FRIPS  Quarterly Letter  Q2/2003
Focused Research in Productive Securities.

Mission: Find companies worthy of investment that meet the 4 criteria advocated by Warren Buffett and Charles Munger. These are 1. Understandable products, 2. Sustainable competitive advantages, 3. Effective Management, and 4. Margin of Safety ( Bargain Price ).

Why I like USG

By Cesar "Bud" Labitan, Jr. MD MBA 
 © 2003 Bud Labitan 4/2003

 

     Recently, while searching for new opportunities, I have also been studying the USG Corporation.  I believe that it is a good company that fits Warren Buffet’s 4 main filter criteria for acquisition.  USG, in my view, has 1. Understandable products, 2. A sustainable competitive advantage in distribution and product innovation. 3. Effective management, and 4. A recent market price range in bargain territory.  The annual report indicates that USG and its subsidiaries never mined, made or sold raw asbestos. It was never used in USG’s drywall products.  Asbestos was only a minor ingredient—typically less than 5 percent—in some of their plasters and joint compounds, and by 1977, more than 25 years ago, USG had stopped using it entirely.  Further online research at the Casualty Actuarial Society website revealed interesting data ( A presentation entitled: Concurrent Session: Asbestos Claims Liabilities, Quantification of Asbestos Liabilities)

http://www.casact.org/coneduc/annual/2001/handouts/herbers1.ppt

that showed the decline in the number of potential asbestos exposed litigants as the years pass. 

Take a look at an estimated value here, and adjust your own assumptions:

http://www.quicken.com/investments/seceval/?cmetric=intrinsic&cursym=&csym=USG&csym1=&csym2=&initearnec=135%2C000%2C000&egrrbtn=ec&egrdd=0&egrec=5&dcrrbtn=dd&dcrec=5&dcrdd=2&p=USG

     These facts along with the knowledge that Berkshire Hathaway still owns approximately 15.03% of the equity leads me to believe that USG is in the sensible bargain category.  Recently, on Feb. 21, 2003, federal district court judge Alfred M. Wolin issued an order in response to the Corporation's request to establish procedures to resolve the asbestos personal injury liability in its bankruptcy case.   The order, which pertains to cancer claims only, provides that a bar date, or deadline, will be established for individuals to submit those claims against USG or its affiliates. Claimants will be required to provide a medical report by a board-certified doctor demonstrating a diagnosis of cancer that was caused by asbestos exposure. Each claimant will also be required to provide additional information regarding their claim, including the claimant's occupational exposure to products made by the Corporation's affiliates and the claimant's smoking history.  This is a significant event that moves the process forward.  Furthermore, it is generally believed that cancer in asbestos related cases is more significant in those patients with a positive smoking history.  Therefore, it is possible that evaluating cases using this shared liability concept will decrease the potential liabilities. 

 

 

In a special investment topics paper, I set out to examine how Buffett and Munger "frame" an investment decision. I examined the behavioral processes practiced by Warren Buffett and Charlie Munger to: 1. avoid irrational behavior and 2. maximize long-term gains by successful investment decision making. .In 1992, Takemura showed that the effects of framing are likely to be lower when subjects are warned in advance that they will be required to justify their choices, and when more time is allowed for arriving at their choices. I believe that by looking into the writings of Warren Buffett from "Warren Buffett’s frame of reference", we gain insights into his and Charlie Munger's successful rational investment decision processes. Buffett and Munger have employed the principles taught by Dave Dodd and Ben Graham. I call their approach the Compounding Success Model because I imagined how their sequence of rational decisions could push their probability of investment return success into the upper percentiles. Their record provides the proof. The Compounding Success of the Graham-Dodd-Buffett-Munger investment ideas reviewed are conguent with that study. I concluded that these 10 major factors contribute to the Compounding Success of the Graham-Dodd-Buffett-Munger investment approach:

1. Rational and thorough business analysis, with keen emotional intellects that promote ethical information exchange.

2. Wide experience with analyzing and managing numerous different businesses.

3. Charlie Munger's Role as (a.)"Devils-Advocate" and (b.) his role in encouraging further limiting of the portfolio towards "wonderful businesses."

4. Leverage via a Low Cost of Capital from Insurance Operations

5. Disciplined Tracking of Understandable Businesses

6. Analysis of Strategic and Sustainable Competitive Advantages of Industries and Businesses.

7. Trustworthy First-Class Managements with proven track records.

8. Ben Graham's Mr. Market and search for the Margin of Safety.
Margin of Safety is the bargain obtained when purchasing at a market price below the intrinsic value estimation. Graham and Dodd taught: "An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return."

9. Satisfaction:
Buffett stated: "Though "working" means nothing to me financially, I love doing it at Berkshire for some simple reasons: It gives me a sense of achievement, a freedom to act as I see fit and an opportunity to interact daily with people I like and trust."

10. Learning from Practice, Mistakes, and Experiences: "After many years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them."

 

The ten factors presented were derived from the writings of Warren Buffett. Buffett and Munger have said that their investment behaviors are based on rational and thorough business analysis. I believe that by looking into the writings of Warren Buffett from his "frame of reference", we gain insights into his and Charlie Munger's successful rational investment decision making processes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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