlements and pension funds are a disaster than will occur down the road Stocks/holdings o Fairfax Financial (Toronto Stock Exchange: FFH) Is their largest holding Really likes the management team Thought their experience with CRE helped them understand the P&C insurance business o Berkshire Hathaway (BRK)

Ben Claremon: The Inoculated Investor

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Is their 2nd largest holding Allows them to sleep well at night Starbucks (SBUX) When the company was just becoming popular, they saw long lines for expensive coffee Could see that the returns they were making on each new store were high Saw that the culture could translate well to other countries as well Liked that the company did not have any debt Was 15% of their portfolio for a time Generated high return on new stores and the stock price went up But then they started doing things he was not comfortable with Lower returns on stores Aggressive stock options Bought back their own shares using all their free cash flow (FCF) and debt o At too high a price Sold out by 2006 Still liked the characteristics on the company But, results suffered from misallocation of capital Price dropped a lot during 2008-2009 and they bought back in Now the 3rd largest position o Now more focused on returns o Now paying a dividend Less cash lying around RG Barry (DFX) Sells slippers that are sold at Macys and other retailers Sold a low price item but had a manufacturing platform that was based on high cost labor Outsourced to China to cut costs Are the largest shareholder of this company Goldman Sachs (GS) Have always admired the culture Were concerned about the aggressive culture But crisis came and the competitors went away This is a business they want to own, despite concerns over future returns as a result of regulations American Express (AXP) Great global brand with loyal customers

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Wells Fargo (WFC) WFC came through the crisis better than ever Best management team US Bank (USB) #1 in the west Stacked (Private) Take a store that would akin to the size of a California Pizza Kitchen (CPKI) Menu that specializes in burgers, salads and pizzas Get seated by the hostess and there is an iPad on the table that allows you to customize your order Hostess brings the food when it is done Swipe credit card on iPad when you are done Raised $10M to open 4 stores LA, San Diego and Orange County o All mall locations so far Looking for a non-mall stores as Looking to franchise it around the country FFH+ BRK+ SBUX+ Cash represents about 50% of the portfolio

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Given his real estate background, does he have plans to invest in CMBS? Can they take advantage of future dislocations in that market? Would not invest in companies that manage real estate They can do that themselves Saw how REITs managed their properties and do not want to run their company that way Thought that the financial crisis would create opportunities o But it didnt happen- too much capital and cap rates are too low o Leverage is so prevalent these days You need leverage to make great returns Can he give some examples of companies they invest in with exposure to Brazil? Dont invest in companies in Brazil Most obvious company is Coca Cola (KO) They wouldnt look at KO because you can see a Coke sign everywhere when you travel the world But, AXP is a good example Emerging countries will use more credit cards in the future Do not do much in commodities Does he have opinions on the housing market? Housing marketthey were careful not to be anywhere near it in 2006 and 2007 Liked what Prem Watsa said would happen with housing Liked what he did with CDS Housing will bottom at some point Then there will be the need to build some new houses

Ben Claremon: The Inoculated Investor

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On his street all of his neighbors owned 5 houses That was unsustainable Not an industry that they are going to mess with Like less cyclical and commodity-like opportunities His friend who is a CEO of a homebuilder is not optimisticalthough he was at first more optimistic after the crash There are too many houses in foreclosure They like companies that they are comfortable with. How can they invest in banks given that? How can they trust management teams? Tougher to know what is going on in insurance policies or bank loans You can get to know management When you listen to WFC talk, it is totally different from other banks Knowing that these industries were not going away, they believed that the ones who were not doing foolish things would come out ahead and with a stronger market position Were willing to own Fairfax going into the crisis Bought WFC too early Think the management team is goodwant the team to be their partner What was is about the valuation of SBUX in the 1990s that attracted them? Didnt it have a really high multiple? SBUX sold at a large P/E but there was a lot of demand and room to grow Almost didnt care about the multiple they paid Now they have 15,000 stores and the price really makes a difference Have to think about international growth now o How many stores can there be in China? No brainer in 1998could have paid 10% more or 10% less and it would have not mattered What attracts them about preferreds during the crisis? Have a lot of cash and wanted to park their cash somewhere that generated returns Look at preferreds with variable rate features from banks like GS Not a buyer today because the 20% discount to par has closed Looking for a future opportunities to buy more Dont pay much attention to the macro data, but they have made good calls. What other info or data do they look at? They look at the market prices and valuations of the stocks in the same sector as companies that they own Are they higher or lower than the companies they own? o Try to assess the state of the market with that framework Dont try to guess when the market is going to peak When they were buying SBUX during the lows, how did they size it? The second time they he was thinking of buying SBUX, he remembered that he had said he would never buy until they had a SSS decline

Ben Claremon: The Inoculated Investor

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But he bought when it went below $20. Bought under $20 and bought more around $10 o Knew the business was not going to go away o The accounts owned about 10% SBUX Today they are thinking about trimming their position and would not be a buyer today What about the overlap between their holdings and those of BRK? Are they ever concerned that the overlap makes them too concentrated since they own BRK as well? Are other segments of the markets not represented? When he was buying CRE in Denver, he put all of his net worth in there He knew Denver real estate and knew he couldnt lose Would rather own more of what they are most comfortable with Do not want to spread their risks into things they dont understand When you have good management, they are likely to not make mistakes When they see that a market was going to change, they chose to get outlike in the real estate markets But good managers have the ability to avoid bad markets Even if a company has a great brand, you have to pay attention to management too

Speaker #5 Opportunities in a Complacent World Steve Romick- First Pacific Advisors Now he has all of the time in the world after not having to present in years before He has no idea what the future holds and the present lacks clarity o Looks to find something in the rubble that looks attractive o Looking for cheap stocks is like trying to ski down Aspen in the summer We blew it after the crisis o People are complacent o People claim to look for safety but they are seeking risk o People believe in the government to stop bubbles Romick does not believe that people who didnt see bubbles in the past will be able to stop them this time Hard to have confidence in the US governments numbers o GAO report said that the governments financial statements have material weaknesses If they say there isnt inflation, that is only because they dont eat or drive Government is talking its book Believe there is much more inflation than is being reported o Government is increasingly hiring more people though We have a debt problem o Mandatory spending keeps on increasing relative to GDP o Only 16% of the budget was on the table to cut in the newest Obama budget

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Ben Claremon: The Inoculated Investor

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If we were really serious about cutting expenses, everything would be on the table Social security is morphing from benefit to an entitlement Great deal for people as the collection age has not gone up with life expectancy Not saying that we should get rid of social security o We just shouldnt add to the obligations How does the government keep spending money when consumer cannot? Successively diminishing return on productivity of debt in the US Government is supplementing Treasury demand by borrowing short 40% of debt maturing in the next 2 years Have to convince lenders that we can pay off our debt and that the dollars will be still be worth something then Given that, he doesnt know who is buying our debt CBO has sanguine estimatesCPI inflation projected to average just 2% until 2021 These unrealistic numbers keep politicians complacent Even so, they have interest expense getting so high in the future that it is more than defense spending 5% increase in interest rates would cause interest expense as a percentage of revenues to go from 6% to 21% Government spending spigot continues to be open We are confusing medicine for narcotics We havent taken the pain We need assets to fall in value and prices to clear We are in a recovery is between 2 crises Children will pay for the sins of their fathers The New Monopoly game Eliminated paper moneycreating electronic money One path leads to inflation and that can be seen in commodity prices It is hard to imagine that the increase in monetary base will not end up in inflation down the road FPAs returns will come from what they dont own rather than what they own Anxious about the returns on the US dollar Cash is building in the portfolio Looking for large business with foreign revenue sources Not many opportunities Margins are near all-time highs for US companies Wall Street said that there is always an opportunity Analysts have a terrible track record Using a cyclically adjusted Shiller P/E, the S&P 500 trades as 23x Small caps trade a 20% premium to large caps Fewer analystsless efficiently priced? Easier to understand?

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Grow faster? o This is a myth based on Russell 1000 and 2000 data Large caps stocks have grown faster since 1995 Large caps have more exposure to foreign revenue More likely to be bought? o FPA is basically short M&A o FPA is positioned for inflation Largest sector is energy Have a big position in an insurance broker Subprime whole loans at $.45 on the dollar Private REIT in farmland CVS Caremark (CVS) o Likes the trends in pharmacies o Lots of growth in the old age population o Pharmacy utilization should be up o Medicare market is growing fast 32M people will get coverage in 2014 if it happens Free option could be a 20% bump to the number of prescriptions that CVS already writes o Drugs are 10% of health care spending Patient adherence to prescription regimens saves money o CVS and Walgreens (WAG) are both best positioned 7100+ stores Great footprint and opportunity to gain shares from independents Independent share is down to 20% and has halved in the last decade o Is mail order a real threat? Small affect over timeonly 19% of the market consistently o Lots of drugs coming off of patents Generics come on and it is beneficial to CVS Better marginspeak in 2012 since they make better margins on generics Now self-distribute generics and can capture the margin there o People care about private label versus branded when you can taste the product But people dont care as much when you cant taste them Production problems and JNJ recalls are helping private label sales Higher gross margins but lower price on these products Could increase operating income by 3.5% Tesco has 50% private label products CVS has a lot on runway on this front

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Pharmacy Benefit Management (PBM) business Almost 50% of CVSs sales and 1/3 of the profits PBMs aggregate buying power to get lower prices Induce pharmacists to switch from branded to generic PBM and retail business allows them to offer mail order business as well 15% of Caremarks customers use maintenance choice o Could grow even more Challenges Lower future rebates Legally mandated transparency of drug purchase costs Decided to hedge out some of the PBM risk o Management Skilled operators and capital allocators Retiring CEO has $300M in share exposure CVS has been returning capital to shareholders $3-4B in buybacks per year Added to a dividend the yield jumps a lot o CVS has the opportunity to reduce inventory By 2013 their goal is to be on one platform CVS estimate of $2B in inventory savings by yearend 2013 o Trading at 6.6x 2011 EV/EBITDA Caremark can outperform its peers but they have still hedged out the PBM exposure by shorting other PBM companies o Could they spinoff Caremark? Want to let the company execute on its plans regarding Express Scripts and Medco could be likely buyers if CVS cannot improve the PBMs operations o The stock is not a homerun and is not as cheap as it was when he started writing the presentation Goldlion Holdings Limited (Hong Kong: 0533) o Hong Kong based company that is a wholesale clothing and apparel brand o The company has $400M market cap Float is about 1/3rd of that o It is like the Polo of Hong Kong but is not as nice as Gucci o Maintains quality above all else Do not want cutthroat prices o Market share slide shows 6% market share in the fragmented Chinese apparel market Ranked 6th in a Credit Suisse brand survey in China o Positives Rapid growth

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ROC: 49% High margins Optionality Real estate assets 6.3% dividend yield Has been public since 1992 Has a name brand auditor Has lots of cash and some investment properties Has not de-worsified in recent years o Current market cap is 3.26B Hong Kong Dollars Effective multiple of 2.6x trailing EBIT Upside of 50-100% , supported by the dividend Value investing is the best means to preserve capital and provide adequate growth over the long term o Let thoughtfulness and patience be the driving philosophy Q&A o When it comes to CVS, what is your the appraisal of the current management? Acquisitions are not likely because they have already bought what they could buy New systems are going to help the company drive inventory out Can reduce the number of SKUs and stock outs o You see out of stock positions at CVS and not at WAG Very high marks for management o What do you think of Goldlions corporate governance? China is the wild west There have never been insider dealings with this company Has been public for 20 years The paper trail and history give him comfort o Inflation calculations have changed over time. Also, what does P/E 100 years ago have to do with todays? There are appropriate changes to CPI that should be made overtime Doesnt buy that the high inflation numbers put out by John Williams of ShadowStats are accurate The problem with the Shiller P/E chart is that the data on the might not be great going way back o Isnt it true that Goldlion has been leasing a lot over the last few years? They are not a retailer Even if you adjust ROC for leases, it is still very high 50% is ridiculous o Very large ROC even if you incorporate leases Only own the stock in small funds due to the small float and the inability to accumulate shares If you want to invest in China, there are no guarantees But there is a margin of safety He is trying to swing for a bigger hit; not just looking for a compounder

Ben Claremon: The Inoculated Investor

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If you can buy the asset at a large enough discount, you can make money For Caremark, are there other headwinds? Drug prices are going to be transparent Corporate customers will see the price of drugs o May demand lower prices o He has no idea how to handicap that Caremark had been losing share but the new management team looks set up for success o FPA is hedging out industry risk Thinks they are going to stabilize and gain market share o Winning lower margin but large accounts Insurers will be getting into the business Especially on the specialty pharmacy side In terms of rising interest rates, what would be the catalyst? 2 catalysts If we actually get inflation o Could be hard to see with high unemployment and low capacity utilization o We could also import inflation in commodities o Bernanke mentioned inflation 86 times in his most recent presentation and deflation only twice o One day the inflation will be here without much warning Lenders goes on a buyers strike o Will lenders want to get paid in the same dollars they are lending money in? o Lenders may want a higher rate of interest, even without inflation

Speaker #6 Hockey, Snow and Value: Uncovering Bargains North of the Border Guy Gottfried- Rational Investment Group Guy is 29 years old His fund launched during 200940% returns per annum o Average cash of 27% since inception o Has not realized a loss yet on any investments Americans are concerned with US monetary and fiscal policy o Canadian market offers an opportunity Economy has been strong 11 years of budget surpluses before the recession 4th lowest corporate tax rate in OECD Lowest debt to GDP of G7 Strongest banking system in the world for 3 straight years

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Ben Claremon: The Inoculated Investor

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No crazy mortgage products No bailouts and not one bank even cut its dividend during the crisis This is an inefficient market Very few value investors People are obsessed with Canadian resource stocks o Mining and oil stocks comprise about 33% of all of the listed companies in the TSX o There is an entire economy that is overlooked Small markets

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Morguard Corp (Toronto Stock Exchange: MRC) Market cap: $780M Has great business and is dirt cheap Originally a distributor of auto parts Controlling shareholder turned around the operations, sold them and had cash to invest Real estate stocks had a slump in the 1990s in Canada o Bought stakes in 5 large real estate firms at this time 4 parts of the company Wholly-owned properties Other investments Investment in Mortgage REIT Management and advisory business Extremely cheap 4.8x FCF, net of Morguard REIT investment Implied CAP rate of 13% on its portfolio Valuing its owned portfolio below $0 o Getting paid to own those attractive assets High quality assets Outstanding capital allocation history Several catalysts possible that can unlock shareholder value Why is it so cheap? Most real estate stocks in Canada are REITs and pay dividends Pays out less than 10% of FCF o Likes to retain capital rather than pay it out Illiquid due to CEO large ownership Not big enough for large institutions No sell side coverage

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Does not have a promotional management team Owned portfolio Assortment of apartments, industrial, retail and office properties Trailing NOI of $152M 10.3K apartments Apartments are the most stable, lowest cap rate real estate asset class 97.5% occupied apartments located in Toronto, Canadas biggest city Morguard REIT (Toronto Stock Exchange: MRT-UN) Owns 8.3M square feet of real estate Morguard owns 45% $35M in management fees and dividends each year Dividend is sustainable Zero risk of losing MRT as client Steady stream of growing fees Capital source, exit strategy for fully valued properties Advisory- Property Management Segment Real estate management services to Morguard and other firms Wholly owned subsidiary that provides $20M in NOI One of largest property managers in Canada Smaller NOI numbers than generated by the owned portfolio So the market overlooks this segment Low CAPEX business 30% pretax margins Grew even during the recession Stable cash flows and revenues Want to grow this business and they have been successful Capital allocation and management Have in a great capital allocator in a capital intensive industry is really important Company has a strong balance sheet and discipline o Can create opportunities by buying during the panic Rai Sahi is an owner operator who owns 50% of the company Has aggressively bought back the stock Have not issued an option in a decade Conservative balance sheet with a 50-55% loan to value (LVT) ratio on the owned portfolio This ratios is very low given that a lot of the properties are apartments, which are highly leverageable Conservative account FFO includes PP&E deprecation on non-building items o Peers inflate FFO by adding back all depreciation

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Very conservative company Has bought back 38% of its diluted shares since 1996 The company is buying large blocks of stock Has continued buying throughout its history o 2006-201: 11.8% of shares bought back, all at a great price This is what we look like as value investors Acquisitions Sahi is a corporate raider and has performed takeovers at fire sale prices Has done 5 major takeover recently Goldlist Properties o 17 multi-unit apartment buildings o $335M price, including assumed debt o Busted IPO o Morguard bought 40% of the IPO at $9 Was able to cut the offer price of the IPO by 10% and reduced the dividend the owner pulled out of the company Revenue Properties o Gained control of the company at an average cost of $1.48 o Privatized RPC in 2008 by buying the remaining 27% at $12 per share Advisor hired to provide a fairness opinion at $420M o Implied cap rate of 35% MIL o Bought from Mutual Life Assurance o Generates $20M in per tax income now and was bought by $33M Valuation 7.1x FCF (14% FCF yield) High quality business If you back out MRT, the core business free cash flow multiple is 4.8X Owns MRT for strategic reasons; not for operating reasons o Instructive to see how the market is valuing the rest of the company, ex-MRT Cap rate calculation NOI/Market Cap implies a cap rate of 12.8% o For the owned portfolio alone o These are Toronto apartment buildings that usually sell at a 5.5% cap rate Even commercial and industrial properties in Canadian command a 6-7.5% cap rate If you subtract out the value of the other segments, the owned portfolio is valued at less than $0actually negative $79M o Guy is being paid to own 10.3K residential units and 6.9M square feet in commercial space that are generating $150M in NOI Catalysts

Ben Claremon: The Inoculated Investor

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Create a new REIT to hold investment propertiescould sell properties to a REIT at current market prices Cap rates on apartments are in the 5.5% to 6.5% range o Implied cap rate on the portfolio is currently about 13% New stream of income o Would become property manager and advisor to those buildings Could sell properties to MRT Morguard investors are clamoring for the company to expand o Analysts want the firm to grow its portfolio US expansion Valuations are rich so there is little to do in Canada o Undervalued acquisitions are likely on the horizon in the US Could profit from compression of the difference between price and intrinsic value Also get growth in intrinsic value

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Any concern that the supply of apartments is going to increase? There are a lot of cranes there, but there are 10x as many in Israel Residential construction in Toronto is on the condo side o There are few apartments o Condos are hotter because more can be squeezed out Cap rates are extremely rich in general o Company knows this and hinted that it might try to monetize some the assets at those rates Takes a long time to do so though Are the controlling partners incentives aligned with shareholders? He doesnt think Sahi plans to buy out the companythe stock fell to $13 in the crisis and he could have bought it out Now it is at $60 Does not that that Sahi wants the price to stay low so that he can buy it o He could have bought it over the last 20 years are much lower prices Thinks he wants to grow the business instead o But you never know 100% Even a margin of safety can protect you from something like that The market has a mind of its ownthe price can go up no matter what the CEO wants How do you differentiate between skill and being in the right place at the right time (referring so Sahis ability to buy low and sell high)? Does the skill move abroadto the US? Company already has been active in the US Great management can create value in any environment Most companies operate with the herd o Make acquisitions when times are good and do not buy during panics

Ben Claremon: The Inoculated Investor

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Morguard has been able to maintain its results in good times and bad o Can operate better in down markets Cheap price with a management that knows how to deploy capital o Question from Peter Brotchie of Union Trust Mortgage Corporation: If they do not spin the properties off, is there a lot of maintenance CAPEX in the pipeline, based on the age of the properties? No, they have a normal CAPEX program and Guy does not expect a large ramp in CAPEX in the coming years o How accessible has the management team? Can they be influenced? Not amenable to activism Management has been buying back stock at the right times and making deals at the right price Has already been selling properties to MRT without pressure Slowly embarking on this strategy When you are aligned with good owner-operators, you dont need to be an activist o Alex Rubalcava of Rubalcava Capital Management: How did he value the asset management business? Has the CEO sold or bought shares? There is no exact science to valuing a business Pretax income multiplied by 12x o Did not look that closely at comps because the company is so cheap CEO has bought shares in 2008 and 2009 in the $30 range Has never sold a share Through the company buying back shares and buying shares on his own, he has taken his stake from 20% to 50% o How old is the CEO and does he have kids in the business? Daughter works for the company in the US He is in his mid-60s No kid who is an executive or who is highly paid No evidence of nepotism o What is the variant perception here? Why is the stock being ignored? He is not aware of what he is missing Market is looking at: Illiquidity- can buy a few millions of dollars in it Business is a bit obscure o Owned portfolio dwarfs the numbers of those of the property management business Shares a conference call with the REIT95% of questions go to the REIT o Very low profile company Does not need to be promotional Pays a low dividend Speaker # 7 Global Value Investing: Guidelines Opportunities, Pitfalls and Actionable Ideas Ori Eyal- Emerging Value Capital Management

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Has been running this firm since 2008 Learning experience o Had the opportunity when he was working at Deutsche Bank to participate in a Russian power plant IPO The ultimate decision was based on his meeting with the CEO The CEO said he was issuing equity and said he was doing so because equity was free and debt had to be paid back o He didnt do the deal and he was lucky because it performed very poorly Lack of concern for the rights of minority shareholders is prevalent outside of the US o In the US companies at least pretend to care o Do not even pretend to care in some other countries Strategy is to take the principles of value investing and apply them all over the world o Guidelines You have to do detailed research on the company and the country you are investing in Some countries are more attractive than others and you cant just invest in every country Dont chase GDP growth No correlation between GDP growth and stock market returns Why not? o Expected GDP is priced into the stocks you are buying o Benefits of growth may accrue to new firms not in the basket of stocks you purchased o Benefits of the return could get stolen, inflated away or expropriated Why is his cash in US dollars? o Emergency market and commodity currencies are likely to appreciate versus the dollar over time Not going to be a straight line though o When they can invest in country like these, they can get an additional tailwind o But, they need cash when there is a crisis Flight to safety occurs as people move from risky assets to US dollars Dollars are likely to be up in times of crisis, exactly when they need their cash One billion new capitalists in emerging markets o People are moving to the cities and they embrace capitalism more o They become an emerging middle class o Look for businesses that have good management, trade at a reasonable price and that are selling more to emerging markets

Ben Claremon: The Inoculated Investor

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Promoter De Informaciones SA (NYSE:PRIS) PRISA is a levered media company Share class arbitrage opportunity Merged with a US SPAC (Liberty Acquisition) at the end of last year Created new shares o PRISA A and PRISA B B shares are a lot better Yet, they trade at almost the same price Strategy is to short the A shares and go long the B shares B shares eventually become A shares Mandatorily convert in 3 years o Shareholders can convert at any point A shares cannot trade at a higher price than the B shares because people would just convert The spread cannot turn negative B Shares pay a mandatory dividend while the A shares do not 1.6 euros per share is the NPV of that stream o This is not the whole story though B Shares offer downside protection As long as A shares trade above 8 euros, you get a 1 to 1 conversion But, if they trade below 8 euros, you get extra A shares o Do not lose money until the A shares fall below 6 euros o At very least he thinks the B shares are worth 2.6 euros more than the A shares Price could be about 4.2 euros higher than the A shares o This is a lot considering that the A shares trade at 8 euros About 50% upside and little downside o Catalysts Dividends are going to start to be paid Hasnt been paid yetwe dont know when it is going to be paid o Likely between now and September Bad news from PRISA group or macro bad news from Spain Would highlight the value of the downside protection o Larger funds have not been able to borrow the A shares

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If you cant borrow them (exchange A shares for B shares), just go long the B shares This is a good opportunity even if you can short the A shares Research the country: Israel o Often finds very interesting opportunities there o Israel has a well-managed economy and barely felt the economic crisis Has the most NASDAQ listed companies and start-up companies outside of the US o Shareholder protection and rule of law are present o Favorable business environment o Highest rates of entrepreneurship among women o Higher life expectancy than that of the UK, Germany and US o Discovered a huge offshore natural gas field Will wean Israel off of foreign energy sources o Most well regarded research universities in the world G. Willi Food International (NASDAQ: WILC) o NASDAQ listed company o One of Israels largest food importers Search the world for successful food products and work with the maker to create kosher products Specializes in Kosher foods Appeals to Muslims and other non-Jews o Viewed as healthier due to less animal fat 80% of sales are into Israel o 20% rest of the world- mostly US Expanding rapidly internationally Growing 15% each year o Divisions Gold Foods Shamir Salads 51% interest o Financials $100M in sales 9.5% operating margin in 2010 $8M in net income $51M in cash and essentially no debt

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Ben Claremon: The Inoculated Investor

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Market cap is $100M EV equals $50M Should earn $10M in 2011 Net of cash, the company is trading at 5x this years earnings Looking to acquire a distributor in the US They are not going to overpay Want to get their food on the shelves of US stores If they cant acquire one, they will pay a dividend Are in talks with private equity firms If it gets sold, he only get a onetime bump o Hopes they dont get bought out This is a compounding machine Well managed, recession resistant business Literally trade on the NASDAQnot an ADR Regarding PRISA, would you consider writing a covered call on the As if you cant borrow the A shares? Does not think they have listed options Would love to create a synthetic short or buy a put Does he have any thoughts on the turmoil in the Middle East? How does it affect this company? Doesnt affect Willis Food in any way In fact it could benefit because other foods get rationed in the event of a war The main issue is that Iran is building a nuclear bomb and a mechanism to deliver it Egypt and Libya situations are not as important as what is going on in Iran What exactly does the company hope to achieve with a US distributor? US market for kosher foods is well developed already. Willi Foods already has products on shelves in US Believes that there is a shortage of strong kosher brands Third party distributors eat up profit and control of shelf space Company thinks it could distribute much better if it owned its own distributor Has not disclosed any names of who the company is interested in buying Can you elaborate on the 2.6 euros and 4.2 euros upside on PRISA group? Equation: Dividend stream+ Downside Protection (3 year at-the-money put option)= 2.8 euros Extra value comes at the expense of the A shares o 2 A shares for every B shares o If the B shares gain 2.8 euros then the A shares lose 1.4 euros o 1.4 euros + 2.8 euros= 4.2 euros How did this opportunity come about?

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Merged with Liberty Acquisition and the merger was complex Brokers cant even find the B shares Market is just not recognizing what is going on o The company will pay a dividend of at close to an 8% yield How is Willi Foods positioned to handle rising food costs? Rising food costs are a negative for every food producer in the world Company is fully aware of it and have hedged in the past Got it wrong and stopped hedging They do try to match currencies though May depress margins in the short run In the long run the costs have to be passed on Question from Michael Kao of Akanthos Capital: Could the company increase the float or add A shares? It is possible to issue more A shares May also be able to issue more B shares The SPAC was mostly cash and the result of the merger was a de-levering So, the company is not that levered and has little reason to issue equity

Speaker # 8: Lessons from 15 years in Micro-Cap Land David Nierenberg- D3 Funds

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D3 Funds o Concentrated portfolio o Large block stakes o Look for undervalued growth micro caps o Private equity- like model o Take 10% stakes o Busted growth companies o Not activismconstructive engagement Want to be partners in unlocking value o Almost all of the money in D3 comes from individuals and families Have a multiyear lock up but investors stick around after it expires o Avoid leverage o Most of his own net worth is in the funds o During the 12 years beginning in 1999, the firm has compounded after fees at 11.4% The macro backdrop matters o Painful lessons learned in the recent crisis o Sailed through the 2000-2002 correction Actually gained over the 3 year period o The 2008-09 period was payback time Had to rethink how to preserve capital Cheap stocks got cheaper

Ben Claremon: The Inoculated Investor

http://inoculatedinvestor.blogspot.com/

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40% of companies in the portfolio were trading at less than net cash/share Smallest companies were illiquid and the stocks went down more o Average market cap: $400M Needed to figure out how to profit from the pain o Report by Ed Easterling of Crestmont Research Market likely remains in a bear market Multiples may trough at 8-10x P/E multiple Increasing inflation and slowing growth are likely to compress P/E multiples Market is likely to remain volatile Slow growth Reinhardt and Rogoffs rule of 90% debt to GDP o When countries go through that threshold growth starts to slow Aging population in the US will hamper growth Need to have a point of view and focus on preservation of capital Even if they are wrong, their strategy will not hurt them o Strategic changes Will now sell at fair market valuation as opposed to target valuation Unless they have proprietary insight that the company could be worth far more than it is Cash is not trash Now focusing on what appropriate purchase levels are for future purchases Defensive valuations Started returning to public board service Shift portfolio to higher growth businesses and higher margin geographies Emerging markets Natural resources Mobile computing Seek companies that pay regular and special cash dividends 45% of returns came from dividends in the last century Shorting again Invest in businesses that benefit from inflation Sample portfolio companies: AACC, BABY, ESIO, HDV, HPY, MBAC, MDTH, MOVE, MPLUS, PSA Growth investing o Multiplus o MBAC Activism o ESIO o RSYS If you own more than 10%, make a difference As tech growth slows, do something smart with the cash Invited to be on the board in the last year

Ben Claremon: The Inoculated Investor -

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Multiplus (Sao Paolo Exchange: MPLU3) o Loyalty program operator One of only 2 publically traded ones in the world Busted IPO Spun out of leading Brazilian airlineTam Believe that the company rushed to market because it went to market before it had a CEO or CFO Revenues generated from the sale of points, breakage and float Breakage- points expire unused Float- 18-24 months of float before the points are typically redeemed Growth in credit card usage in Brazil: 22% CAGR Personal consumption expenditures: 11% CAGR Passenger traffic: 9% CAGR Wealth distribution now includes a middle class World cup and Olympics are coming to Brazil No inventory and negative working capital Float at around a 12% rate 95% of earnings are to be paid as dividends Yield will be 17% in 2011 o Combined special and regular dividends 6% estimate yield in 2012 o MBAC Fertilizer Corp (Toronto Stock Exchange: MBC) Company is currently building a phosphate mine in Brazil Low CAPEX, project is fully funded and has received of all of the permits for construction Should be cash flow positive in Q4 2012 or early 2013 Twain: A mine is a hole in a ground with a liar in front of it CEO and CFO were involved with Yamana Gold (NYSE: AUY) Another D3 investment company

Ben Claremon: The Inoculated Investor

http://inoculatedinvestor.blogspot.com/

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Know phosphate mining very well Economist article on the miracle of the Ceraddo area of Brazil highlighted the vast resources Brazil has by far the most potentially arable land of any country Brazil leads the world in a number of different commodities o But it needs fertilizerespecially in the Ceraddo region Land needs 7x the amount or fertilizer needed in the US Landed cost advantage Cost advantage over imports and domestic competitors o Exploration and M&A Expansion into Itafos resources There are a number of M&A opportunities o 3 different valuation models NAV Valuation per ton of the resource EBITDA multiples No matter how they look at it they see short term upside potential of 35% but it could be as much as a 4x Generic Observations about boards o Too much time spent on the wrong things and not on the critical things Box checking compliance idiocy Sarbanes Oxley Fighting the last war Management dog and pony shows Solution is part of the problem o Interpersonal dynamics suppress questions, doubt and consent Group think happens too frequently o Compensation is excessively complex and ineffective Rigged to insiders o Balance sheet assets are seen as corporate assets and not shareholders assets o Not enough skin in the game Too many options and RSUs Not buying stocks with cash What does he bring on board? o Focus o Sense of urgency of an owner o Asking questions with the willingness of child o Looks at cash requests and capital allocations based on opportunity cost Electro Scientific Industries (ESIO) o Leading supplier of laser based manufacturing o Financial fortress

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Ben Claremon: The Inoculated Investor

http://inoculatedinvestor.blogspot.com/

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Land at book and Cash came to $7.20/share of the share price No debt Positive cash flow from operations every year What is he doing? Succession planning Company has an old CEO and Chairman Capital allocation decisions Emphasis on the imperative for cost reduction Manufacturing and cost of quality Linkage between compensation and performance Focusing the firm on performance

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RadiSys (RSYS) o Leading provider of hardware and software embedded computing systems for next generation IP networks that enable telecom, medical and military/aerospace customers o A game changing acquisition and management change happened today Acquired Continuous Computing for $105M Current CEO will become Vice Chairman of combined board Acquired CEO will be combined CEO Opportunity to reduce customer concentration and to improve margins as the acquired company has much higher margins o Priorities Succession planning Rational, analytical and outward looking process for capital allocation Cost reduction Focus on operations Q&A o What is the preferred way of aligning management and shareholder interests? Good idea to ask people what incentives light up the scoreboard for them No one size fits all All companies and people are different Start with the people on the compensation committee to have one-on-one discussions about how to motivate people Agnostic about the mix But it has to be linked to performance o Growth in EPS and total shareholder return

Ben Claremon: The Inoculated Investor

http://inoculatedinvestor.blogspot.com/

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Not averse to working with consultants to unscramble the mess Compensation is a non-delegable duty Too often people use consultants and lawyers and consultants What can be done to reverse the trend of management ripping off shareholders? Proxy advisory business has mushroomed into a powerful movement May be faith-based sometimes These firms are so powerful now Being on the board is challenging because it requires subjective decisions Cant always find a great formula for compensation There should be more situations in which large block shareholders are asked to become a part of the board They should be able to rock the boat just enough to create value Board members should be required to have real skin in the game Not RSUs and not options Question from Aaron Edelheit of SabreValue- Said he was hurt in 2008 as well. Is there not every 20 or 30 years an event that causes small cap value to go down a lot? Does what happened in 2008 helps perpetuate the outperformance because the competitors are gone? 100 year floods hit the financial markets hit a lot Increasing use of complexity, leverage and electronic trading almost guarantee that they will happen again This is why they went through the changes they discussed in the slides Apparently there is tons of corruption in Brazil and lots of payoffs. How does he feel about that? US-based companies have more trouble getting contracts MBAC is Headquartered in Toronto but all of the members of the management team live in Brazil Brazil is a very tough country to do business in They feel really great about the management team Need to bet on the right people Alex Rubalcava of Rubalcava Capital: The technology transition at RSYS has taken a long time. Why is that? Regarding MBAC, should they become a producing company or sell out before production? Should not say much about RSYSs situation aside from the fact that the technology transition has taken longer than they had hoped In the case of MBAC, they prefer that company becomes a producer But everything has a price and would love to be bought out at a huge price If it were more early stage they might want them to prove out and then sell out Management team is populated by operators This things is up and ready to go

Speaker #9

Ben Claremon: The Inoculated Investor

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An Update on St Joe and out Analysis of Howard Hughes Corporation Glenn Tongue and Whitney Tilson- T2 Partners Largest short: St Joe Company (JOE) o Bruce Berkowitz of Fairholme Capital responded to David Einhorns (of Greenlight Capital) short presentation with a presentation that showed a lot of beautiful pictures of Windmark, a St Joe development in Florida o Many of the lots in Windmark are in foreclosure But St. Joe sold all of those off so they have no exposure to what is known as Phase 1 o The bubble burst before they were able to sell all of the lots off Only 42 lots sold and only a few homes were built No beachfront properties in Phase 2 lots Phase 1 houses are beachfront o Photos in the Fairholme presentation appear to be staged No sales are being made Foreclosed lots from Phase 1 are competing with sales of St Joes lots Shows pictures of stores and restaurants that had actually been shut down even before the presentation was released Many of the pictures have no people in them The people doing construction may be doing it because they have contractual obligations o Whats Windmark worth? It is being carried on the balance sheet at $160.9M But Greenlight valued it at only $17.8M o But overestimated how much lots were actually selling for May only be worth $12.25M They dont think St Joe is a $0 because it has net cash on its B/S Just overvalued by a multiple of 2x-3x Company has an incentive not to write down assets because the market will catch on that the stock is completely overvalued Delayed their 10-K release but still took no impairments o Recoverability testif undiscounted future cash flows added up are worth as much as the carrying value, then no impairment is not necessary

Ben Claremon: The Inoculated Investor o

http://inoculatedinvestor.blogspot.com/

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Management assumed 7% price appreciation in the properties for 17 years! It is claiming that the selling period for the residential properties is 17 years and is 35 years for the commercial real estate There is no precedent for this St Joe has a lot of Timberland but that cannot make up much more than $7-$8 of the stock price Berkowitz has said that the current state is depressed but the market will pick up and people will buy and develop these lots This is the Redneck Riviera Population is poor , high unemployment, poorly developed Who is going to be buying these properties? o There is 8 years of condo inventory in nicer areas of Florida These lots may never be built

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Long position: Howard Hughes Company (HHC) o HHC owns, manages and develops commercial, residential, and mixed use real estate o Has 3 types of properties Master planned communities Operating properties Development opportunities o Spun out of General Growth Properties (GGP) o REIT structure is not ideal for owning development assets, master planned communities and assets whose cash flows do not reflect future potential They would have stayed in GGP if the assets had not been very attractive o They believe that HHC has undervalued, high quality real estate assets in premier locations Basics o Price: $65.21 o Warrants: 10.7M Spinoff characteristics o Spun out of a reorganization o No research coverage yet o Many GGP investors only own REITs so they sold the shares post spinoff o The only assets that the management team cares about are in HHC o Insiders are incentivized Very difficult to value the company and have no idea what it is worth o Seems to be limited downside and they think it is worth way more than it is trading at

Ben Claremon: The Inoculated Investor o o o

http://inoculatedinvestor.blogspot.com/

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Insiders own 50% of stock, including warrants New CEO purchased $1