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Grahamites
Grahamites
Articles (202) 

Timeless Lessons From the 2017 DJCO Meeting – Part II The Investment

Notes on Q&As regarding the auto parts supplier company purchase

March 03, 2017 | About:

In my last article I posted part of my notes and observations from the 2017 Daily Journal Corp. (NASDAQ:DJCO) meeting including the after-meeting small group discussion. Some readers have asked specifically about the auto parts supplier investment that made Charlie Munger $80 million profits, which turned into $400 million by Li Lu. In this article, I’ll share my notes on this specific example.

(Disclaimer: The follow-up analysis was based on pure speculation, and it was intended for entertainment purposes only.)

The discussion came about as someone asked Munger a question regarding changing his mind on the airlines and railroads industries after 50 years of following them. Below are my notes on the series of Q&As that specified this investment:

Q: You’ve read the airlines and railroads for 50 years even though you have disdain for them?

A: "I’ve read Barron’s for 50 years. In 50 years I found one investment opportunity in Barron’s, out of which I made about $80 million. For almost no risk. I took the $80 million and gave it to Li Lu, who turned it into $400 million or $500 million. So I have made $400 million or $500 million out of reading Barron’s for 50 years and following one idea. That doesn’t help you very much, does it? I’m sorry, but that’s the way it really happened. If you can’t do it, I didn’t have a lot of ideas. I didn’t find them that easily, but I did pounce on one."

Q: Can you share which company was that?

A: "It was a little automotive supply company. Anyway, it was a cigar butt."

Q: Is it KMW Automotive?

A: "No. I forgot the name of the company, but it was a Monroe shock absorber (manufacturer) and all that stuff. The stock was $1, and the junk bonds were cheap, too. I bought the junk bonds, they paid me the 35%, and they went to 107%, and they called. The stock went from one to 40, but I sold my stock at 15."

Q: What did the Barron’s article say?

A: "It said it was a cheap stock."

Q: How long did it take you to make that 15-bagger on that stock?

A: "A couple of years."

Q: How long did it take you to make the decision to buy it once you read the article?

A: "About an hour and half."

Q: What was it about the company?

A: "I kind of knew based on experience how sticky some of the secondary auto market was and how many old cars needed Monroe shock absorbers. And I just knew it was too cheap. People were afraid it was going to go broke obviously if their bonds were selling at 35."

As with the readers, I am also extremely intrigued by this investment so I did a little exercise. We have three knowables here: It was from a Barron’s article, it was an auto parts supplier, and it was before he gave the money to Li Lu.

This is pure speculation, but the above three factors led me to an article from Barron’s.

A few interesting things from the article:

  1. It was about an auto supplier company.
  2. The stock was cheap.
  3. It was worth more breaking up in parts than in a whole.

If we fast forward to the end of 1999, something interesting happened. Tenneco Automotive Inc. did break up, and Tenneco (NYSE:TEN) was formed in November 1999 when its packaging unit was spun off to shareholders. Tenneco had a fair amount of debt ($1.4 billion) relative to the equity, and it was losing money in 2000 and 2001. The stock dropped to as low as $1.3 per share in 2001 (market cap less than $100 million) and popped to as high as $17.5 in 2004 and eventually reached a high of almost $38 in 2007.

What’s more fascinating is that Tenneco’s stock dropped to less than $1 in 2009 and today it’s about $65 a share.

Again, I am in no way suggesting Tenneco was the investment Munger made based on the Barron’s article. I did the exercise for entertainment purposes. It was a fun exercise for me because I now have a better understanding of the benefit of reading Barron's.

The real lessons, as I wrote in my last article, are the importance of patience, being prepared and concentration.

More notes to come in my next article.

Disclosure: No position in Tenneco.

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Rating: 5.0/5 (7 votes)

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Comments

bryand24
Bryand24 - 1 month ago    Report SPAM

can anyone find online the original Barrons article charlie referenced? I have searched but havent found anything. It would be interesting to look back and see what he saw when he made that decision.

Sivaram
Sivaram - 1 month ago    Report SPAM

Grahamites, you may have linked to the article Munger was talking about. The time frame sort of seems to make sense, given how he gave money to Lu Liu after that investment and I think he only knew him in the last few decades.

It might be a good investment case to analyze (if I get time, I might do it on my blog). It's one of the few times where we have enough info and it is somewhat recent (more easy to analyze something in 2000 than in 1970).

Good job with this article.

rlawson36
Rlawson36 premium member - 1 month ago

If that Barron's article is the right one, here's another thing that's remarkable. That was dated early 1999, when the entire WORLD was gaga over dot.coms and zillions were being made in Dell, Oracle, and every oddball dot com you could think of.

His ignoring that obvious bubble isn't what's remarkable. That's to be expected and known. But consdier that it was also prior to a huge market peak in early 2000. Much was over-priced, but he found a single stock he knew (KNEW) was undervalued.

So in a time when the vast majority of investors were soon to be hammered, he made a single, concentrated bet to make a few hundred million.

rlawson36
Rlawson36 premium member - 1 month ago

If that Barron's article is the right one, here's another thing that's remarkable. That was dated early 1999, when the entire WORLD was gaga over dot.coms and zillions were being made in Dell, Oracle, and every oddball dot com you could think of.

His ignoring that obvious bubble isn't what's remarkable. That's to be expected and known. But consdier that it was also prior to a huge market peak in early 2000. Much was over-priced, but he found a single stock he knew (KNEW) was undervalued.

So in a time when the vast majority of investors were soon to be hammered, he made a single, concentrated bet to make a few hundred million.

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