High Powered Investing Many Succumb, Few Prevail

Decades ago, after Ron Perelman won control of Revlon, he took a walk through one of its Boeing 727’s used for hunting by its then disposed headman, Michel Bergerac. Perelman, a gutter fighter, stood puzzled at such largesse. He was the 42-year-old headman at Pantry Pride, a supermarket chain. What was a purveyor of fingernail polish doing with gun racks in a richly appointed aircraft?

Historically, personal holding companies have always sold at a discount to book value. The thinking is sound. Sooner or later the lone operator gets himself in trouble. Reasons vary, but employing too much leverage is high on the list. 

I do carry a portfolio of a dozen ragamuffins. These are under 10 dollar properties which could bite the dust and go out of business. Burn! Burn! Burn! 

In the financial meltdown of 2008, Lehman succumbed. I owned the $25 preferred stock of Bank of America ticking at $9. Buffett stepped in to refinance them and prevailed. The preferred came back and made him billions. 

Past 60 years, this is my initial market cycle where I’m underinvested as yet. Not up to my eyeballs in debt leverage. Instead, I’m following daily changes in basis points for 2, 10 and 30-year Treasuries. I own 2 and 10-year paper, awaiting the FRB ready to drop short term rates by 25 to 50 basis points. Could be 6 to 12 months away.  

My deep basic is unless we see easier money there’s no structure in place for a bull market in stocks. For decades, Mike Milken was the judge who decided who got deal capital. Milken was more concerned where he could market high yield corporate debt, whether it was 7% or 9% paper, going back to the seventies and eighties. 

I remember buying Saul Steinberg’s 20% position in the New York Times. Saul thought he could break this trust of the family’s class of stock, but he couldn’t so he gave up. It proved a rewarding passive holding for me over the years. 

Ron Perelman, winning control of Revlon,  was one of the few exceptions of a non-establishment player winning control of such a major plain vanilla corporation as Revlon. Meanwhile, establishment corporations made a succession of terrible deals. 

Atlantic Richfield fought for Anaconda and Burroughs took on Sperry. Mobil choked on Montgomery Ward. Phillip Morris took on Miller Brewing which never earned its keep. Nor did Prudential’s top-of-cycle buyout of Bache. Gimme-a-break,  Bache?

How many of us remember that few hostile deals ever get off the ground and fly high? Boone Pickins failed to bag Texaco and Carl Icahn lost out on Unical and Phillips. The attraction in an oil operator is oil and gas assets always carry value. But,  the range in oil futures can be 30% or more in a matter of months. 

As for timing, when markets turn south and you’re 150% long, normally you don’t average down. You head for the hills. 

Note,  the market flopped down to 10 times earnings from 20 times earnings. In 1972, after peaking at 20 times expected earnings it dealt out death to bulls with high tech growthies selling off the page. Today, either corporate earnings elevate soon or the market gets punished.  Note for pundits remain silent on appropriate price-earnings ratios for our Big Board.