Thursday, March 31, 2011

Sokol's Great Lubrizol Misadventure

While there is much to say about Sokol's lapse of judgment (the kindest thing that can be said about his purchase of ~100k shares of Lubrizol and advancing the company forward as a potential investment prospect), I offer these four observations:

Observation 1: BH has a code of conduct of ethics that clearly outlines expectations of employees. You can read that code here.

Obervation 2: Sokol's activities appear to violate this code.  Specifically, the section on Corporate Opportunities, noted below (highlights are mine), seems to be at the forefront of his abrading against this code:

2.    Corporate Opportunities.

Covered Parties are prohibited from taking for themselves opportunities that are discovered through the use of corporate property, information or position without the consent of the Board of Directors of the Company.  No Covered Party may use corporate property, information or position for improper personal gain and no employee may compete with the Company directly or indirectly.  Covered Parties owe a duty to the Company to advance its legitimate interests whenever possible.

In his position, Sokol would have been invited into confidential discussions and provided confidential information that an ordinary investor would not be privvy to. His making a personal investment on information that he obtained while performing his duties appears to be a clear violation of the above policy (to my eye).  There is no defense to that code violation.

In the event that the clause above was too obscure, you would think that the following clause might give one engaged in such a transaction some pause:

Given the variety and complexity of ethical questions that may arise in the Company’s course of business, this Code of Business Conduct and Ethics serves only as a rough guide. Confronted with ethically ambiguous situations, the Covered Parties should remember the Company’s commitment to the highest ethical standards and seek advice from supervisors, managers or other appropriate personnel to ensure that all actions they take on behalf of the Company honor this commitment. When in doubt, remember Warren Buffett’s rule of thumb:

“…I want employees to ask themselves whether they are willing to have any contemplated act appear the next day on the front page of their local paper – to be read by their spouses, children and friends
– with the reporting done by an informed and critical reporter.”

And finally, under "Violations of Standards" we have this

2.    Accountability for Violations.

If the Company’s Audit Committee or its designee determines that this Code has been violated, either directly, by failure to report a violation, or by withholding information related to a violation, the offending Covered Party may be disciplined for non-compliance with penalties up to and including removal from office or dismissal. 

So egregious the transgression of this code, so indefensible his actions, there really was no choice but to resign for there would be no reasonable choice but to fire him.

Observation 3:  Perhaps the code should be a little more specific for those that are unable to comprehend their special access to information as an invitee for the purposes of BH making acquisition or the simplicity and power of  Buffet's rule of thumb and state: UNDER NO CIRCUMSTANCE IS A COVERED PARTY TO HAVE AN UNDISCLOSED FINANCIAL INTEREST IN A COMPANY THAT IS RECOMMENDED FOR CONSIDERATION FOR INVESTMENT/ACQUISITION. ALL SUCH FINANCIAL INTERESTS SHOULD BE DISCLOSED TO THE AUDIT COMMITTEE AND LEGAL COUNSEL AND THE COVERED PARTY WILL ACT IN ACCORD WITH RECOMMENDATIONS BY EITHER OF THOSE TWO BODIES. Or something like that...  At the very least, BH needs an internal control that BEFORE an investment is made, there is an internal conflict of interest check to ensure that such matters are discovered prior to their becoming issues and that executives with recommendation and/or approval responsibilities submits a periodic disclosure of his or her holdings.

 Observation 4:  You hear much about these so-called smart guys.  Well, you and I could easily read the Code of Conduct and know that buying Lubrizol on information obtained as an invitee for purposes of a transaction consideration and subsequently recommending Lubrizol without disclosing that one had a financial stake in the transaction, smells worse than three day old fish. Smart money has not looked too smart in the last decade, and not so smart in this new decade either.  Another good example for not selling yourself short!

Wednesday, March 30, 2011

Squeezing into True Religion Jeans

Today's listing boat concerns the ~22% short interest in TRGL.  Let's take a look at the chart (click to make larger):

According to FINVIZ, the short float in this stock is just north of 23%.  They have already reported earnings which were not the catalyst that the shorts were hoping for.  The company's financial profile looks terrific:  they have great earnings, cash flow and no debt.

Not sure what the bears are looking for, but they might be at a campfire expecting to roast marshmallows and might go home with with singed fur.  I took a long position earlier today anticipating a squeeze with an entry of $23.16.  Let's look at a 30 minute chart pulled today:

A breach of $23.40 may cause some bovine ursine! angst from being wrong-footed on this short trade.

Sunday, March 06, 2011

Post Cards from the Edge: Existentialist Market Warrior

Prologue:  This post puts together a few things that I have read (and in some cases written about) separately.  I wanted to put them together in a post).

Justin Mamis wrote that we all find our particular way of becoming a victim in the market. That is true in life as well but without the stark price tag. Think of one of your great friends or colleagues who is wonderfully interesting and engaging—who everyday has something new and exciting to share with you. Sometimes your friend buys you lunch or drinks; other times your friend freeloads on your nickel. At other times, your friend brings you an unexpected gift; but jilts you on your birthday.

Such a friend! Except, sometimes your friend arrives late or sometimes not at all. And sometimes your friend meets you and sucker punches you. You withstand these breaches because your friend is so exciting to be with and the propensity for delight and surprise makes you willing to withstand the indignities.You don’t need friends like that; and if you expect the market to be a friend to you, that is just the type of friend it will be.

The market was not created to keep your money safe in a happily hereinafter way. To be sure, there is an entire industry crafted around that very notion.  However the laws of money dynamics do not work that way.  While a rising tide lifts all boats, when the wind shifts, or worse, the tide goes out, your portfolio might feel like a dinghy traversing the Cape Horn passageway.

Approaching the market with the right mental model will go a long way toward keeping your feet planted on your road to discover your inner market genius and keeping your eyes and ears tuned to speeding vehicles that might mow you down. That model conjures up visions of raccoons and skunks in search of pheromones and all they found was the tough, acrid love of Goodyear or Michelin. It is a vision worth keeping in your head.

We could take our mental model many rungs higher, and craft a great existentialist view of market life and our place in it. Here are a few bulleted points from the website, All About Philosophy about Existentialism:
• Human free will
• Human nature is chosen through life choices
• A person is best when struggling against their individual nature, fighting for life
• Decisions are not without stress and consequences
• There are things that are not rational
• Personal responsibility and discipline is crucial
Let’s consider the third bullet: A person is best when struggling against their individual nature, fighting for life. That, my friend, is the essence of what I want to convey with great gravitas and import. We must first understand and conquer our own demons before moving to outward.That leaves us with a more concrete model of a great warrior. Gerald Loeb wrote the investment classic, The Battle for Investment Survival—one of those timeless books that warrant your time and attention: and such a battle it is!

Your approach to the market is that of a warrior—and for a warrior to survive, s/he must be prepared physically and mentally. Miyamoto Musashi, pictured to the left (click on image to learn more about Musashi from Wikipedia), was a Japanese swordsman in addition to a long list of other accomplishments: expert swordsman, author, artist, calligrapher, sculptor, teacher and finally, strategist.

Go Rin No Sho, or The Book of Five Rings, is the work for which he is best known. I have a cork board by my desk. To it I have pinned the following nine underpinnings of Musashi’s philosophy cum success. I look at these each day, though, like exercise and other needful things, I must profess that my practice of them is left wanting--and that does translate into lack of desired results.

  • Think of what is right and true. 
  • Practice and cultivate the science. 
  • Become acquainted with the arts. 
  • Know the principles of the crafts.
  • Understand the harm and benefit in everything. 
  • Learn to see everything accurately.
  • Become aware of what is not obvious. 
  • Be careful even in small matters. 
  • Do not do anything useless.
The Book of Five Rings
Miyamoto Musashi

Translated by Thomas Cleary, 1993; 1997 Barnes & Noble Books

It is a slim little book in a number of incarnations, and I highly recommend it.

The importance of these items in everyday life is self explanatory. A rich and informed life is a mosaic of understanding arts, the crafts and science and more importantly developing skill. Doing so provides balance. To do battle you must have skill and confidence. To be a strategist you must have the proper perspective (seeing things accurately—and becoming aware of what is not obvious). Being careful even in small matters and resisting engaging in useless tasks are the foundation of discipline and efficacious undertakings.

To succeed as a warrior you must meld strategy with mental and physical preparedness. You might find this metaphor preposterous. There is an aphorism, “there is nothing new under the sun”. That saying is true in market life and non-market life. Using a warrior metaphor will help you remember that there are many skills that you need to bring to the battleground called market life. These are the same skills that you need for non-market life. Failing to see the parallel between market and non-market life means that you will bring to the market the same potential for victimhood as you may in your non-market life.

Two other passages from this wonderful book are instructive:

Two essential elements of ancient martial and strategic traditions:

  • The first of these basic principles is keeping inwardly calm and clear even in the midst of violent chaos;
  • The second is not forgetting about the possibility of disorder in times order.
Harmony and disharmony in rhythm occur in every walk of life. It is imperative to distinguish carefully between the rhythms of flourishing and the rhythms of decline in every single thing.

 The last item that I would leave you with is something that I have found very useful when I find myself in a rhythm that is akin to running the market gauntlet. This passage is from Yagyu Munenori.  I often cite this passage when I see my on-line colleagues frustrated by market events or their own actions:

When fighting with enemies, if you get to feeling snarled up and are making no progress, you toss your mood away and think in your heart that you are starting everything anew. As you get the rhythm, you discern how to win. This is "becoming new."

The Book of Family Traditions on the Art of War
Yagyu Munenori
Translated by Thomas Cleary, 1993; 1997 Barnes & Noble Books

I hope this little post helps provide you with a model for crafting a mental model that works for you.