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					                                    Graham & Doddsville
                             An investment newsletter from the students of Columbia Business School

                             Issue XIX                                                                         Fall 2013
Inside this issue:
Guy Spier            P. 4                               Guy Spier is the founder and managing partner of
                               Guy Spier —              Aquamarine Capital, an investment partnership styled
Homex (HMX)                                             after the original 1950’s Buffett partnerships. In 2008
9.75% 2020’s         P. 16    Build Your Life           Mr. Spier, along with Mohnish Pabrai, had lunch with
                              in a Way That             Warren Buffett after submitting the winning bid for
Wabash National                                         Buffett’s annual Glide charity auction. Mr. Spier
(WNC)           P. 18
                                Suits You               completed his undergraduate studies at Oxford and
                                                        earned an M.B.A. from Harvard Business School.
Active Network                                          Graham and Doddsville (G&D): How did you first become
(ACTV)         P. 20                                    interested in investing? What drew you in and what keeps you
                                                        going?
Koch Industries      P. 22
                                                        Guy Spier (GS): I guess there are some natural proclivities
                                                        that I have. One is that I don’t like managing people and I’m
                                                        really bad at executing on stuff. Getting Mr. Guy Spier to have
                                                        the ambition of building Starbucks like Howard Schultz did
                                                        would never happen. Guy would still be running some crummy
Editors                                                 coffee shop because I’m just not very good at execution. I
Chris Brigham                                           know that I’m an extrovert, I enjoy meeting people but on
MBA 2014                           Guy Spier                                                            (Continued on page 4)


Jackson Thies, CFA
MBA 2014
Jason Yang
                                     Koch Industries — Creating Value in Society
MBA 2014
                                                                                   Koch Industries is an industrial
Matt Ford                                                                          conglomerate headquartered
MBA 2015                                                                           in Wichita, Kansas. It is the
                                                                                   second largest private
Mike Guichon                                                                       company in the U.S. with $115
MBA 2015                                                                           billion in sales. Its businesses
                                                                                   range from petroleum
                                                                                   refineries and fertilizers to
                                                                                   chemicals and fibers, as well as
Visit us at:
                                                                                   Georgia-Pacific, which Koch
www.grahamanddodd.com          Dave Robertson            Steve Feilmeier
www.csima.org                                                                      acquired in 2005 for $21
                                                                                   billion.

                              Koch’s recent investments include a $1.5 billion minority stake in Guardian
                              Industries, an architectural glass manufacturer; an investment in Colfax
                              Corporation, a diversified manufacturing and engineering company; and a $240
                              million preferred stock investment in American Greetings Corp.

                              Richard Hunt, Graham and Doddsville’s former AVP and a summer business
                                                                                                        (Continued on page 22)
                Page 2


                               Welcome to Graham & Doddsville
                               It is our pleasure to bring you       We also sat down with Koch         as to some of the newer and
                               the 19th edition of Graham &          Industries Executive Vice          less-familiar faces in the
                               Doddsville. This student-led          President and Chief Financial      investment community. We
                               investment publication of             Officer, Steve Feilmeier, as       also have a few other ideas in
                               Columbia Business School is           well as President and Chief        store, so stay tuned for our
                               co-sponsored by the Heilbrunn         Operating Officer, Dave            upcoming editions.
                               Center for Graham & Dodd              Robertson. They discuss their
                               Investing and the Columbia            approach to finding investments    As always, we thank our
                               Student Investment Management         that are not only great            interviewees for contributing
                               Association (CSIMA).                  standalone businesses, but also    their time and insights not only
                                                                     ones that can be integrated        to us but to the investment
                               As students return to campus          into their existing operations.    community as a whole, and we
                               here at Columbia Business                                                thank you for reading.
Pictured: Heilbrunn Center     School, we are reminded and           We continue to bring you
Director Louisa Serene         implore our readers to continue       pitches from current students                - G&Dsville Editors
Schneider. Louisa skillfully   the search for what Charlie           at Columbia Business School.
leads the Heilbrunn Center,    Munger has called “worldly            CSIMA’s Investment Ideas Club
cultivating strong relation-   wisdom.” By dedicating our lives      meets regularly throughout the
ships with some of the         to continuous learning, we            year, including during the
world’s most experienced       become not just better                summer, and provides CBS
value investors and creating   investors, but better thinkers        students the opportunity to
numerous learning oppor-       and contributors to the world in      practice crafting and delivering
tunities for students inter-   which we live.                        investment pitches. Three of
ested in value investing.                                            the best ideas from this
The classes sponsored by       Our first interview is with Guy       summer are contained for your
the Heilbrunn Center are       Spier, the founder and portfolio      perusal—long the 9.75% senior
among the most heavily         manager of Aquamarine Capital.        guaranteed 2020 USD notes of
demanded and highly rated      In a candid discussion with Gra-      Homex (EJ0116982), long Wa-
classes at Columbia            ham & Doddsville, Mr. Spier           bash National shares (WNC),
Business School.               discusses everything from his         and long Active Network
                               use of checklists to several of his   shares (ACTV).
                               recent investments. Insightfully,
                               he points out that it does little     Looking forward to the coming
                               good to aspire to be a different      academic year, we are working
                               investor, but instead suggests to     to bring you even more
                               focus on creating an investment       fascinating interviews; we plan
                               philosophy and portfolio that is      to expand our gaze to
                               consistent with who you are.          international investors as well

Pictured: Professor Bruce
Greenwald. The Heilbrunn
Center sponsors the Value
Investing program, a rigor-
ous academic curriculum
for particularly committed
students that is taught by
some of the industry’s best
practitioners.




                                  Bill Ackman and David Winters at the                      Students waiting to hear the final
                                          Omaha Dinner in May                              presentations at the 2013 Pershing
                                                                                                   Square Challenge
 Volume I,
Issue XIX Issue 2                                              Page 3




                             SAVE THE DATE

           17th Annual Columbia Student Investment
             Management Association Conference

                                         February 7, 2014




          A full-day event featuring some of the most well-known
                   investors in the industry, presented by:
      The Columbia Student Investment Management Association
                                and
         The Heilbrunn Center for Graham & Dodd Investing


    Visit our website for updates: http://www.csima.org


    For inquiries contact:
    Taylor Davis     TDavis14@gsb.columbia.edu
    Ivan Dias        IDias14@gsb.columbia.edu
    Joe Fleury       JFleury14@gsb.columbia.edu
      Page 4


               Guy Spier
               (Continued from page 1)           think that at the end of the   People who go to Oxford
               some level I lose patience        day, it suited my internal     are great thinkers, they just
               with humanity as well. Being      wiring. I think I’m aware of   can’t get anything done.
               in a situation where I don’t      some of that wiring but I’m    That’s a broad
               have to deal with too many        not aware of all of it.        generalization. Oxford
               people if I don’t want to,                                       brought out my proclivity
               and I don’t have to manage                                       for discussing, writing
               them is a big plus. So I think                                   essays, all of those things.
               there are very specific ways                                     Harvard Business School on
               in which it was natural for          “I sometimes ask
                                                                                the other hand, is much
               me to go into investing. I          myself, ‘If you had          more practical. It would
               think it’s something that is                                     have been very hard to
               suitable for me, but at the        the choice between            choose between those two.
Guy Spier      same time the world of
               investing is broad so you           either Oxford/HBS            Then I sometimes ask
               still want to find a niche or a                                  myself, ‘If you had the
               place in it that suits your         and the education            choice between either
               own particularities.                                             Oxford/HBS and the
                                                  that you get around
                                                                                education that you get
               Five years ago I asked                Warren Buffett,            around Warren Buffett,
               Warren, ‘Berkshire                                               Charlie Munger, Ben
               Hathaway is structured a bit         Charlie Munger,             Graham, etc.’ I think hands
               like the starfish versus the                                     down Charlie Munger, Ben
               spider?’ The idea is that a        Ben Graham, etc.’ I           Graham and all of that is
               starfish, if you cut off a leg,                                  much better, for me at least.
               it regenerates. A starfish is a      think hands down
               decentralized organism and                                       At Oxford, for example, I
               a spider is not – you pick off       Charlie Munger,
                                                                                studied the Rudi Dornbusch
               a leg and it doesn’t grow          Ben Graham and all            exchange rate overshooting
               back a new leg.                                                  model. It’s a beautiful thing
               Decentralized organisms are           of that is much            and it might describe some
               more resilient to having                                         measure of reality. But it’s a
               their legs cut off and                     better.”              very powerful idea that
               Berkshire Hathaway is the                                        grabbed hold of the whole
               same way. It’s very resilient                                    of academic economics, this
               as opposed to a command                                          idea that you could solve
               and control organization. I       G&D: Can you talk about        equations representing the
               asked Warren, ‘That’s really      your background at Oxford      economy through time by
               smart. Did you figure that        where you studied              assuming rational
               out twenty years ago?’ And        philosophy, policy and         expectations, which is now
               he said, ‘No. I absolutely        economics? Did that affect     an important part and parcel
               had not figured any of that       your investment                of the neoclassical model of
               out. Berkshire Hathaway is        methodology or philosophy?     economics. Now you’ve got
               the way it is because it suits                                   a way of moving things to
               me. It suits my particular        GS: I was lucky enough to      equilibrium through time
               personality.’ I don’t know if     attend both Oxford             even if people don’t know
               he actually said it, but he       University and Harvard         what the outcome is
               clearly implied that if he had    Business School. But I         because somehow all the
               Jack Welch’s personality and      sometimes ask myself which     actors in aggregate are
               abilities and internal wiring,    I would have chosen if I       moving the market price to
               Berkshire Hathaway would          could only do one. Two         their rational expectation of
               have looked very, very            very different educations.                   (Continued on page 5)
               different. So why investing? I
 Volume I,
Issue XIX Issue 2                                                                                        Page 5


Guy Spier
(Continued from page 4)          things aligned right I could      Intelligent Investor – Mr.
what it should be.               make billions and live this       Market, things having
                                 incredible life.’ And many        intrinsic value, stocks
I think that it handicapped      people who do value               representing part interest in
me in a profound way.            investing end up living these     businesses – are fantastic.
Because there I was at           incredible lives. And we live     But I was in a position ten
Harvard Business School          long lives is what we’ve          years ago not to charge a
and Warren Buffett shows         figured out. We know from         management fee the way
up and I have no interest in     Warren Buffett that it’s not      Warren Buffett did, but I
him. I also have no interest                                       was charging a management
in the financial markets                                           fee. Why on earth was I
because in my rational                                             doing that? I don’t know
expectations view, there are                                       how many years ago I met
no dollar bills on the             “It took me a long              Mohnish [Pabrai]. He was
ground; they would have                                            not charging a management
been picked up by this              time to figure out             fee. I was an example of the
spectacularly efficient                                            guy sitting on the other side
market. Now I’m sure I              that my job is not             of the road at the gas
learned plenty at Oxford                                           station. You know the Tom
and at HBS, but I don’t think
                                       to be Warren
                                                                   Peters story? Mohnish talks
they helped me much               Buffett or to be Bill            about cloning and seeing
professionally. I’m sure I’m a                                     whether people are willing
better human being but they        Ackman. My job is               to clone or not. I’m sitting
did not help me with                                               there, laughing at all those
investing, I don’t think. And       to be Guy Spier.”              idiots who don’t clone. At
I don’t know one person I                                          some point I realized, ‘Wait.
studied with who even                                              I’m the guy on the other
understands what I do or                                           side of the road who is not
understands the basic            got to do with intelligence -     cloning what is obviously
philosophies of value            he says some people get it,       working.’ There are so
investing. They just think,      some people don’t.                many things that I lost time
‘Whatever. He’s just a                                             with and didn’t learn
finance guy.’                    I got it, but my God, have I      because I had too narrow
                                 strayed from the path in so       an understanding of the
G&D: Not even David              many different ways. I had        wisdom that was to be
Cameron gets it?                 such a narrow                     imparted.
                                 understanding of the
GS: David Cameron is a           wisdom that Warren Buffett        G&D: You went straight
very, very, very smart guy       had to impart. If my              from being in investment
and he understands British       investment career is the          banking to managing money
politics and understands         only thing we’re talking          raised from friends and
what can and cannot be           about, I definitely lost at       family. What caused you to
done with Britain in a way       least five years, perhaps         do that?
that I could be living in        more, getting started on it
Britain 100 years and not        because my head was filled        GS: A few things. It took
understand. But we               with all these ideas of           me a long time to figure out
underestimate how many           efficient markets. But I’ve       that my job is not to be
people have any clue about       lost more time by not fully       Warren Buffett or to be Bill
the way we feel, which is,       learning the lessons that are     Ackman. My job is to be
‘Oh my God. This is so           available there for all to see.   Guy Spier. I’m not going to
exciting. There are market                                         do a very good job of being
inefficiencies that I can        The basic tenets of The                         (Continued on page 6)
exploit. If I just get a few
            Page 6


                        Guy Spier
                        (Continued from page 5)           If the first tier is Morgan        guy that I should not have
                        Bill Ackman or being              Stanley, Goldman Sachs,            associated myself with, and
                        Warren Buffett but I’m            Credit Suisse, globally            in finance especially, your
                        going to do a damned good         recognized brand names and         associations count. People
                        job of being Guy Spier,           then you have a second tier        don’t have the time, the
                        better than anybody on the        of Robert Baird and                energy or the interest to
                        planet.                           Associates and regional            really dig deep to find out if
                                                          investment banks. Then you         this is a good guy or not.
                        Everybody’s path is unique        have this third tier doing         You don’t have to get
                        and I think it’s really, really   things like taking penny           yourself burned. If you see
   “Something I         important that we find our        stocks public or venture           there’s smoke you don’t
                        own path. If I look back at       investment banking where           have to put your hand in the
   believe quite        the path that I took, there       you would take a company           fire. The good news is that
                        are many mistakes that I          that didn’t have any earnings      when you make mistakes
 strongly is that if    made. Many things I would         and take it public. After I        you want to make them
                        have done differently. But        joined, I discovered that          early. You want to make
    you want to         that’s yet another thing we       there were people engaging         those mistakes when you’re
                        have to learn, to own our         in practices which were on         25 and not when you’re 40
understand who an       path with its mistakes and        the borderline of legal. In        or 50 or 60.
investor is, you need   to be accepting that every        fact, five years after I left,
                        single person has massive         the SEC shut down half of          In my case, I was very
to understand their     mistakes in their path, and       the firm. I knew that to go        interested in this investing
                        that’s part of life.              and join Goldman Sachs I           stuff. I started putting
  relationship to                                         would have been a glorified        together mock portfolios. I
                        Leaving business school, I        photocopier or something           met some great people on
 money in general,      had this pristine resume. I’d     like that. I didn’t care what      the way, Carley Cunniff was
                        worked for a consulting           brand name I had, I wasn’t         very generous. That’s when
their relationship to
                        firm, had a great                 doing that. I was doing            I started going to the
  the money that        undergraduate degree,             something real. That said I        Berkshire meetings. I didn’t
                        Harvard Business School           should have left that place        know anybody, but just
  they specifically     and I wanted to throw up all      three months into it               started showing up. Then in
                        over anything that had to do      because it was a snake pit.        my case what happened is
manage, and what        with the establishment. I                                            that my father notices this.
                        just had no interest. I did       What happened to me, and           There’s a family business in
 the money means        not pursue interviews with        again I’m just describing my       London trading agricultural
                        Goldman Sachs and all of          path, was I was reading all        chemicals. He had made
     to them.”
                        those people. Which I think       sorts of books. I pick up The      some money and he started
                        was a mistake. I was feeling      Intelligent Investor and a light   investing that with me.
                        rebellious and had to break       goes on in my head. An aha!        From my father’s
                        out of these straight and         moment happens and now             perspective he wanted me
                        narrow tracks. However, I         I’m applying for jobs as an        involved, whether
                        think that there’s so much        analyst doing what you guys        consciously or
                        to be said for being on the       do, except that I’d gone to        subconsciously, he realized
                        corporate bandwagon for a         work for DH Blair. I was           that by getting me to invest
                        while and not getting off it      interviewing with a number         the family wealth he was
                        right away.                       of places but I wasn’t having      getting me back involved. I
                                                          an easy time of it and these       didn’t realize but at that
                        I started working for a guy       question marks arose. I            point, on some level, I had
                        who was also a graduate of        made a very, very, very bad        re-joined the family
                        Harvard Business School           judgment call in terms of my       business.
                        who had his own banking/          own personal reputation. I
                        investment firm, he was           had associated myself with a                     (Continued on page 7)
                        very solidly in the third tier.
 Volume I,
Issue XIX Issue 2                                                                                                  Page 7


Guy Spier
(Continued from page 6)          different people.               people just go, ‘You know...
G&D: How did you feel                                            Warren owned Coca Cola
comfortable starting out on      I don’t understand some         during the period when
your own and managing            peoples’ approach to            Doug Ivester was messing
close relations’ money?          money. I don’t understand       up completely but it didn’t
                                 why they love it so much.       get under Warren’s skin.’
GS: My father is the kind of     Now contrast that with          People had to practically
person who doesn’t do            somebody that we all know       read the Riot Act to him
things half measure. He          pretty well—Mohnish.            before he acted to remove
doesn’t say, ‘Here’s 10% of      Mohnish is on record as         Doug Ivester. You have one
my wealth and if you do          saying that his dad went        extreme there and then you
well with it I’ll give you       bankrupt a number of times      have Bill. I think
another 10%.’ He dumps all       so he’s very familiar with      understanding those
his liquid wealth on me,         having money and not            personality traits and
which was pretty much            having money. And he’s very     realizing they are                    “The investors that
everything, which instantly      familiar with seeing how his    unbelievably idiosyncratic in
made me unbelievably risk        parents were unchanged          each one of us is really              we appreciate and
averse because I knew            through that. His core          important to do.
exactly what I was dealing       family circumstances actually                                          do well somehow
with. Then again, I’ve gone      didn’t change that much. He     G&D: Clearly you’re
back and said to myself, ‘If     has a much lower fear of        heavily influenced by
                                                                                                       have found a way
he would have dribbled it        loss of money I think           Benjamin Graham and
out to me, I think I would
                                                                                                         to reflect their
                                 because of that. The other      Warren Buffett, value
have been much more              thing is when he started        investing legends. But what           inner life in a very
willing to take big gutsy        Pabrai Funds it wasn’t Guy’s    do you think sets you apart
bets.’ In that period I had      dad saying, ‘Here’s some        from those guys that gives            fundamental way in
really great investments.        money that I’ve made. Invest    you an edge in investing?
One was Duff & Phelps            it.’ It was Mohnish having                                              their investing
which is one of the credit       sold his business and taking    GS: I’m dumber. The
rating agencies. It’s now part   a portion of that and           Aquamarine Fund is open
                                                                                                            moves.”
of Fimalac and that was a        investing it. That again is a   but I’m not really trying to
7X over three or four            very, very different            raise money and it’s a
years, just a wonderful,         psychological relationship to   wonderful release because I
amazing situation, but I         money and I think that          don’t care about
didn’t invest very much. I       drives a huge amount of         distinguishing myself and
was scared stiff. One thing      investment behavior.            differentiating myself and all
that I’m adamant about is I’ll                                   of those things. Warren
leave with one track record      I would love to do the          Buffett has a 180 IQ, maybe
and all of those things go       analysis on Bill Ackman on      higher. Mohnish has a way
into the track record.           that front. I don’t have        higher IQ than I do; it’s 160
                                 enough information, but Bill    or more. If you ask me, I
Something I believe quite        I think, like me, came from     think Mohnish’s IQ is not as
strongly is that if you want     an environment where            high as Warren’s but I tell
to understand who an             there was established           you they’re both streets
investor is, you need to         wealth. For Bill, money, it     ahead of me. Warren runs
understand both their            seems to me, is the             around saying that you don’t
relationship to money in         opportunity to play out stuff   need a high IQ, he’s just
general, their relationship to   that on some psychological      being nice. Having a high IQ
the money that they              level he cares about.           really helps. He says it’s
specifically manage, and         Misgovernance in the            better to be sensible than to
what the money means to          companies that he follows       be super smart – he’s
them. Money means very           gets under his skin. Some                     (Continued on page 8)
different things to very
                Page 8


                             Guy Spier
                             (Continued from page 7)            Buffett has deep respect for      particular commodity. I
                             absolutely right. But if you       John Bogel. In many ways          never thought that I would
                             can be sensible and super          John Bogel is not an              understand banks and I
                             smart that is definitely           investor; he’s just a guy who     know that I nailed banks
                             better.                            runs a machine.                   two years ago but it was
                                                                                                  really specific—large
                             The investors that we              G&D: How do your                  American money center
                             appreciate and do well             personality and your life         banks were unbelievably
                             somehow have found a way           experiences manifest              underpriced and a really safe
Pictured: Bill Ackman and    to reflect their inner life in a   themselves in your investing      place to put lots of money.
Louisa Serene Schneider at   very fundamental way in
the Omaha Dinner in May                                         decisions? What do you
                             their investing moves. At          look for?                         People jeeringly said to me,
2013.
                             the end of the day, every                                            ‘You don’t understand Bank
                             successful investor ends up        GS: I don’t like situations       of America’s balance sheet.’
                             differentiating themselves on      where there’s a lot of public     I’d come right back and say,
                             the unique aspects of their        controversy. I get                ‘Neither does Brian
                             personality and who they           particularly scared when I        Moynihan but it doesn’t
                             are. I’m not trying to be the      see very smart people on          matter.’ I think that what’s
                             best investor. I’m just trying     both sides of the equation. I     interesting is I have a much
                             to be Guy Spier. If you give       know that I’m much more           better sense of when
                             me a path in life that             comfortable in a place            something is in my circle of
                             involves higher returns to         where people just aren’t          competence and I’m much
                             my limited partners and/or         paying attention. That feels      more willing to define stuff
                             high returns to me, but it         much, much better to me. I        outside of my circle of
                             makes me less Guy Spier, I         figured out I know                competence.
                             wouldn’t take it. So in a          absolutely nothing about
                             certain way I guess I              retail, that retail is just a     In reverse engineering the
                             disagree with the premise of       dumb place for me. I’ve           Berkshire Hathaway 13-F
                             the question, which is I’m         realized that it would not be     filing, one of the positions
                             different to all those             smart for me to invest in         they have is a company
                             investors because I’m Guy          the healthcare sector, but I      called VeriSign. VeriSign is a
                             Spier and I’m not Ben              think I can get through life      beautiful, beautiful business.
                             Graham and I’m not                 without investing in the          It’s probably not cheap but I
                             Warren Buffett. I shouldn’t        healthcare sector.                never thought that a
                             try to out-Warren Warren.                                            company that is in the tech
                                                                G&D: Which industries             space would be within my
                             To compare myself to any           attract you more?                 circle of competence. I gave
                             of those other people is a                                           up doing the work because
                             very dangerous thing to do         GS: The core home base            it’s too expensive and
                             and probably not helpful           for me is branded consumer        because allocating one’s
                             actually. But they are all         goods. It’s really hard to find   time to the stuff that’s
                             smarter than me and they’re        something that’s super            cheap rather than spending
                             all better investors and           attractively cheap but I just     all this time studying great
                             that’s okay. I’m comfortable       know that I’m on safe             businesses is smarter. But I
                             with that. It’s about being        territory there. I actually       think I would have been
                             the best version of yourself.      now feel I’m in a lot safer       ready to define VeriSign as
                             That may be investing in low       territory in terms of natural     being within my circle of
                             cost index funds because           resources. They have to be        competence.
                             that’s where you’re at in          the lowest cost producer,
                             terms of your ability to           for example, and we have to       G&D: Would you by any
                             analyze and your                   understand the supply and         chance be willing to discuss
                             relationship to money, and         demand dynamics of a                             (Continued on page 9)
                             that’s perfectly fine. Warren
 Volume I,
Issue XIX Issue 2                                                                                                        Page 9


Guy Spier
(Continued from page 8)           lot to lose you can counter-       This is a huge cost to
any current ideas you have?       sue each other and you can         American industry. On the
                                  say, ‘If you’re going to get       one side they’re hated by
GS: I will tell you that,         me on violating this set of        people like Apple and the
where I am right now, I           patents I’m going to get you       other large companies and
have not found something          on others so why don’t we          on the other side they’re
that I want to put in the         just call it a day? You get on     the champions of inventors
portfolio for quite a long        with your business and we’ll       who often feel they’ve been
time. There’s been quite a        get on with ours.’ This is         screwed over by big
dry spell; it’s not like we’re    what usually happens.              industry. What Reciprocal
not looking. I’m happy with                                          Patent Exchange does is
my portfolio the way it is so     Then there are these things        they go to all these
I haven’t done a lot recently.    called patent trolls. They         companies that are basically
I’ll tell you one that I          just sue people for                settling at the court’s door
rejected, but I think it is an    violations of patents and          or they’re paying these                  “The idea that
interesting business and is       collect some kind of               companies to go away and
such a puzzle.                    reward. If I’m a patent troll,     they say, ‘Why don’t we                  we’re managing
                                  I will acquire a pool of           pool our resources?’ To cut
The one that came up was          patents from somebody and          a long story short, it’s                some finely tuned
Reciprocal Patent Exchange        haul Apple into court and I        fractional ownership of
(RPX). So I was introduced                                                                                  machine is just not
                                  say, ‘You’re violating this set    patents. Like fractional jet
to the whole world of             of patents.’ I didn’t invent it,   ownership, fractional patent            the case. I’m just
intellectual property. First of   and I don’t have a business        ownership. You pay a
all, IP is a big deal. What I     off it, but I own the IP. The      subscription to us, we’ll              trying to get it right
learned is that 200,000 or        law is if you own the IP,          acquire all this IP and you’ll
300,000 patents get granted       you’re the inventor. The           never get sued on account              55% of the time or
every year and nobody             problem that Apple has is          of this IP. It doesn’t take
completely knows what the         Apple has to go and defend         away the legal risk entirely,          get it slightly better
patent covers or doesn’t          that. Now if I was some            but it massively reduces the
cover. But in the US and                                                                                     55% of the time.”
                                  other operating business           legal risk and they now have
Western countries, the            Apple would say, ‘Let’s sit        much more buying power
policy is, we grant people        down and talk. Let’s see           because it’s on behalf of all
patents. A patent lasts 25        what you’ve got. Let’s get         of their clients and they
years. What does that             some arbitration, we don’t         have something like 200
patent give you the right to      really want to go to court.        clients. It is a really
do? It gives you the right to     We can see you’re a small          interesting business and it’s
pull somebody to court and        business, you’re trying to         cheap and they generate
say, ‘You’re violating my         grow this division. Why            massive amounts of cash.
patent.’ It’s an interesting      don’t we buy a whole bunch         Really, really interesting, but
right and it becomes a lot        of stuff from you? Why             at the end of the day I put it
more interesting or               don’t we license you?’             in the ‘too hard’ pile.
uncertain when you realize        There’s some kind of
the scope. At the end of the      business arrangement that          G&D: What about Fiat,
day a judge has to decide         settles it out. Not with the       would you be comfortable
was the patent being              patent trolls. The patent          discussing that investment?
violated or not? What             trolls say, ‘We don’t have a
happened with Apple versus        business. We are secure.           GS: What I’d say about Fiat,
Samsung is extremely              You can’t sue us for               I don’t want to talk too
unusual because what              anything but we can sue you        much about it because of
happens is like nuclear           for that.’ So at the end of        commitment, consistency
warfare between two               the day Apple settles.             and all of those things but it
countries, when you have                                                           (Continued on page 10)
two big corporations with a
             Page 10


                             Guy Spier
                             (Continued from page 9)          about the money being             facts change I change my
                             really is an interesting         made or lost. They cared          mind. What do you do?’
                             situation. What I think is       about saving jobs.                You want to be in a position
                             interesting about Fiat is that                                     to do that. The more
                             what the Italians and the        I think there is space on the     people who know what
                             Europeans see is some also-      planet for one Italian brand.     your opinion is on Fiat, the
                             ran European automobile          We have four or five              less easy it is to change your
                             manufacturer. They see a         German brands, global             mind. Dangerous stuff.
Pictured: Rahul Raymoulik,   company that is a much           German brands. The only
Richard Hunt, and Stephen    smaller automobile               company that has a chance         G&D: How do you make
Lieu at the 2013 Pershing    manufacturer with sales          of being a global automobile      your sell decisions?
Square Challenge.            skewed to Southern               brand from Italy and not just
                             Europe, which has been           in the high end like Ferrari is   GS: Very badly. The idea
                             much worse hit than              Fiat. Chrysler does an            that we’re managing some
                             Northern Europe. They            amazing thing for Fiat. Fiat’s    finely tuned machine is just
                             don’t have a clue what           business has already              not the case. I’m just trying
                             Chrysler is but people here      improved dramatically             to get it right 55% of the
                             in the United States             because they now have the         time or get it slightly better
                             understand that Chrysler is      ability to allocate costs and     55% of the time. What has
                             a substantial business, they     production around the             worked for me is first of all,
                             have some blockbuster            planet.                           do not touch the portfolio
                             brands, and it has a real                                          unless you have a clear
                             franchise value. But they        Fiat used to be very heavily      reason for action. One of
                             can’t invest in Chrysler         under the thumb of the            the things that I do is I don’t
                             because it’s all owned by        Italian government and            want to look at the
                             the VEBA, this voluntary         Italian unions. Now Fiat can      portfolio too often. I know I
                             employee benefits                say, ‘Yeah, we’re                 will perform better if I can
                             association, and Fiat. I think   headquartered in Turin but        do this.
                             that is one of those unusual     we don’t have to
                             situations.                      manufacture cars in Turin.        A lot of the time what
                                                              We’ll produce them in             happens to me is I’m
                             The whole way in which Fiat      Brazil and we’ll import them      cleaning positions out for
                             acquired Chrysler is very        to you...’ Chrysler has given     something else. I look at the
                             interesting. Sergio              them a global base from           investment more as a
                             Marchionne, the CEO of           which to really allocate          source of performance or as
                             Fiat, comes to the               production across different       a source of cash. When I
                             negotiating table. They’re       factories. I think that takes     have a great new idea I’m
                             close to doing a deal for an     three or four years to play       saying, ‘Where am I going to
                             undisclosed sum of money,        out.                              raise money for it?’ and I
                             but the day before Barack                                          will sell the thing that I
                             Obama says, ‘we’re going to      I got the permission from         believe is the least
                             save Chrysler as well.’ So       the people I did the work         undervalued or the least
                             Sergio says to the people        with on Chrysler to talk to       likely to contribute to
                             negotiating on behalf of the     Forbes about it but I think       performance going forward.
                             government, ‘Do you really       that for me, investment           But I’ve been surprised a
                             want to go back to your          theses are fragile. I don’t       number of times by things
                             president and say that           want to say what I just said      that I’ve had in the portfolio
                             actually there is no deal and    too many times; the more          that have gone up anyway. I
                             what the president said to       times I say it the more           will tell you, an experiment
                             the American public isn’t        difficult it becomes should I     that is really worth running
                             true? It’s that or you’re        want to change my mind.           is to pick portfolios by darts
                             giving it to us for free.’ The   Keynes said, ‘When the                          (Continued on page 11)
                             US government didn’t care
 Volume I,
Issue XIX Issue 2                                                                                                  Page 11


Guy Spier
(Continued from page 10)         to me made that I                from the sugar and sweets
or by any other system and       understand, and am I             to the meat and potatoes.
then you just leave those        repeating these mistakes?        Sugar and sweets is most of
portfolios alone, and it’s       It’s a bit like the common       the stuff that comes up in a
often only one or two            law. You’re not trying to        Google search. It’s designed
companies that provide           talk in generalities. You’re     to get that instant response.
most of the performance. I       saying, ‘I remember when I       Meat and potatoes is down
think that meddling just         invested in EBC oil and          in the 10-K. Reading the 10-
ends up reducing returns so      someone in management            K or reading something
I really try to leave it alone   was going through a divorce      that, because of the process
until there’s a compelling       and it really messed up the      through which it went
reason for action.               investment. Is anybody here      through – e.g. in the case of
                                 going through a divorce I        the 10-K, legal checking by
I’d like to be optimal, I just   need to know about?’ I           lawyers – to make sure the
don’t know how to be             remember when I invested         claims being made are
optimal. I have two barriers,    in Lab Corp of America it        correct. That’s where we
or two difficulties, in doing    was over-leveraged. We           really want to start. Then
that. One is I don’t actually                                                                               “What has
                                 didn’t realize it was over-      once we’ve got the solid
know if the conclusions that     leveraged. It was a great        diet, the meat and potatoes,
I’m drawing are accurate         business but the investment      we can move on to the
                                                                                                         worked for me is
conclusions. I don’t know if     went down by 80%. Is that        sugar and sweets. But if we
the information that I have      the case here? That’s            allow the sugar and sweets
                                                                                                         first of all do not
is the right or the full and     definitely one thing.            in first, there’s no space for
complete information or                                           the meat and potatoes and                  touch the
whether I have enough            I will tell you that other       we know that what comes
information. I don’t know if     things I’ve picked up from       into our brains first affects          portfolio unless
I’m analyzing it correctly.      Mohnish that are just smart      us massively. If I favor the
Then there’s overcoming          moves. Don’t buy when the        meat and potatoes sources              you have a clear
my bias towards inaction         market’s open. Don’t trade       of information before other
and overcoming all the           when the market’s open. I        sources of information, over              reason for
personal psychological           don’t like to talk to the        a lifetime of decision-
biases about endowment           traders. I just want to send     making, my decision-making                  action.”
effects and all of those         them an e-mail. I don’t want     will be a little bit better and
things - fricking nightmares.    any feedback from the            that little bit better is what I
                                 market or any of those           need.
G&D: I think there’s an          things.
investor presentation I                                           Another simple thing is how
looked at that had a litany of   Sequencing the information       one communicates with
biases that humans have in       that I get is another way. A     management, which is part
decision making. So what do      sales person will get in         of this information diet idea.
you do specifically to make      touch and say, ‘Hey, I want      Company visits are a very
sure you don’t fall prey to      to call you up and talk about    dangerous thing. I haven’t
those biases?                    something.’ The standard         done a company visit in
                                 response is, ‘Please put it in   quite a while, but my goal is
GS: Suffer.                      writing.’ Make people            not to make a buy or sell
                                 submit stuff to you in           decision within three days
G&D: And use a checklist?        writing first because we         of visiting a company
                                 know that we’re less biased      because there are all sorts
GS: That’s a great one. A        when we get the                  of influences.
checklist is a very personal     information in writing.
thing for me. It’s what                                           For instance, a company
mistakes have I made, what       Our information diet goes                      (Continued on page 12)
mistakes have people close
Page 12


          Guy Spier
          (Continued from page 11)         cost of production and            ‘I’m trying to find out about
          called Quicksilver               some wells are lower cost         Quicksilver,’ or ‘I’m trying
          Resources. I’ve no idea how      and obviously you decide          to find out about RPX.’
          and why it came onto my          where to go based on those        Instead say, ‘I’ve been doing
          screen. Another reject.          costs. I knew I didn’t have       some work on RPX. Looks
          Very good reputation, family     to go any further.                like an interesting business.
          controlled, natural gas,                                           Here are three articles that
          making a lot of money on         The other thing that I would      I think are the best articles
          their hedges. I e-mailed the     say is unbelievably critical is   I’ve found. Here are some
          investor relations guy and       to have relationships with        links. Here are some of the
          he said, ‘I’m happy to get on    the right people. How does        things that I’ve learned but I
          the phone and talk to you        one practically do that? I        would love to see if you
          about the company.’ I said,      think that this really works;     might be willing to
          ‘That will be great. But         if somebody I know is not a       contribute to my knowledge
          before we do that, I just        healthy influence on me for       or point me in the right
          have two questions. Maybe        decision-making, I’ll respond     direction.’ It’s giving value in
          you have an e-mail answer        to their e-mail three or four     the e-mail at the same time
          for me which would be            days later. Maybe I’ll leave it   as asking for something. If
          quicker.’ Again, wanting to      in my inbox for a month. So       anything, you develop your
          have the written                 they’ll get a response, but       network.
          communication before the         I’m simply prioritizing and
          verbal communication             being mindful and conscious       G&D: Honestly, as a
          because I know this guy can      about how and why I’m             student you get an almost
          sell the pants off me. ‘I’m      prioritizing.                     100% response rate.
          having trouble
          understanding how you have       In fact, take the people with     GS: I would still develop
          been so successful at            whom one can have healthy         the habit of adding value to
          hedging over so many             conversations and write           them and not just saying ‘I’ll
          years.’ The price at which       them a thank you note             be really grateful to you and
          they’re selling the natural      every now and then or send        happy to do something for
          gas is at $2.60 or $2.70 but     them something or find a          you in the future.’ What
          it’s coming in with the          reason to deepen that             you’re doing is building up
          hedges at $5. But if you’re      relationship, even if it’s just   your analyst franchise. In
          doing that year after year       a little bit. Over a short        five years’ time you want to
          after year these hedges          period of time there’s no         be in a place where there
          must cost a lot of money         obvious change but over a         are so many people who
          and I just couldn’t figure out   long period of time that can      just love you because every
          where the cash was coming        make a massive, massive           time you have had a
          from. And I said, ‘Could you     difference.                       conversation about some
          tell me what your all-in cost                                      company you have found a
          of production is?’ No            G&D: What other ways              way to add value back in
          response. That shouldn’t         besides through your              their lives. Your information
          take more than a paragraph       network do you find the           flow will be that much
          to answer. My conclusion         right contacts?                   better than other people
          was that their cost of                                             who weren’t doing that.
          production was way higher        GS: Something I’ve tried          You don’t have much of a
          than they’d like it to be. If    without much success, but         way to distinguish yourself
          you’re doing anything, if        is really interesting, is         now from many other
          you’re half doing stuff right,   LinkedIn. So pull up the          people but over five years
          you know that number and         company, see who’s                that makes a big difference.
          you’re trying to allocate        connected to it, e-mail 20        How did I learn this?
          resources based on it            people. But don’t just say,                     (Continued on page 13)
          because some wells are high
 Volume I,
Issue XIX Issue 2                                                                                                       Page 13


Guy Spier
(Continued from page 12)          idea from Robert Cialdini,      and the average person in
G&D: Mohnish Pabrai and           right?                          my set of friends is
the practice of cloning?                                          incapable of giving it the
                                  GS: There’s a huge amount       attribution it deserves.
GS: What’s so beautiful           of wisdom there. I told         They’ll say, ‘You’re lucky.
about cloning is that it’s not    somebody 10 years ago, ‘I’m     You’re smart. You’re in the
mutually exclusive. The           writing 20 thank you notes a    right place at the right time.’
more you do it, it’s helpful      week.’ And they say, ‘How       And I’m like, ‘No, no, no.
for the whole community           ridiculous. Who are you         It’s because I was doing               Pictured: Mario Gabelli ’67
and enough of humanity will       writing thank you notes to?’    Cialdini for the last five             speaking at the 2013
never do it. I’m at the           I say, ‘The doorman,            years. You can do it too.’             Omaha Dinner.
Berkshire meeting with            anybody I can put my hands      You know, in some way that
Mohnish and all of these          on really, the person who       is even more surprising to
people are coming up to           served me at the shop. You      me than value investing
him. He has spent the last        name it, left, right and        because value investing is a
twenty years making people        center.’ They’re like, ‘How’s   very narrow thing. All we’re
feel glad that Mohnish            that working for you? Have      talking about now is a
Pabrai’s on the planet. In        you seen any changes?’ Not      strategy for anyone to
small ways and in big ways,       really. They say, ‘What a       improve their lives. Finally,
just doing it as a habit. So if   dumb idea.’ I say, ‘Well, the   after ten years of being
you’ve been handling people       doorman was really nice to      married and five years of
right for 20 years, you           me this morning.’               doing this, my wife gets it.
become a very real asset to
whatever business you’re a        So say I’m writing thank you    As you can see, in a certain
part of because you’re just       notes like that and I attend    way I’m more enthusiastic
going to get lucky more           the Pabrai Fund Annual          about this than value
often. I’ve experienced that      Meeting and I write him a       investing. Having read Ben
over the last five years. I’ve    thank you note, one of          Graham would not have
gotten luckier with people        twenty I wrote that week,       helped me if I was a poor
more and more often and           but that may have been the      boy in Bangladesh, but this
it’s just a lovely thing. I had   only thank you note             Cialdini reciprocity stuff is
to realize I was not put on       Mohnish received from the       much more basic and would
earth to help Guy Spier. I        meeting he held in Chicago.     have helped anyone.
was put on earth to help          And when he was in New          Warren has this famous
humanity.                         York for some reason he         saying about how he was
                                  had the idea to call or to e-   very lucky as to where he
I’ll give you an example. Bill    mail me and to say, ‘Would      was born. If he was born in
Ackman got into doing this        you like to get dinner?’        Bangladesh those good
a year or two before me. I        These simple changes in         business practices wouldn’t
knew him; he was a year           behavior make such a            have made a big difference.
above me in business              massive difference because
school. They had offices in       at the time my derisive         It’s like Wal-Mart. Sam
245 Park Avenue and he just       friend is asking me how my      Walton figured something
said, ‘Come here, use             relationship with the           out with Wal-Mart: stack it
Bloomberg, spend as much          doorman is going, the thank     high, sell it cheap, keep
time as you like. Really          you note to Mohnish Pabrai      delivering massive value to
happy to have you here.’ I        hadn’t been written.            the consumer, always give
remember that and I would                                         them better value than they
leap at the opportunity to        I’ll tell you something else.   can find elsewhere, work
help him out in some way if       It’s made me more               really hard to negotiate with
he asked me to.                   successful that the average     your suppliers to give
                                  member of Joe Q. Public                       (Continued on page 14)
G&D: Mohnish got that
         Page 14


                    Guy Spier
                    (Continued from page 13)        people that you want to get      to be in the room with you
                    [customers] great stuff at      close to? The first natural      to mentor to you.
                    low cost. Who would have        response is, ‘Nothing.’ But
                    thought that piling it high     we can. First of all, thanking   Before our meeting with
                    and selling it cheap would      people. Every human being        Buffett, we sent our bios
                    have developed into the         wants to feel thanked. We        over. I sent this bio, ‘I grew
                    amazing business franchise      were there to say thank you      up in South Africa and
                    that Wal-Mart is now.           and we were there to             Israel, lived in London, and
                    Where I started off on this     appreciate him, not just         moved to the United
                    little reverie is that we can   some idiot on the street,        States.’ My wife Lory, the
                    do the same things. I can’t     but as people who had            only thing her bio says
                    be Wal-Mart and I can’t be      studied him really closely.      pretty much is ‘born in
                    Sam Walton but my God, I                                         Salisbury, North Carolina.’
                    have the tools to develop a     I sent my most recent            Warren had no interest in
“My goal is not     similar unique Guy Spier        annual letter to Debbie          the fact that I’d lived in Iran,
                    franchise just by getting       Bosanek. Here’s what I said      Israel, whatever, but he
to make a buy or    mind space and getting          to Debbie. I said, ‘Debbie,      liked the fact that Lory grew
                    people to feel a certain way    there’s no wisdom in here        up some place. That’s his
  sell decision     about me. It’s just caring      Warren’s going to glean,         mind-set. He’s not just an
                    about them, caring about        nothing about the world          American guy; he’s a guy
within three days   the outcomes in their lives,    that he doesn’t already          from the American mid-
                    and figuring out a way to       know, but I think he might       west and he knows what he
  of visiting a     help them. That’s the ideal,    enjoy seeing what a              likes and he likes what he
                    actually helping them, but      powerful impact he has had       likes and he’s not interested
   company          the second best is to let       on me. This thing has got        in experimenting very much
                    them know you would have        ‘See what Warren Buffett         with other stuff.
                    wanted to help them. That’s
 because there      effectively what a card does.
                                                    inspired me to do’ written
                                                    all over it and he might         The starfish and the spider
                    I have a rule—every single      enjoy it on that level’.         that I talked about was
 are all sorts of   person who sends me a job                                        really an awakener for me.
                    application gets an e-mail      I think the mentors that you     It was not just what he said,
  influences.”      back. It’s particularly         and I want, we can’t             but the way he said it
                    important for people who        necessarily spend every day      because he knew exactly
                    apply as analysts because       with because they don’t          where I was coming from. In
                    they’re likely to go on and     have time and you may not        a certain way he was
                    do great things so I want       know them and they may           teaching me a really
                    them to like me. I want to      not even be alive. So            important lesson. ‘Don’t try
                    help them.                      studying them really closely     to build the best business
                                                    to get a good sense of the       you can build. Build the
                    G&D: Could we talk about        answers they would give to       business that suits you the
                    the lunch you had with          the questions we have is         best. Build your life in a way
                    Buffett? Can you give us        totally the right track and a    that suits you.’
                    some questions that you         very, very smart thing to do,
                    asked him and were you          especially with people who       Realize you only have one
                    surprised by any of the         are not alive. What would        life to live on the planet.
                    answers to his questions?       Shackleton say? What would       ‘Yeah, Berkshire Hathaway
                                                    Ben Graham say? What             is this wonderful big
                    GS: One of the things that      would Franklin say? You can      company, but it suits me.’
                    Mohnish did is he set the       go to Seneca. You can go to      That’s the most important
                    tone of the lunch in the        Marcus Aurelius. They’re all     thing about Berkshire to
                    right direction. We were        available the minute you         Warren. So in a certain way
                    there to say thank you.         drop the idea that they have                   (Continued on page 15)
                    What can you guys give the
 Volume I,
Issue XIX Issue 2                                                                                  Page 15


Guy Spier
(Continued from page 14)          she is that she doesn’t mind    don’t know. I don’t think
I came away with a renewed        being perceived as Warren       Warren could be who he is
appreciation of how unusual       Buffett’s assistant. She’s so   if Debbie wasn’t who she is.
Warren is. Given the choice
between building a bigger                                         Something I’ve learned is
Berkshire and building a                                          that to say I have a
Berkshire more suited to                                          relationship with Warren is
him, or building a Berkshire          “In five years’             to say he knows who I am.
with higher returns, he                                           But if I want a good
takes the Berkshire more           time you want to               relationship with people like
suited to him. He said,                                           Warren, the key is to have a
‘We’re not going to make              be in a place               good relationship with their
any decision that would get                                       assistant. And it’s not trying
us more money if it means           where there are               to manipulate them into
we lose one night of sleep.’                                      doing right for you. It’s
That’s effectively saying, ‘I
want this to suit me. I don’t
                                    so many people                really genuinely caring about
                                                                  who they are, caring about
want to be the best, biggest,                                     what their job is, and trying
fastest.’                          who just love you
                                                                  to help them to do a good
                                     because every                job for the guy that they’re
That’s just a profound                                            working for. When you get
insight and I can tell you it’s                                   them as allies it’s a huge
scary for me to stand up in          time you have                amount of fun and joy. I
front of my investors and                                         don’t even address anything
say, ‘I’m not trying to have                had a                 to Warren anymore. I
the highest possible returns.                                     address it to Debbie. I say,
I’m trying to run this in a           conversation                ‘Dear Debbie dot dot dot.’
way that fundamentally                                            Or I might say, ‘Warren
really suits who I am.’ Half           about some                 might want to see this, but
your investors leave the                                          only if you’re printing it out
room.                                 company you                 for him and giving it to him
                                                                  at the right time when he’s
I’ll just give you one final          have found a                not busy, when he’s ready
thing. We talked about the                                        for a bit of a laugh.’
limits to the size of              way to add value
Berkshire. For some reason                                        G&D: Guy, thank you for
we haven’t had a company
that’s broken through a
                                       back in their              your time.

trillion dollars in market cap
and somehow that seems to                   lives.”
be the limit to size. The
fierce pride with which
Warren asserted that              much more than that. She
Berkshire wasn’t subject to       knows everything that’s
that was fascinating.             going on. It’s impossible for
                                  Warren to function if she
G&D: What did you learn           doesn’t. She’s a repository
from Debbie?                      of a huge amount of
                                  knowledge at Berkshire
GS: Let me tell you how           Hathaway. She’s a
special a person Debbie is.       repository of many things
She’s somebody who’s so           that managers at Berkshire
self-confident about who
              Page 16

                                 Homex (9.75% Sr. Guaranteed 2020 US$ Notes) - Long @ 36.94 (5/28/13)
                                 Peter Bowley
                                 PBowley14@gsb.columbia.edu




Peter is a second year MBA
student participating in the
Value Investing Program.
During the summer, he
worked at Perry Capital
researching high yield and
distressed debt                  Recommendation:
opportunities. Prior to          BUY Homex (“HMX”) 9.75% Senior 2020 Notes. Even assum-
Columbia Business School,        ing aggressive down-side scenarios (30% of face tender offer/
he worked at a farmland          restructuring or liquidation), making money (on prob.
investment fund based in         weighted avg. return basis) requires only a 5% probability the
Argentina. Peter holds a BS      notes remain performing. I estimate this probability as at least
from Boston College.             30% due to HMX’s market leadership, relationships with government/domestic and international
                                 banks/suppliers, non-core assets available for sale, Mexico’s significant remaining housing supply defi-
Peter was part of the 1st        cit, continued government subsidy support to subsidize housing demand and Mexico’s favorable mac-
place team in Columbia’s         roeconomic outlook. Restructuring is a much more likely outcome than liquidation, due to family-
2012 Restructuring Case          controlled nature of the company, as well as the significantly larger value of land bank as an on-going
Competition. He was a semi       concern versus liquidation value.
-finalist in Origami Capital’s
2013 Global Investment           Background
Idea Competition for his         HMX is a vertically integrated homebuilder focused on affordable entry-level and middle-income
research on water rights.        housing in Mexico, as well as a small operation in Brazil. Its tourism development division targets high-
Peter is co-President of the     income foreigners, and its infrastructure division constructs/operates public-private partnership pro-
student-run Commodity            jects like prisons. In 2012, HMX operated in 35 cities/22 states, building 46,357 homes (#3 player with
Club.                            2.0% market share), 91% in the affordable entry level segment. In 1Q13, HMX had a land reserve of
                                 76.7 MM m2 in Mexico, 2.3 MM m2 in Brazil, as well as 0.3 MM m2 tourism-related land bank and a
The student pitches              hotel. Customer price/sale risk has historically been reduced through federally-subsidized mortgages
featured in this issue are a     (INFONAVIT/FOVISSSTE) for low-income earners (financed via obligatory payroll taxes), to reduce
selection from Columbia          Mexico’s 4.3 MM housing unit deficit (+2.5 MM fed/state/muni. formal-sector employees alone).
Business School's
Investment Ideas Club            During 2011-12, leading Mexican homebuilders expanded land banks into 2nd/3rd tier regions. Simul-
(“IIC”). If you are              taneously, their horizontal row-house building model generally failed as suburban locations lacked
interested in hearing more       transportation infrastructure for residents to reach workplaces. Many homeowners “mailed back
pitches by serving as an IIC     keys” (100% LTV purchases from government-subsidized mortgages), turning some developments
judge, please contact Ben        into abandoned ghettos. Government payments of receivables to homebuilders slowed significantly in
Isaac (bisaac14@                 4Q12-1Q13 as ministries transitioned for newly elected President Peña Nieto. To address the failed
gsb.columbia.edu) or             suburban row-house building model, the government announced homebuilders will be required to
Charles Buaron (cbuaron14        build urban vertical developments (more costly; less land available). These factors created a liquidity
@gsb.columbia.edu).              crunch for Mexican homebuilders, including HMX, which burned (MXN$6.1 BN) and (MXN$3.2 BN)
                                 in operating cash flow in 2012 and 1Q13. HMX has MXN$20.6 BN in debt (incl. 1Q13 Inbursa bank
                                 debt), of which 56% is Senior Unsecured notes. In April 2013, HMX breached a covenant on US$70
                                 MM of swaps with Credit Suisse and Barclays (who are taking HMX to court for payment remedies),
                                 as well as on a loan from a Brazilian bank for HMX’s Brazil operations. Both events could qualify as an
                                 event of default for HMX’s Senior Unsecured Notes, including the 2020 Notes. Further contributing
                                 to the homebuilder liquidity crunch, in late-May 2013, INFONAVIT (the Mexican government mort-
                                 gage credit agency; issues 2/3 of housing sales by HMX) was ordered by courts to suspend payments
                                 to homebuilders due to legal actions of foreign/local creditors to the homebuilders.
  Volume I,
 Issue XIX Issue 2                                                                                             Page 17

Desarrolladora Homex (Continued from previous page)
Investment Thesis:
A. HMX selling non-core assets and focus on cash flow generation: MXN$4 BN sale of prison assets;
MXN$2 BN for debt repayment, MXN$2 BN for working capital; actively marketing tourism land bank
(MXN$750 MM market value); owns 2.3 MM m2 Brazil land bank, a 150 room hotel and 2 airplanes
B. HMX has sufficient liquidity through 2013E, even in a downside scenario: +MXN$2 BN in new work-
ing capital to unlock value from current construction in progress; low capex needs (<MXN$100 MM);
13E debt amort + interest of MXN$3.0 BN; (MXN$1.4 BN) financing gap can be met by non-core asset
sales (high demand for tourism assets as constitutional ban to be removed for foreigners to own beach
front land; large real estate fund believed Brazil land bank could be developed for industrial use).
C. Federal government and domestic banks need top homebuilders to survive: still +2.5 MM home unit
deficit for salaried police/army employees alone; Top 4 homebuilders build +150k new units/year (20% of
affordable homes in 2012); President announced +MXN$7 TN in public infrastructure spending; HMX
CEO has strong relationship with new president and helped get elected, should benefit from new, high-
ROIC infrastructure deals; domestic banks are large creditors to homebuilding sector with symbiotic
relationship (uninterested in foreclosing on land bank/work-in-progress construction creating price col-
lapse; also repackage mortgages into CMBS).
D. Vertical Building Model: Gradual and Subsidized Transition: government mandate for vertical home-
building won’t take effect until 2014-2015; new government subsidy program to guarantee first 30% loss
on new loans for vertical construction (HMX already received US$12 MM bridge loan from ABC Capital/
Cemex); HMX increased to 55% vertical construction in 2012 (from 5% in 2010).
E. Mexico Macroeconomic Tailwinds: balanced budget since 2006; 27% debt/GDP; increased tax collec-
tion and energy/PEMEX reform to drive 13E/14E GDP growth of 3-4% p.a.; May 2013 Fitch upgraded
Mexico to BBB+ (if fiscal/energy reforms passed could go to A-level).

Valuation/Recovery Analysis:
 My liquidation valuation: (i) 70% discount to homebuilding land banks, (ii) 30% discount to tourism land
  bank, (iii) 40% discount to other assets, (iv) no value assigned to infrastructure division other than the
  prison service operation.




                                                                 Investment Risks/Considerations:
                                                                  Distressed sale of competitor’s land
                                                                 bank/home inventory: could cause land
                                                                 bank and housing prices to drop
                                                                  Extended suspension of payments from
                                                                 INFONAVIT: past 3-4Q13 could impair
                                                                 HMX liquidity (post non-core asset sales)
                                                                  Collateral value expropriation in a
                                                                 liquidation: CEO/family is controlling
                                                                 shareholder
                                                                  Weak bankruptcy laws/institutions:
                                                                 judgments in pesos; subsidiary guaran-
                                                                 tees/fraudulent conveyance;
                                                                 intercompany debt (Vitro case)
              Page 18

                               Wabash National Corp. (WNC) - Long
                               Adam Trivison
                               ATrivison14@gsb.columbia.edu

                                Ticker: WNC (NYSE)                                   Market Cap: $717mm
                                Current Price: $10.47 (7/19/13)                      Enterprise Value: $1,088mm
                                Shares Outstanding: 68.5mm                           ROE: 51% (FY2012)
                                Price Target: $14.50                                 ROIC: 12% (FY2012)
                                Target Time Horizon: One year                        EV/EBITDA: 6.8x (Consensus NTM)
                                Target Return: 40%                                   NTM P/E: 11.9x (Consensus NTM)

                               Business Description
Adam is a second year MBA
                               Wabash National Corporation is a leading manufacturer of truck trailers in the US. Headquartered in
student focused on
                               Lafayette, Indiana, the company has leading positions in the Dry Van and platform trailer markets, and
investment management.
                               also has top 3 positions in the market for Refrigerated and Dump trailers. The company's customer
Prior to enrolling at
                               base is primarily comprised of large trucking fleets (e.g. UPS, Werner Enterprises and Knight Trans-
Columbia Business School,
                               portation) and large corporations that own trucking fleets (Dillard’s and Safeway). WNC also pro-
he was an investment
                               vides parts and support for its products through a dealership network. With the acquisition of Walk-
analyst at Mont Pelerin
                               er Group (specifically its liquid storage business), WNC gained exposure to the chemical, energy,
Capital. Adam holds a BS in
                               aviation, and food industries.
Finance from California
State University.
                               Investment Thesis
                               North American trailer cycle is still in early innings with strong secular and structural
                               supports: Significant underinvestment by trucking fleets during the 2008-2010 time period has lead
The student pitches
                               to an elevation of the average truck trailer age to record levels. Currently, the system wide trailer age
featured in this issue are a
                               stands at near 8 years old, versus an average long-haul life of 10 years. As trailers age, maintenance
selection from Columbia
                               costs increase and the economics of a new trailer purchases improve. Moreover, the US trailer popu-
Business School's
                               lation is 10% lower than pre-2008 levels despite the fact that aggregate truck tonnage has recovered
Investment Ideas Club
                               to (and exceeded) pre-2008 levels. Purchases thus far in the cycle have only served to replace old
(“IIC”). If you are
                               trailers, thus trailer purchase volumes will need to outpace current levels (and expectations) to grow
interested in hearing more
                               the trailer population as tonnage continues to increase. Industry organizations currently expect vol-
pitches by serving as an IIC
                               umes to remain flat at just under the 250k level; the two most recent cycles have had multiple years
judge, please contact Ben
                               above the 250k level. Regulatory pressures, specifically Hours of Service rule changes and CSA 2010,
Isaac (bisaac14@
                               are forcing truckers to increase trailer purchases. The compliance date for the Federal Motor Carrier
gsb.columbia.edu) or
                               Safety Administration’s final regulations governing Hours of Service for commercial drivers was July 1,
Charles Buaron (cbuaron14
                               2013. The rule changes reduce a driver’s maximum work week by 12 hours to 70 hours from 84.
@gsb.columbia.edu).
                               WNC management has stated that customers have indicated that they will increase the use of drop-
                               and-hook activity (i.e. when a driver simply "drops" his trailer at a customer location and "hooks" to
                               another trailer), which will increase trailer demand. Also, the Compliance, Safety, Accountability
                               (CSA) program, instituted in 2010, has created incentives for equipment replacement through a scor-
                               ing system that is partially based on the fleet condition. The environment for truckers is fairly positive
                               as tonnage has grown consistently since its 2009 trough and diesel fuel prices have stabilized near
                               $4.00. Increased home building activity has added another vector to the growth of tonnage, particu-
                               larly in the flatbed segment of the market, in which WNC has a leadership position through its acqui-
                               sition of Transcraft and Benson in 2007 and 2008, respectively. NTM consensus revenue growth ex-
                               pectations for public trucking companies sit in the mid-single-digit range and NTM EBITDA growth
                               expectations in the mid-teens.

                               Efforts to diversify the business have transformed the firm, creating a more stable cash
                               flow stream: Historically, WNC’s business has been almost entirely reliant on dry van trailer sales.
                               Dry van cycles are extremely volatile and, in the past, the Company regularly incurred large losses
                               during cycle troughs. In 2007, WNC’s management instituted their Next Steps initiative, a plan fo-
                               cused on diversifying the business and improving operations. Since then, the Company has expanded
                               outside of their traditional dry van trailer business through organic initiatives and the acquisition of
                               four businesses. These new businesses create value through synergies that can be broken down into
                               several buckets, including supply chain optimization, commercialization and distribution of new and
                               existing products, back office and administrative consolidation. Moreover, these acquisitions and initi-
                               atives represent significant growth opportunities as they are levered to secular growth drivers (i.e.
                               fuel efficiency, US energy production). Most notably, the acquisition of Walker Group in May 2012,
                               gave the Company a leadership position in liquid transportation systems and relationships with a Blue-
                               chip customer base. Moreover, Walker’s +25% gross margins helped to raise company-wide gross
                               margins. The acquisition should create more than $10mm of annual synergies over the next year.
  Volume I,
 Issue XIX Issue 2                                                                                               Page 19

Wabash National Corporation (Continued from previous page)
Profitability will continue to improve as multiple factors drive margin expansion: The Com-
pany has also been more selective in terms of the orders they are taking on, raising prices at a mid-single
-digit rate. Volumes initially decreased with the price taking, but management has stated that they are
beginning to see those customers who initially walked away from the higher prices come back. The price
taking has helped to expand their Commercial Truck segment’s margins from the low single-digits in late
2011 to the high-single-digits in the most recent quarter. Ultimately, Commercial truck margins should
reach the low-teens later in the cycle as volumes and prices continue to increase. Moreover, aluminum
(one of WNC’s primary raw materials) prices have fallen from $0.95 per pound in January to $0.80 in
July. The benefit of the decreased cost should be evident in 3Q12 results. The Company has mitigated its
exposure to wood and rubber prices through escalators in customer contracts.
Competitive Dynamics:
The truck trailer market is an oligopoly (four-firm concentration ~65%). Players in the industry offer
marginally differentiated products, thus only two criteria matter: Price and Relationships. Scale is im-
portant as it drives down cost and allows for profit at market prices, thus all small players focus on a
market niches. The largest players include Wabash Nation Corporation (20% of industry market share),
Great Dane (20% of industry market share), Utility (15% of industry market share), Hyundai Translead
(10% of industry market share), and Stougton (5% of industry market share). Wabash dominates in the
dry van, flatbed, and liquid tank categories, while Utility leads in the refrigerated segment.
Industry Outlook:
Despite popular belief, the amount of tonnage transported by trucks is growing and rail transport is not
a threat to trucking volumes. If anything, intermodal transport will cannibalize rail volumes over the next
10 years. According to the American Trucking Association, Truckload volumes will grow 3.2% through
2018 and 1.1% annually between 2019 and 2024. Less-than-truckload volume should grow 3.5% annually
through 2018 and by 2.4% until 2024. In general, US Trailer fleets are in decent financial shape in terms
of leverage and business outlook.
Valuation:
WNC offers a compelling risk/reward payoff at current levels as the market currently underestimates
future trailer order volumes and thus WNC’s future revenues and profit. WNC can earn an EPS of
$2.50 in 2017 based on mid-single digit revenue growth, gross margin expansion in the commercial trail-
er segment to prior cycle levels of 11%, and lower interest expense as the Company pays down debt and
buys back shares with free cash flow. My price target for the stock is $14.50 based on an 8.0x P/E multi-
ple on 2017 earnings, discounted to the present at a discount rate of 10.8%. The 8.0x multiple sits rela-
tive to historical peak earnings multiples of 6.0x; the higher multiple reflects the high quality of WNC’s
business relative to prior periods. The peak earnings valuation is confirmed by free cash flow valuations
as they produce price targets that bracket the peak earnings price target.

FCF Valuation
In $mm                      Actual                           Company Projections                      Terminal
FCF Calculation:            2012        2013        2014           2015          2016       2017       2018
EBITDA                      118.4       168.8       205.6         241.5          271.3      295.2      295.2
EBIT                         87.7       129.5       167.6          204.6         235.5      260.3        -
NOPAT                        54.8        84.2       108.9         133.0          153.1      169.2      169.2
NWI                         116.8       130.9       142.7          151.6         154.7      159.4        -
 Change in NWI                -          14.2        11.7           9.0            3.1        4.6        -
NFA                         132.2       128.9       122.2          115.3         108.2      100.8        -
 Change in NFA                -          (3.3)       (6.7)         (6.9)          (7.2)      (7.4)       -
Deferred Taxes               64.2        64.2        64.2           64.2          64.2       64.2        -
 Change in Deferred Taxes     -           0.0         0.0           0.0            0.0        0.0        -
FCF                           -          73.3       103.8         130.9          157.2      171.9      171.9
 FCF Yield                    -         10.2%       14.4%         18.1%          21.8%      23.8%      23.8%
Discounted FCF                -          64.5        84.7          96.4          104.5      103.2        -
Tax Rate                    37.5%       35.0%       35.0%         35.0%          35.0%      35.0%        -


WACC                        10.8%    Competitive Markets                     EBITDA Exit Multiple
PV of yr. 1-10              $453.2   NOPAT for 2017                 169.2    EBITDA Multiple            5.0x
Peak P/E Multiple                    TV at 2017                    1,573.5   TV at 2017               1,476.0
2017 Earnings               $2.55    TV PV                          944.3    TV PV                     885.8
Peak P/E Multiple            8.0x    Firm Value                    1,397.5   Firm Value               1,339.0
2016 Equity Price Tar-                                                       Equity Val-
get                         $20.40   Equity Value                   987.5    ue                        929.0
Current Equity Value PS     $14.56   Equity Value Per Share        $14.74    Equity Value Per Share   $13.87
              Page 20

                               Active Network, Inc. (ACTV) - Long on 7/21/13
                               Wes Aull, CPA
                               WAull14@gsb.columbia.edu
                               Recommendation:
                               Active Network, Inc. (ACTV) has significant upside potential
                               with catalysts in the coming year to realize EBITDA expansion
                               and improved performance. The main catalysts are reduced
                               R&D spend, due to end of a new cloud-based platform imple-
                               mentation, along with improved management after the found-
                               ers’ overdue departure. Increased EBITDA and improved man-
                               agement should further catalyze multiple expansion to valua-
                               tion more in-line with peers. The downside to Active Net-
                               work’s current base revenue is small due to its leading market
                               position and competitive advantages (e.g. sticky customer
                               groups).
Wes is a second year MBA
student focused on             Business Description
investment management.         Leading provider of SaaS, cloud-based event/organization man-
Prior to enrolling at          agement in four activity segments: sports, communities, out-
Columbia Business School,      doors, and business. It’s solutions help over 55K organizations
he worked in public            process ~90M transactions for 200K+ activities. ACTV’s plat-
accounting, beginning at       form provides operations management, analytics, marketing,
BDO Seidman in assurance.      registration, and payment tools.
He went on to found his
firm (now Aull & Cooper,       Investment Thesis
CPAs PLLC).
                               Strong Base of Revenue With Leading Market Share in Its Activity Segments, Solidi-
                               fied by Competitive Advantages.
He graduated magna cum
laude from the University of
Kentucky with a BS             ACTV has established customers with multi-year contracts in each of its segments: Sports– Iron-
Mathematical Economics.        man, Little League Baseball, USA Triathlon; Communities–60 of top 100 North American park
He also earned his Master’s    dept.’s; Outdoors—National Park Service, California State Parks; Business– CISCO Live!, Oracle
of Public Accounting at the    OpenWorld, Macworld. 25% of revenue derived from corporate conference platforms, seeking
University of Texas—           best in brand. 25% of revenue derived from state and federal government agencies with sticky
Austin.                        contracts.

The student pitches            Customer captivity created because of ease in using existing marketing/operational functionality
featured in this issue are a   for event organizers and their end users year-on-year. Database and tool conversion creates
selection from Columbia        painful switching costs.
Business School's
Investment Ideas Club          ACTV has a leading market share amongst a fragmented industry. Because of ACTV’s research
(“IIC”). If you are            and development spend (~20% of sales) with its superior market share, the company has a R&D
interested in hearing more     lead over most competitors. ACTV’s R&D spend is nearly 2x of Constant Contact, a significant
pitches by serving as an IIC   competitor.
judge, please contact Ben
Isaac (bisaac14@               Bar Lowered for ACTV Over FY ‘12 and 1st Half FY ‘13: Expectations That Can Be
gsb.columbia.edu) or
                               Beat Based on Founding Mgmt.’s Departing Performance
Charles Buaron (cbuaron14
@gsb.columbia.edu).
                               From mid-2012 to mid-2013, ACTV disappointed investors and anchored low expectations be-
                               cause of:
                                Progressively lowered guidance on sales growth from 20-30% to 10-20% YOY.
                                Longer-than expected spend and implement. of new cloud-based ActiveWorks platform,
                                   resulting in significantly higher R&D spend over past 2-3 yrs.
                                ACTV founders (chairman and CEO) both resigned in May ‘13 after leading the organization
                                   for over 12 years. The stock price has seen a 60% drop during their tenure after ACTV’s
                                   IPO in 2011.
                                Poor performance in outdoor (due to cold spring) and one-time marketing svc.’s in Q1 ’13
                                   were outside of normalized earnings.
  Volume I,
 Issue XIX Issue 2                                                                                      Page 21

Active Network, Inc. (Continued from previous page)
ACTV substantially undervalued against its peers despite its higher quality earnings.
While ACTV has a lower gross margin versus its peers, its EBITDA margin of 7% (vs peer avg. of
2.9%) stands notably higher despite ACTV’s greater R&D spend. Because of ACTV’s scale and lean
SGA, it is able to operate with a much lower sales & marketing (as % of sales) versus its peers.

In spite of the higher EBITDA margin, the market gives ACTV’s earnings a lower valuation (EV/
EBITDA—9.2 versus 20.3 peer avg.; EV/Sales—1.0 versus 2.3 peer avg.). While sales growth has
slowed, it does not justify the dramatic valuation difference.

EBITDA expansion and improved management to catalyze stock appreciation.
 R&D expense will be significantly reduced following implementation of cloud-based Active-
   Works (end of 2013). Reversion of R&D as % of sales to forecasted 16-17% in ‘14 re-
   sults in a 23-33% increase EBITDA.
 New management will improve Active Network, Inc. where prior ‘founding’ leadership was
   limited or lacked vision/execution. Ripe for a turnaround? Founding chairman and CEO
   both unexpectedly resigned together, signaling a potential board move after disappointing re-
   sults in prior years. After their resignation, the stock price did not retreat but celebrated man-
   agement’s departure.
       Page 22


                 Koch Industries
                 (Continued from page 1)        key to unleashing those         buyer who can do big deals
                 development intern at          pent-up ideas and               quickly. What sets you apart
                 Koch Industries, sat           innovations. The system         from not only Berkshire
                 down with Steve                allows all of our employees     Hathaway, but also other
                 Feilmeier and Dave             to share in a portion of the    financial or strategic buyers
                 Robertson at Koch’s            value that they are creating.   when it comes to investing
                 headquarters. Steve            It doesn't matter what your     in businesses?
                 Feilmeier is Koch’s            role is—if you can find ways
                 executive vice president       to help us better serve our     SF: It’s our ability to tailor
                 and chief financial officer    customers so that we profit     our investment to the very
Dave Robertson   and has been with the          more, we want you to share      specific needs of our
                 company since 1997.            in some of that profit. You     counterparty to solve the
                 Steve earned his               are rewarded like an            problem they’re trying to
                 bachelor’s and master’s        entrepreneur is rewarded. If    solve. A typical hedge fund
                 degrees in accounting          you're successful at that,      or private equity fund is
                 from Wichita State             you’ll do better and if you     limited in the types of things
                 University. Dave is            fail, then you won’t do as      they can do, types of
                 president and chief            well.                           securities they can invest in,
                 operating officer of Koch                                      or the duration of the
                 and started his career         Steve Feilmeier (SF): It's      investment because they are
                 with the company in            also the incentive to speak     beholden to their own
                 1984. Dave earned his          up when you think               investors who may
                 bachelor’s degree in           somebody else’s idea has        prescribe certain mandates
                 business administration        some limitations—what we        or rules.
                 and marketing from             call our challenge process.
                 Emporia State                  Not only do we incentivize      We try to listen and will
                 University.                    people to speak up, but we      adapt to meet our
                                                also expect the recipient of    counterparty’s needs. The
                 Graham and Doddsville          that information not to be      key is to make sure we’re
                 (G&D): Koch Industries         defensive so he or she is       being compensated for the
                 has one of the best long-      open to incorporating           risk that we’re taking.
                 term compounding records,      different viewpoints. We'd
                 with mid-teens compound        much rather limit the           G&D: Koch is in a unique
                 annual growth for over 50      mistake rather than invest in   position to allocate capital
                 years. Why do you think        it—then you’ve really got a     given its diverse set of
                 Koch has been so successful    mess on your hands.             businesses and significant
                 over the years?                                                capital to invest in new
                                                Having an open and honest       opportunities. Can you
                 Dave Robertson (DR):           culture where we trust each     explain Koch’s overall
                 Our management                 other is key. A lot of          capital allocation
                 philosophy, Market-Based       companies think they do a       philosophy?
                 Management®, is what           good job at incentivizing
                 allows us to achieve those     people, then they get in        SF: First, you have to be in
                 types of returns over time.    here and say, “Wow, it's        the right businesses where
                 When we acquire a new          night and day.”                 you have the capability to
                 company, Market-Based                                          create real value. Then,
                 Management® unleashes the      G&D: A recent article in        don’t try to optimize and
                 knowledge and ideas that       the Wall Street Journal         trade in and out of them
                 people in that firm have to    talked about how Koch           like a private equity firm has
                 innovate and to make their     Industries wants to be          to do.
                 product or process better.     considered alongside
                                                Berkshire Hathaway as a                       (Continued on page 23)
                 Our incentive system is very
 Volume I,
Issue XIX Issue 2                                                                                                 Page 23


Koch Industries
(Continued from page 22)        trying to pick the ones that       typically constrained by
As Charles [Koch] likes to      provide the best return on         whether or not the markets
say, it’s hard enough to find   the risk that we’re taking.        are offering an appropriate
good businesses. Why                                               return or whether or not
would you want to sell one      It’s a little bit of first-come,   we’ve got the capabilities to
once you already own it?        first-served in that when we       manage the investment.
That is a very important key    see good opportunities that        When we have more ideas
to how you compound—get         present an attractive return       or good opportunities than
good businesses, and then       on the risk, then we go after      capital, we could always use
invest in them for the long     them.                              debt capital but this is rare.
run.                                                               Our goal is to finance                 Steve Feilmeier
                                                                   everything with equity.
Another critical dimension
is to stay very rigorous in                                        DR: Our transaction
your discipline. All too                                           excellence capability is the
often, you’ll hear public         “As Charles [Koch]
                                                                   discipline that Steve’s talking
companies acquiring              likes to say, it’s hard           about. We can evaluate
businesses for “strategic                                          each of these opportunities,
reasons.” For us, if we’re       enough to find good               whether it’s a project to add
not earning an appropriate                                         on to an existing facility, an
rate of return, it’s never          businesses. Why                acquisition, or an equity
strategic. Strategic should                                        investment. We’re putting
mean that you’re creating         would you want to                each of those through the
real value in society. If                                          same rigor and analysis to
you’re not earning an              sell one once you
                                                                   determine the expected
appropriate return on your           already own it?               risk-adjusted return.
investment, by definition,
you’re not creating value.            That is a very               G&D: You have said in the
                                                                   past that Koch is not
So we stick to our                 important key to                bounded by any industry—
disciplines and make sure                                          instead, it’s bounded by its
that the returns on risks are            how you                   capabilities. Could you
appropriate each and every                                         describe Koch’s capabilities?
time. Then we look at things         compound: get
                                                                   And given how fast the
not through a filter of             good businesses,               world changes, how do you
“who’s going to get how                                            think about developing new
much capital this year.”           and then invest in              capabilities?
We’ll fund any and all
projects in each of the            them for the long               SF: Most of our businesses
businesses we have that                                            have more in common than
meet these criteria.                        run.”                  might meet the eye. We
                                                                   take some form of
DR: A lot of firms have a                                          commodity and we’ll
budget mentality where they                                        process it through a very,
say “we’ll give this business                                      very large plant that
this much capital,” and         SF: We’ve never been in a          requires sophisticated
we’re not doing that. We        situation where our internal       technology and analysis to
have shareholders who           funding hasn’t generated           ensure that we have a
historically have reinvested    enough capital where we’ve         competitive advantage and a
90% of the earnings back in     been constrained. So we’re         capability to go to market in
the company. So we’re           not constrained by the fact        scale. Then we’ll optimize
looking at any and all          that we’re private. We’re                        (Continued on page 24)
opportunities and then
             Page 24


                           Koch Industries
                           (Continued from page 23)         money by being excellent at      requires looking forward
                           around that processing or        getting product to the store     and trying to understand the
                           manufacturing process            and having the right             trends that might really
                           because there is raw             inventory at the right place     matter, for example, energy
                           material risk, commodity         at the right time. And they      and agriculture products
                           risk, and counterparty risk.     have the scale to do so at       should continue to be in
                                                            low cost, too.                   high demand. The world is
                           We also have the capability                                       going to need more of the
                           to be very efficient and                                          products from these
Pictured: Leon Cooperman   effective from a cost
’67 speaking at the 2013                                                                     industries in the future.
                           perspective and the               “A great business is
Omaha Dinner.
                           capability to constantly                                          G&D: How would you
                           innovate because the                 one where you
                                                                                             define a great business?
                           technology changes in these                                       What are some examples of
                           big plants. We must be
                                                              have a significant
                                                                                             great businesses that you
                           adaptable to ensure that we            competitive                admire?
                           don’t fall from the first
                           quartile to the second,              advantage with               DR: A great business is one
                           third, or fourth quartile in                                      where you have a significant
                           cost advantage.                       offshoots that              competitive advantage with
                                                                                             offshoots that allow that
                           Our other core capabilities       allow that business
                                                                                             business to grow. That
                           besides innovation and                                            advantage could come from
                           operations excellence are
                                                                 to grow. That
                                                                                             a raw material advantage,
                           Market-Based                        advantage could               technology advantage, or a
                           Management®; trading;                                             number of other sources.
                           transaction excellence; and         come from a raw
                           public sector, which                                              Take our Pine Bend, MN
                           encompasses legal,                       material                 refinery. It's a great
                           communication, community                                          business. We buy
                           relations, and government               advantage,
                                                                                             advantaged feedstocks,
                           relations.                                                        convert those into very
                                                                   technology
                                                                                             high-value end products, and
                           So, whether it’s crude oil           advantage, or a              sell them in one of the best
                           going into refined products,                                      marketplaces in the country.
                           natural gas going into              number of other               That has propelled us into
                           fertilizer, naphtha going into                                    other businesses, like our
                           chemicals, trees going into              sources.”                petroleum coke business in
                           pulp, metals going into our                                       Koch Minerals.
                           manufacturing businesses—
                           each of these businesses fit                                      SF: When we say
                           the capabilities described       We don’t have that               “competitive advantage,”
                           above.                           capability. So there are         that does not mean an
                                                            certain things that we           advantage over our
                           Certain businesses simply        couldn’t envision—that           customer where we can
                           do not benefit from these        doesn’t mean that we             profit at their expense. It
                           capabilities. We’re not a big,   wouldn’t build the capability.   means that we have created
                           multi-unit retailer. The         We would consider building       something that creates a
                           capabilities of the largest      capabilities whenever it’s       great advantage over the
                           retailers are being very, very   evident that society is not      way things used to be done
                           sophisticated at information     effectively allocating capital   or over the way our
                           technology management and        to an industry. That                          (Continued on page 25)
                           logistics. They make their
 Volume I,
Issue XIX Issue 2                                                                                        Page 25


Koch Industries
(Continued from page 24)          that Koch often has more         to find actionable
competition does it today.        than 100 companies on its        opportunities that would fit
As a consequence of that,         investment watch list. How       our capabilities. We have
we're using fewer resources       does Koch go about               well over 100 business
to produce goods or               generating these investment      development personnel
services that somebody will       ideas?                           across all the companies.
value. And that's good for
society. Everybody wins.          DR: We have business             SF: We must be able to do
Our customers win because         development (BD)                 something with a business
they'll participate in that       personnel in all of our          that the incumbent owners
value creation.                   different businesses. So for     cannot, or else we’re not
                                  example, Georgia-Pacific has     creating any value—they’re
We stress this idea to all of                                      a better owner than we are
our employees that we’re                                           otherwise. It doesn’t make
not seeking the type of                                            sense for us to own
advantage where you win                                            anything unless we add
and someone loses. Not                                             value to it.
every business thinks of it         “We must be able
this way. We think of this as                                      I’ll give you two examples
subsidization or cronyism            to do something               out of our fertilizer
which distorts markets and                                         business. Agrotain, which
is not good for society.           with a business that            produces a specialty
                                                                   molecule that, when
DR: It’s a great point                the incumbent                combined with straight-run
because win/lose is not                                            commodity fertilizer, makes
sustainable over time. You
                                    owners cannot, or
                                                                   a much better product for
can’t do what Koch has                 else we’re not              the farmer. With Agrotain
done over 50 years by us                                           applied, the amount of
winning and our customers               creating any               fertilizer that actually
losing. Competitive                                                reaches the plant goes way
advantage assumes that we            value—they’re a               up, and that creates value
can provide goods and                                              for everybody. J&H Bunn in
services to our customers           better owner than              the UK is good at fertilizer
and be their best alternative.                                     distribution, blending, and
The spread in that equation
                                   we are otherwise. It
                                                                   warehousing and dealing
is profit, and we believe          doesn’t make sense              directly with the customer.
profit really is the measure
of how much value we are               for us to own               Koch Fertilizer’s core
adding in society.                                                 competency before
                                   anything unless we              acquiring these two
The only reason a business                                         businesses was having a
exists is to make people’s           add value to it.”             global breadth and depth of
lives better. We use                                               manufacturing commodity
resources more efficiently                                         fertilizers, and then getting
to produce goods and                                               them to market through our
services that people want to                                       terminal system and
buy. If we do that                a BD Team and Flint Hills        marketing capability. The
effectively, then we are          has a BD team. Within            Agrotain and Bunn business
creating value in society. It’s   Steve’s group at a corporate     lacked the capability that we
an important backdrop to          level, we also have a            have to reach global
this discussion.                  business development team.       markets.
                                  Those teams’ daily activity is                (Continued on page 26)
G&D: Dave, you’ve said
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          Koch Industries
          (Continued from page 25)          easy to make a mistake. We       You learn a lot about how
          These businesses came             know that our culture is         the company treats them.
          together synergistically          unique—we talk about that
          where we could take               a lot. So we’re not going to     DR: If we thought a
          Agrotain, use J&H Bunn’s          find someone whose culture       company’s culture was one
          knowledge of blending,            fits exactly.                    that lacked integrity and
          storing, distribution, and                                         compliance, we'd back away.
          customer service, and do          We try to make sure that         We wouldn't do the deal;
          that globally.                    their culture isn't so           it's not worth it. And that
                                            antithetical to ours that we     has happened more than
          That’s what we brought to         wouldn't be able to, over        once.
          both of these businesses and      time, meld it or blend it into
          why transactions made             our culture. But it's            G&D: Given that gasoline
          sense for all three               something that we haven't        consumption in the U.S. is in
          businesses.                       really been great at. We're      structural decline from
                                            trying to get better by          increases in fuel efficiency
          DR: We can’t just dream up        spending more time and           and the shift toward hybrid
          or manufacture these              energy assessing it and          and electric vehicles, is the
          opportunities amongst             understanding how different      refinery business still a good
          business development              they are, what those             business?
          people. They have to have         differences are, and what
          contacts and relationships in     we need to do to bring           DR: Yes, depending on the
          the industry to have the          them into our culture.           asset. We look at these
          opportunities shown to us.                                         businesses on a supply stack
          So it requires a lot of           SF: Culture is many              from who we think is most
          different interactions to be      different things. For us, it     competitive to who we
          able to size up, screen, and      starts with our ten              think is least competitive. As
          think about where the             principles. They are each        volume shrinks in a market,
          opportunities might be.           important because they           you move closer to the
                                            work together, but there is      more competitive players to
          G&D: How do you judge             one in particular that I pay     be able to meet the demand
          whether or not the culture        attention to when we're          in the marketplace. As long
          of a potential acquisition will   looking at another company,      as you're far left in the
          be a good fit for Koch? How       and that is humility.            supply stack, then it can be a
          do you prevent mistakes?                                           very attractive business. If
                                            Being open to challenge is       you're far right—if you're a
          DR: It’s very difficult to do,    really important. The way        high-cost producer—and
          and it depends on the type        people treat each other is       the market is shrinking, then
          of deal. If it’s a public         also really important. I was     it's a bad place to be
          company deal, you get very        with a company yesterday         because you're going to be
          little due diligence. You’re      where the CEO knew every         less profitable, or
          not going to get a full           single person's name that he     unprofitable.
          picture of the culture, other     passed by. It tells you a lot!
          than the feel you get from                                         We feel good about our
          the handful of leaders that       Understanding culture            position in the refining
          you meet.                         before we acquire a              business, but for those with
                                            business could be the most       marginal assets, it's probably
          If you’re doing an asset-         important thing we do. And       not a good place to be.
          based deal or carve-out, you      it's been the one of the
          may get a lot more time to        hardest to do. You have to       SF: Having the correct
          work with the counterparty        talk to the employees,           vision for the business is
          to find out what their            customers, and suppliers.                      (Continued on page 27)
          culture is like. But it is very
 Volume I,
Issue XIX Issue 2                                                                                     Page 27


Koch Industries
(Continued from page 26)         engines need higher octane.    today, even without
key. For example, Flint Hills                                   subsidies or mandates.
used to view themselves as       A blend of gasoline with
strictly a crude-oil-based       ethanol to increase the        SF: Here are some
refined products business.       octane level makes sense to    numbers to put with that.
Now they view themselves         feed those engines. So         You can buy 87, 89, or 91
as a transportation fuels        ethanol has a place in the     octane gasoline. That is
business. These visions are      transportation fuel industry   regular unleaded, mid-grade,
very different.                                                 or premium. One way to
                                                                achieve 89 or 91 is by
When you make that shift in                                     blending a higher-octane
how you think about the            “We don't spend a            component with regular
world, suddenly you will                                        gasoline.
look at ethanol, biodiesel,       lot of energy trying
and hybrid vehicles                                             Ethanol has a high octane
differently. It's changed the         to predict the            value of about 99 or 100.
way we invest in those                                          When you blend it with
assets. Time will tell how         future. That goes
                                                                carbon-based motor
good the vision is, but we'll     back to getting into          gasoline it has the equivalent
adapt it again as we need to.                                   of 120 octane value because
                                    businesses where            of the chemistry. So as the
G&D: How do you think                                           engine manufacturers
about investing in areas                 you have               increase their compression
boosted by big government                                       ratios to get higher fuel
subsidies such as ethanol,             competitive              efficiency, we're going to
especially given Charles                                        need more octane in the
Koch’s free-market views?          advantages, where
                                                                future.
                                  you can build out a
DR: We're not in favor of                                       People often look at us and
any subsidies or mandates             platform, and             say, "You guys are
where the government picks                                      hypocrites because you're
winners and losers. We're           where you have              investing in an industry that
opposed to all of that, even                                    has a subsidy or a mandate."
if it’s detrimental to us. The    optionality in what           That's not why we're
ethanol industry is not                                         invested. We're invested
subsidized anymore today,          you do. Then you
                                                                because it will be an
but it is mandated. It's great    can adjust as things          important fuel of the future.
that the subsidy went away,                                     The industry survives just
and we'd like to see the              change in the             fine without subsidies or
mandate go away and let                                         mandates and we advocate
ethanol compete on its own          economy. We’re              for such policies.
merits.
                                       much more                G&D: Given your diverse
If you look at the energy                                       set of businesses, it seems
content in ethanol, it's not       effective at doing
                                                                like you’d have a lot of
as good as gasoline or diesel     that than spending            insights into the current
fuel. But ethanol is a very                                     state of the U.S. economy
cost-effective way to get             time trying to            and where it’s headed. Are
octane. To meet the miles                                       there any unique or
per gallon requirements,          predict the future.”          interesting data points you
engine manufacturers are                                        look at to get a read on the
making smaller engines with                                                  (Continued on page 28)
higher compression. Those
Page 28


          Koch Industries
          (Continued from page 27)         perspective, the EPA is           measures like rail loadings
          health of the economy or to      promulgating policies             might help us manage
          help you make investment         through regulation that they      working capital levels or
          decisions? For example,          can't get done through            something of that sort, but
          Warren Buffett often             legislation, in my opinion. It    long term fundamentals are
          mentions railcar loadings as     makes it very difficult to        what matter most.
          a good indicator of the          meet the immediate
          health and direction of the      demands of consumers              DR: Many companies
          economy.                         when this happens. So, we         embark on those things to
                                           look at the implications of       try to predict the future,
          SF: We look at our               those policies. Do we want        but we think the future is
          business over the next 20        to be an industry like that? If   unknown and unknowable.
          years. We do not worry           we can't get a permit to          So we don't spend a lot of
          too much about short-term        evolve our assets in a            energy trying to predict the
          data points that might help      productive manner, it’s a         future.
          explain our quarterly            hard industry to be involved
          earnings. We worry about         with.                             That goes back to getting
          the long run and I will give                                       into businesses where you
          you two examples.                                                  have competitive
                                                                             advantages, where you can
          First, many policies coming                                        build out a platform, and
          out of Washington are going                                        where you have optionality
          to distort the economy in a                                        in what you do. Then you
          big way. For example, the                                          can adjust as things change
                                               “We take some
          very artificially low interest                                     in the economy. We’re
          rates that are being pushed        form of commodity               much more effective at
          on us by the government                                            doing that than spending
          and the Federal Reserve are        and we’ll process it            time trying to predict the
          causing artificially higher                                        future.
          asset values.                     through a very, very
                                               large plant that              G&D: Going back to your
          It’s interesting to me that                                        comment on the Fed. Steve,
          they’re doing it as a                                              how do you see the
                                                     requires
          response to a problem that                                         unprecedented Fed
          they created in the first              sophisticated               intervention ending, and
          place with the exact same                                          what do you do as CFO of
          low interest rate policy that        technology and                Koch Industries to prepare
          was there throughout the                                           Koch for that eventuality?
          beginning of this decade.           analysis to ensure
          We now know that much of                                           SF: There are lots of ways
          the investment following              that we have a
                                                                             to manage risk. One way to
          these low rates was                                                manage risk is simply not to
                                                  competitive
          unproductive and                                                   take the risk. Here’s an
          unprofitable. The Fed is                advantage.”                example. If you invest in an
          making the same mistake                                            asset, you need to look at
          over again.                                                        what the source of return is
                                                                             from that asset. If you're
          We are very wary of assets                                         investing in a 10-year
          with sky-high valuations. We                                       treasury, your source of
          are not tempted to invest in     Those are the                     return is almost 100%
          them because it’s going to       macroeconomic things we           attributable to the duration
          end badly.                       look at. Short-term                            (Continued on page 29)
          Second, from a policy
 Volume I,
Issue XIX Issue 2                                                                                       Page 29


Koch Industries
(Continued from page 28)         them. It is the most             from them?
of that security and very        profitable single item that a
little attributable to credit    grocery store sells on a per-    SF: Well, this is going to
risk. If you believe there’s     square-foot-of-retail-space-     use the rest of the time!
much more downside than          required basis.                  (Laughs.)
upside because of all the
manipulation, don’t try to       That’s why the greeting card     I think our single biggest
time it—just don’t do it         section still has massive        mistake was the polyester
because you can’t time it.       amounts of square foot           business that we acquired
                                 allocated to it, and it is       from Hoechst, a German
We would rather invest           prominently featured so          company. We probably got
where the source of the          you’re likely to walk by it      back about 80% or 90% of
return comes from the            before you leave the             the capital we put in the
capability or the innovation     grocery store.                   business. That’s definitely a
of a project or business. If                                      mistake when you don’t get
that means taking on more        A reporter commented to          your capital back. In this
illiquidity or duration risk,    me on the day the deal was       case, we did not understand
those risks are much more        announced, “I still don’t get    how significantly the
palatable in this                it. The internet is taking       Chinese economy had
environment than taking on       over this whole space.” And      invested in polyester.
interest rate risk. That’s       I said, “Not really, I don’t
how we look at it. That’s        think you’re right. The facts
how we’re trying to do it        don’t bear that out. Let me         “The number one
anyway (laughs).                 ask you a question. Are you
                                 married?” And the reporter         thing that appeals
What we’re doing with the        said, “Yeah, but what does
American Greetings                                                   to the companies
                                 that have to do with this
investment ties into this        interview?” I said,                  we talk to is our
idea. Although it is an          “Everything. Try sending
interest-rate-sensitive          your wife a text on her next        focus on the next
security, the valuation of the   birthday. Tell me how that
investment will not move         works out for you!” And he          twenty years, not
around very much because         said, ” I kind of get it
the primary source of            now!” (laughs)                     on the next ninety
return comes from the
capability of the equity                                                    days.”
                                 When we see the value
investors that we’re             that’s being created for their
supporting and the               customers and the capability
capabilities within their        of the company to continue       When the treaties between
industry.                        to create value through          the United States and the
                                 innovation, we’re very           other WTO countries were
G&D: What is the thesis          comfortable supporting that      put in place, a lot of
behind the American              investment and earning a         polyester started coming
Greetings investment?            return that’s not 100% tied      over to the United States.
                                 to the discount rate, but        We had no idea how
SF: Even though the              more tied to the capabilities    sophisticated these Chinese
industry demand trends are       that they have.                  producers were and how
flat, they still create                                           much volume would actually
tremendous value for their       G&D: Can you share some          land on our shores. It
customers. They have very        of the biggest investing         displaced a lot of capacity
strong relationships with        mistakes Koch has made           that existed here that we
their retail partners and        and what you’ve learned                       (Continued on page 30)
long-term contracts with
            Page 30


                           Koch Industries
                           (Continued from page 29)         a deal. We don't want to be     example, then it's hard to
                           had just purchased.              handcuffed in our ability to    make the investments in
                           We also didn’t understand        invest and do the right         new capacity that would get
                           that the rate of learning        things for the long-term        supply and demand back in
                           within the industry had          benefit of the business.        balance. This puts upward
                           substantially accelerated.                                       pressure on prices in a
                           For example, a plant that        G&D: Corporate profits in       supply constrained industry.
                           once cost $500 million to        the United States as a
                           build fell to $250 million       percentage of GDP are           So ironically, the very
                           within three years.              currently around 11%,           policies that the federal
Pictured: Professor Tano
Santos at the 2013 Omaha
                                                            which is at all-time high and   government is promoting
                           A couple key lessons came        well above the average over     are causing the opposite of
Dinner.
                           out of that acquisition: one     the last 20 years of about      their intended effect on
                           was that we must have            7%. Do you guys expect a        employment and wages.
                           global knowledge systems,        reversion to the mean, and      And, when supply and
                           not just regional knowledge      how do you think about          demand stay imbalanced,
                           systems, and have a much         investing in an environment     you're going to have higher
                           greater awareness of how         when asset values probably      profits by definition.
                           globally fungible our            reflect these record-high
                           products are. Second, we         profits?                        So that's why we're where
                           must talk to customers,                                          we are as a country and
                           suppliers, and vendors           SF: In this part of the         corporate America. Will
                           before we do an acquisition      business cycle, labor           that change? Well, we hope
                           so we can be attuned to the      normally starts getting a       so. We want less non-value-
                           speed of the technological       bigger piece of the overall     added bureaucratic
                           change within the industry.      GDP via expansion of            regulation. We want the
                                                            employment and wage rates.      ability to take care of our
                           DR: Another thing we've                                          customers.
                           learned the hard way is how      There are a couple things
                           much debt we are willing to      happening that are different    This doesn't mean that all
                           put on a deal. Too much          than in previous cycles,        regulations are bad. But
                           leverage not only stresses a     which have caused profits to    when you layer on
                           deal, but the associated debt    be higher. First, U.S.          regulation after regulation
                           covenants also limit your        companies aren't just           after regulation, it becomes
                           ability to invest for the long   competing with U.S.             extremely
                           term. During downturns,          companies anymore; they're      counterproductive. We
                           you start to bump up against     competing with global           have a lot of that right now.
                           those covenants, and then        companies. Even though
                           you become very restricted       U.S. workers are much           Higher profits will reverse
                           in making good long-term         more productive, there is       over time as new
                           decisions.                       still a cap on our ability to   economies emerge and
                                                            pay more to stay                compete. Exchange rates
                           So you start making short-       competitive globally and to     will also eventually adjust
                           term decisions just to make      expand employment.              and our prosperity will be
                           it through the next quarter                                      challenged without change.
                           to meet those debt               A second reason is the
                           covenant metrics. We've          uncertainty caused by public    DR: Uncertainty is one of
                           learned that it's just           policy coming out of            the biggest factors as to why
                           inconsistent with our long-      Washington. If you don't        you see these profit levels.
                           term philosophy, so we're        know what the Affordable        For example, if you want to
                           going to be relatively           Care Act is going to do to      get a permit to build a
                           conservative in how much         your healthcare costs, for                   (Continued on page 31)
                           debt we're willing to put on
 Volume I,
Issue XIX Issue 2                                                                                  Page 31


Koch Industries
(Continued from page 30)         DR: It hurts the poor. The       this company is being forced
greenfield facility or to        consumers are the ones           to let go very highly skilled,
expand capacity, you may be      who suffer the most              great-culture-fit engineers
in the permitting process        because the goods they           within their company—
for five, six, or seven years.   need just for necessities are    people that in the long run
                                 more expensive.                  would create much more
To start committing capital                                       value staying employed with
to something which may not       SF: Any form of a price          the company than not. Yet
start for seven or eight         control causes this              they’re letting them go
years from now is a very,        imbalance. In Venezuela, the     because their investors are
very high-risk bet because       former Chavez                    putting so much pressure
you don’t know what the          administration stipulated        on the management team
environment’s going to be.       that, “The price of milk         that they have to reduce
You don’t know what the          cannot exceed X.” Guess          their costs to meet short
supply and demand balance        what happens? There’s no         term objectives.
is going to be. You don’t        incentive for people to
even know whether the            create milk. And there’s no      So they’re making poor
product is going to be           milk. It leads to scarcity.      decisions for the long run.
needed that far in the           When you have scarcity,          Look at how disruptive that
future.                          you have very high profits       is. It's disruptive to the
                                 for the people that are left     company because it is
So that dampens additional       in the business, and that’s      getting rid of capability that
investment, which keeps          happening on a much larger,      it needs. It's disruptive to
capacity low and margins         more discrete scale here.        the family of that employee
high. If only the U.S. does                                       that is being let go. We
that, then all the               G&D: Is there anything else      don't need to think that way
manufacturing and                you’d like to add about          here. We look at an
production will eventually       Koch Industries’ strategy in     investment in that kind of an
go to other countries that       acquiring businesses?            employee as an investment
are more advantaged, and                                          in the long run. Let’s find
we’ll be an importer.            SF: The number one thing         something that he or she
                                 that appeals to the              can be working on until the
SF: Look what happened to        companies we talk to is our      market comes back. That is
Wal-Mart just recently in        focus on the next twenty         the number one thing that I
Washington, D.C. where           years, not on the next           talk to people about, and it's
the city council tried to        ninety days. That unleashes      pretty compelling to them.
impose upon them a $12           companies to make different
minimum wage. So what            decisions that they don’t get    G&D: Dave and Steve,
happened? When that kind         to make when they’re a           thank you for your time.
of regulation came in, Wal-      public company under the
Mart said, “We’re not            scrutiny of an investor base
building.”                       that’s trading, not investing,
                                 in their shares.
Is that good for the
consumers? The rest of the       We’re talking to a company
retailers have less              right now that is in the
competition, and prices will     trough. Their industry is
be higher. So profits are        being significantly
higher and labor is              constrained because there
constrained. Those kinds of      was overbuilding and
regulations are causing          demand is weak. As a result
these high profits.              of this temporary condition,
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  cbrigham14@gsb.columbia.edu
      jthies14@gsb.columbia.edu
      zyang14@gsb.columbia.edu


                                    Graham & Doddsville 2013 / 2014 Editors
                                                    Chris Brigham is a second-year MBA student and a member of the Heilbrunn Center’s
                                                    Value Investing Program. Prior to Columbia Business School, he worked as an equity
                                                    trader for Bank of America Merrill Lynch and as a research analyst for Tiresias Capital,
                                                    an event driven hedge fund. Chris graduated Phi Beta Kappa from Claremont McKenna
                                                    College, where he received a BA in Economics. He can be reached at
                                                    cbrigham14@gsb.columbia.edu.


                                                    Jackson Thies is a second-year MBA student and a member of the Heilbrunn Center’s
                                                    Value Investing Program. During the summer he interned at PIMCO as a high yield credit
                                                    analyst. Prior to Columbia Business School, he worked in the research department at the
                                                    Federal Reserve Bank of Dallas. He received a BS in Economics and Engineering from
                                                    Southern Methodist University. He can be reached at jthies14@gsb.columbia.edu.




                                                    Jason Yang is a second-year MBA student and a member of the Heilbrunn Center’s
                                                    Value Investing Program. During the summer Jason interned at Development Capital
                                                    Partners, a concentrated, value-oriented fund investing in sub-Saharan African equities.
                                                    Prior to Columbia Business School, he worked as a consultant in PWC’s Transaction
                                                    Services Strategy practice. Jason received a BS in Economics and Mathematics from Yale
                                                    University. He can be reached at zyang14@gsb.columbia.edu.

				
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