Munger on the perfect turnaround
by PlanMaestro
GEICO is a very interesting model. It’s another one of the hundred or so models you ought to have in your head.
I’ve had many friends in the sick business fix-up game over a long lifetime. And they practically all use the following formula—I call it the cancer surgery formula:
- They look at this mess.
- And they figure out if there’s anything sound left that can live on its own if they cut away everything else.
- And if they find anything sound, they just cut away everything else.
- Of course, if that doesn’t work, they liquidate the business.
- But it frequently does work.
And GEICO had a perfectly magnificent business submerged in a mess, but still working. Misled by success, GEICO had done some foolish things. They got to thinking that, because they were making a lot of money, they knew everything. And they suffered huge losses.
All they had to do was to cut out all the folly and go back to the perfectly wonderful business that was lying there.
And when you think about it, that’s a very simple model. And it’s repeated over and over again.
And, in GEICO’s case, think about all the money we passively made…. It was a wonderful business combined with a bunch of foolishness that could easily be cut out.
And people were coming in who were temperamentally and intellectually designed so they were going to cut it out.
That is a model you want to look for.
Variant Perceptions 
Agree. The easiest turnaround is that there is a core business that can still make money, and other businesses posted large losses that masked the potential profitability of the core.
So I think GKK is a really good one, but MPG is a much more difficult one.
MPG had the Orange County issues acquired from Blackstone. The core LA is great but it has a lot of debt and some legacy issues still to be solved inherited from the release of Mr Maguire.
GKK? waiting for the 10K.
sounds like a model that applies to the AIG situation.
Maybe something is coming 😉
MPG’s core LA property earning is worrisome after they take up so much debt. I tried to figure out how much EPS they can post after disposing the non core assets, but it doesn’t seem to be any.
GKK issued an 8-k last December for pro farma statements as if the real estate division is not existing. The earnings look good to me.
AIG’s really cheap as a large cap. But for small investors like me, there are cheaper opportunities like GKK and a few regional banks.
Dear PlanMaestro,
Could you send me the source of this comment from Munger about turnarounds? I am working on my master thesis and would like to include Mungers statement.
Thanks in advance,
Regards,
Fabian
A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business
Charles Munger, USC Business School, 1994
http://ycombinator.com/munger.html
Any comments on GKK’s 10-k, Plan? CDO 2005 and 2006 are passing. 2006’s compliance margin is slightly improving. 2005 is almost not passing.
Unrestricted cash $163 M.
I just finished moving to a new apartment and I do not have internet yet. From a first reading of GKK’s 10K the results were good. Cash is increasing at a healthy rate, both CDOs are cash flowing, the quality of the loans inside is improving (very little in mezz loans, most are whole loans, fewer pre-crisis loans). And the news of the sale of the Ontario office buildings increasing $16m the unrestricted cash was the cherry on the top.
On other stuff. The resignation of the COO? I have no insights. The price per share drop? maybe disappointment on the lack of news on the div front but it still looks like market madness.
GKK only booked $2M of provision for loan losses, and CDOs are improving, so I think they are in a prime position to report stunning profits next quarter.
Plan, I think this is the cause of the recent market drop. Mr. Market always hates uncertainty, though after we see through the uncertainty, there is actually not too much risk behind.
This is exactly the question I asked you before GKK released the 10-K, which is what they will do in the future when CDO markets are shutdown. Can you give some wild guesses on their future business plan?
“In June 2011, our board of directors established a special committee to direct and oversee an exploration of strategic alternatives available to us subsequent to the execution of the Settlement Agreement for Gramercy Realty’s assets. The special committee is considering the feasibility of raising debt or equity capital, the possibility of a strategic combination of our company, a strategic sale of our assets, or modifying our business plan, including making additional debt repurchases or investing our available capital outside of our CDOs. At the direction of the special committee, we engaged Wells Fargo Securities, LLC to act as our financial advisor and to assist in the process.”
Besides selling the company to the higher bidder, I think NCT, NRF, RAS, ABR, RSO and the other CRE mREITs are good models of what they might be doing going forward. There are also other CRE lenders (STWD, ARI) that are not using CDOs. There is a need, there is a market, and it is profitable.
I am looking into the other REITs that you suggested last time.
I think the market has misunderstood their statement. They were using CDOs before extensively and now they need a strategic shift out of the CDOs. The market thinks they are going to liquidate themselves.
And they are shifting.
Are you two talking about the same “They”? I feel like Zehua’s “they” means “GKK” and Plan’s “They” means “RAS, RSO, NCT etc”.
Either case, GKK seems to be the last one left to be “shifting”…
Personally, I would rather see GKK “shift” than sell itself.
You might be right Heth.
http://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=8526212-731-8026&type=sect&dcn=0001144204-12-019794
GKK reached agreement with KBS and KBS will pay 12 M per year for property management fee. I think this is a good news.
Not earth shattering, but good. If they had not reach an agreement, it would not have been that bad either. Also several of the agreement clauses are better now for Gramercy, including one regarding change of control.
Yeah. I don’t understand why the stock price keeps dropping after each good news.
Probably the market is dorminated with the idea that GKK is about to liquidate itself?
Have you looked at Nokia? Its recent Lumia 900 is selling well, but I don’t know the exact numbers regarding sale and margin.
If they can be profitable here, then they can cut other things.
My concern with the CEO is that he is not a traditional turnaround specialist, so I am not sure if he is capable of doing this turnaround at this time.
Following the Munger framework from this post: Do you see anything worth saving in this mess? I do not. I see more chances for Research in Motion (global server network for secure transmission) finding a way out than Nokia.
OK. So the Munger framework primarily looks at existing business that is worth saving. It is not looking at potential business that may become a profitable one worth saving. In this case, I think NOK is not a good turnaround until we can later see proof that Lumia 900 is indeed the business that is worth saving?
For RIMM, I agree that this looks interesting. I heard Fairfax bought some shares. I haven’t looked into it too deeply though.
I have been learning banks with your help for the past few years, and I feel more confident buying the banks than these tech stocks.
Plan, GKK’s 2012 Q1 result is out:
http://www.sec.gov/Archives/edgar/data/1287701/000114420412026857/v311140_10q.htm
They had an impairment charge on a loan in CDO 2007, and this affected net income to become negative.
CDO 2005’s compliance margin is improving, though still thin.
I am not able to figure out how much cash flow has been directed to GKK for CDO 2005 and CDO 2006 from this filing. Do you know?
Overall this should be a sign of improvement regardless of a negative EPS, right?
Check the cash flow from operations and the unrestricted cash. CDO 2007 does not matter
Yes CDO 2007 doesn’t matter.
The Overcollateralization compliance margin of CDO 2005 slightly improved QoQ, but CDO 2006 narrowed a bit.
Both CDOs’ Interest Coverage narrowed.
“believe that we may fail the overcollaterization test for the 2005 CDO and/or the 2006 CDO 2006 at the July 2012 distribution date.” This is a bit disturbing to me.
Part of the game, there is always the possibility that the CDOs may relapse. But as they have showed, they have tools to cure them starting with the $49.2 million par in CDO bonds that they can retire if needed.
[…] of a turnaround (this link is also worth checking out: http://ycombinator.com/munger.html). Here it […]