IF you believe mainstream media, Sol Trujillo is the most unpopular man in Australia and Telstra is the most unpopular company [full disclosure: I am the beneficiary of a Telstra shareholding]. I don’t think I’ve ever forgiven Telstra for its monopolistic behaviour back when it was Telecom and I didn’t have a choice of carriers.

When Telstra was booted out of the National Broadband Network tender process for submitting a non-compliant tender, pundits were eagerly predicting Telstra’s demise or other “dark and awful consequences”. Telstra had submitted a tender that suited their business model, aspirations and view of the future. They signaled the only way they’d consider lining up for the $4.7 Billion AUD the government was offering. I congratulate them for having the balls to stick to their guns.

Today the Federal Government announced none of the remaining tenders were “value for money” and instead would form a new company to build a fibre to the home network to 90% of Australians. Much ink will be spilled in the future on this deviation from the tender outcomes requested, namely 98% fibre to the node.

Here’s my quick take home analysis:

1. Submitting a tender of this size and complexity is a very expensive exercise.
2. No tenderer was awarded a contract despite complying with the guidelines.
3. Telstra spent a little money outlining the conditions they would accept.
4. Who looks smart now?

This seems like a brilliant use of game theory by Telstra. Sol and his team have been called arrogant and out-of-touch, I think they protected their shareholders interests well.

Just because a deal is on the table doesn’t mean it’s always wisest to take it.

Porsche There is No Substitute!

The background:

• In September 2005 Porsche bought 20% of its larger but less profitable German rival Volkswagen.
• In March 2007 Porsche bought another 19.9% (to 39.9%) and launched a takeover bid.
• In October 2007 the law preventing the takeover of Volkswagen was scrapped.
• On 20 October 2008 Volkswagen’s share price fell 23% on short selling by global hedge funds who bet the price of Volkswagen was too high and Porsche could not economically acquire more stock.
• On 26 October 2008 Porsche announced it controlled Volkswagen through 42.6% direct holding and call options exercised over the another 32.4% (=75% !). As most of the balance is owned by the state or index funds, that left only about 5% on market to cover the shorts the hedge funds sold.
• On Tuesday 28 October Volkwagen became the biggest company in the world momentarily when the hedge funds had to buy “at any cost” driving the price to €1,005 (from below €200 a year ago)
• Late Tuesday Porsche agreed to release an addition 5% of stock to the market to maintain liquidity
• The hedge funds then complained to the regulators that Porsche built a stake without their knowledge.

The sheer arrogance of Hedge Funds crying foul over this should offend me, but it’s their modus operandi to bully, lie and sneak around to make a buck. They have been accused for years of selling naked shorts. Normally you or I must first borrow the stock we plan to sell short before we are allowed to sell it. We’d pay a fee to the lender of the shares. If you sell without borrowing the shares first you are naked. It’s riskier but often more profitable if you can buy the stock on-market after sentiment has turned against a company. Nothing turns sentiment against a company like a huge overhang of stock on the offer line of the quote screen.

So if you can sell a naked short because you think German Automobile Manufacturers are in for a tough time in this economy, it is in your interests to get that story out after you’ve sold. Short sellers told everyone they could that Lehman Brothers was in trouble after they’d sold.

Now naked short sellers represent a counter-party risk of failure to deliver the stock at Trade plus 3 days (T+3).

Take a look at the failure to deliver reports produced by various exchanges. Some companies are consistently targeted by naked short sellers and the sellers regularly fail to deliver stock without serious penalty.

Finally someone with the clout to take on Hedge Funds called their bluff and made a bundle. So the hedge funds cried to the regulators.

These are the same hedge funds ignoring T+3 delivery dates on equities. Imagine what happens if you or I fail to deliver.

What makes me assert these were naked shorts? If the Volkswagen volume was mainly covered shorts it is unlikely the hedge funds would all need to return their borrowed shares on Tuesday 28 October. The borrowing would all be on a normal distribution. So there would not be a spike on 28 October intraday to €1,005. The price would be elevated but it would shake sellers out to the market.

Similarly any index funds or active investor should have been reweighing their portfolio, so the impact should be relatively minor compared to the recent overall market malaise.

Sadly there is a cost to the punters of this lesson. Most hedge funds do not take retail investments from small investors. Instead our retirement and superannuation funds place some of our pooled funds into them. So a hedge fund’s loss does come home to its small investors.

It still felt good to see hedge funds take a hit.

As part of my Corporate Finance class, Warren Buffet and Berkshire Hathaway came up. Nobody had checked its stock price recently so I volunteered to do it. In doing so I came across the following op-ed piece Warren Buffet wrote in the New York Times.

For the record BERKSHIRE HATH HLD A (NYSE: BRK-A) closed on 23 October 2008 at $115,100.00 USD per share with a 52 week range of $105,300.00 – $151,650.00 USD. The company does not pay dividends.

Anyway on to the Sage of Omaha’s words

Buy American. I Am.

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why?

A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month (or a year) from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.

Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.

Update 10:50am ET 24 October 2008 Of course just after I post this, the Dow takes a bath as Wall Street panics. BERKSHIRE HATH HLD A (NYSE: BRK-A) Real-time: 110,903.00 Down 4,197.00 (3.65%)

An unreal valuation is a price that a strategic investor pays because they have non financial objectives.
- Fred Wilson A VC via twitter

That really puts the concept of the Strategic Sale succinctly. When the fit of the vendor’s business to the acquirer is so compelling, that traditional accounting based measures are not sufficient.

I went to the Sydney OpenCoffee Meetup this morning. I love the tagline: “Place for people who love startups to hang out and meet”. So I met a bunch of startup entrepreneurs, a few advisors and a funder or two.

I attended looking for two things:

1. New Product Development ideas/team/products to put through the distribution channels I have built at work.
2. Entrepreneurs, products or companies to invest in, either through my work or through the loose network of friends and associates who like startups.

Today’s meeting was mainly online startups, a few even show promise. Even better I got to chat informally with entrepreneurs who are pursuing their dreams.

Click here to check out
The Sydney OpenCoffee Meetup!

With damn hard WORK (not JOB) how to go from 0 to 5 investment properties.

Assumptions

1. it wont happen fast unless you’re lucky – in which case you didn’t need to follow any plan.
2. You will work harder than anybody with a job to get the same initial results.
3. I’d guess it will take about 7-14 years
4. Getting and keeping a job would be easier (but may leave you broke). How many stories have you read that said “bought my first Investment Property then waited X years before I thought of doing it again because work got in the way”
5. We want this to be legal

So here is the list:

1. Start earning cash now. That probably means learning how to sell something, anything, anywhere.
   1. self-employment sections of the papers
   2. market stalls
   3. Walk around industrial areas with your eyes open. Has someone got an overstock problem? Ask for a sample and a price. Hit the road.
   4. Ask yourself how can I get something to sell on consignment?
2. Start small but scale quickly. Turn $5 into $10. Then $20 then $40 then $80 etc.
3. Learn to fix problems. Look for people with a problem and find a way to make that problem go away. That lets you set your own price that is not tied to time or personal effort.
4. Focus on cashflow. In the early days do not build a system to sell it. How much am I making per week/month (forget year). e.g. Some retailers break even on trading but make money by selling the business, others make money from day 1 — guess who normally wins in the long run?
5. Put 5%-20% (say 10%) away for wealth creation. That way you’ll know when you have enough to buy an accumulating asset. That % may be of gross sales or net profit whatever! But put it away out of every deal/week/invoice.
6. Network. Now. Go out and meet people. Not just your friends. Talk to business people, sales-reps, seminar-junkies, hairdressers, baristas and bar-tenders. Find a 2 sentence intro and ask them questions about themselves. If you can afford internet access you can afford to do a google search on how to network.
7. Optional. Find a deal that is too good to pass up and the money will appear. This is a fact
8. Buy an asset (with your own money) that is 80% right as soon as you see it. You won’t find anything perfect and the time you waste getting 95% perfect will cost you 2 deals. The learning experience is worth the mistakes. Remember you created the deposit and you can do it again if you make a mistake.
9. Did you know that if you had a 34% deposit the money is relatively easy to find?
10. Once you have an investment system that works for you, leverage it with investors. Realise almost no investor will back your first deal.