Chanos was Right. I was Wrong
Chanos was Right. I was Wrong
One sentence in a 2006 review of Macquarie Infrastructure Group earned me a brief period of fame. I wrote of Macquarie's valuation models: 'We’re not sure what’s going in, but what’s coming out is so far from what we’d consider reasonable that it’s almost unbelievable'. Thanks to the powers of Google, I ended up quoted in a New York Times article, interviewed for a Bethany McLean piece in Fortune magazine and also by Gideon Haigh for his piece in The Monthly, Who's Afraid of Macquarie Bank.
All three articles were about the looming downfall of Macquarie and my comments echoed those of famous short-seller Jim Chanos – who was telling the world Macquarie was a house of cards and his favourite short sell.
The difference was that I didn't actually agree with his argument. Yes, the funds were too highly leveraged. Yes the incentives were all wrong and yes the accounting was ridiculous. But the funds are not Macquarie, I argued, and if the fund investors lose their shirts, the impact on Macquarie will be limited to a loss of fees – certainly nothing terminal.
That was dumb. No company exists in a vacuum and very few can walk away from a business that has been their growth engine for the best part of a decade. After taking their fees in stock and investing more than half a billion dollars in their own funds (trying to prop up prices, perhaps?) over the past 12 months, Macquarie ended up with some $6.7bn invested in its own funds at 30 September 2008. It only had $10.3bn of shareholders' capital and, as the prices of the funds plummet, a gaping hole is emerging.
It's a mistake I made twice. When I first recommended Timbercorp at $1.85 per share, I wrote 'we doubt these investors [Timbercorp's customers] will get anything like the returns they are expecting. In fact, they’re likely to end up very unhappy'. The amount of money Timbercorp was making out of it compensated, I thought, for the fact they were selling shoddy products.
This company is now in a much worse situation than Macquarie. Not only are investors not paying the fees due but they're not repaying the loans Timbercorp gave them to invest in the projects. Hardly surprising is it?
One of the key tenets of successful investing is to buy a company selling something people need. Or, as Charlie Munger put it at the 2006 Berkshire annual meeting, you don't make clay out of turds.
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Steve,
Kowtow to you and your courage to confess and look at it as a learning opportunity.
As a T.I.I. subscriber, I have wanted for weeks to fire off a question in Q&A on "what lesson have the T.I.I. team learned in the recent mis-recommendations, most noticeably the TIM debacle". And here we are. Your own reflection.
And just as amazingly, this is the second article I have seen today which is a clear indicator of a bottom forming in the markets. When the most ardent of previous bulls throws in the towel....As a matter of interest, the other article says something about the end of the economy as we know it. Also, I think it is poor form to post links to fee paying sites. I know everyone has to make a living, but this is a turnoff. As for Timbercorp, you may not remember me, but I have warned you that something is fishy with a company that has negative cashflow and yet chooses to pay tax on accounting profits, and distributes dividends, when the main beneficiary of the dividend is the largest shareholder.
Steve and Greg
I would argue that you are running with the hares and running with the hounds in some respects with regard to your recent posts on BM and TII website.
Your recommendation on MAP is BUY at $1.575 (25/2/09). This says that you believe it is significantly undervalued at this price. Your valuation as I read it is based on likely cashflows from air travel and non air travel services and balances these against the refinancing risks.
It seems contradictory for TII to argue that MQG are being deceptive or less than transparent in continuing to value MAP using a similar methodology rather than basing it on the current cheap (according to TII) security price. I acknowledge that there were related party transactions in the recent sale of portions of the MAP portfolio of airports and as such it is hard to use these as a basis for valuation. However I believe that MAP can be fairly valued using the methodology you have used and it appears paradoxical that you criticize MQG for doing similar.
Timbercorp as you now point out has always been set up to pilage the unsuspecting punter who was desperate to get tax deductions in the last 2 months of the financial year. At some point the punters were going to wise up and the music was going to end. I believe MAP has a vastly better product where it supplies air travel related services that are likely to be required for many decades to come.
I am unable to add anything remotely intelligent in MIG.
My concern is with the apparent contradictions in your posts.
This tugs at the heart of your publication's value proposition.
Hi David,
It’s one thing to make an investment in the belief that it’s going to be worth substantially more in future. It’s another altogether to put it on your balance sheet at what you ‘think’ it’s worth and report it as an asset to shareholders when the current market price (and a highly liquid one at that) is half your ‘value’.
As Greg wrote in his review “Moore’s refusal to write down the holdings in MIG and MAp could be described by some (though not us) as justifiable. But nobody could label it ‘conservative’.”
As for the need for their services, you’re right that the world needs airports, but we don’t need Macquarie’s fees. It makes no sense to me whatsoever to pay Macquarie tens of millions in fees, year after year, when Sydney Airport has its own capable management team. We’d be much better off with the airport listed on the stock exchange itself.
Hi Steve
Thanks for your response.
It seems reasonable to me for MQG to value the future likely cashflows from MAP using the same reasoning you have applied in your reviews of MAP. You argue that it is what MQG "think" MAP is worth but that is the same as what you "think" it is worth. That is where I see the contradiction.
I agree this is not conservative but clearly MQG will go to great lengths to avoid the reputational damage associated with the issue of new shares at low prices. In this instance I believe it is not unreasonable for them to not mark their MAP holdings to the prices currently being paid by the most marginal buyers and most marginal sellers.
No arguments from me about the obscene fees billed by MQG and that Sydney airport could be equally well run without the fees to MQG. I'm sure MQG would be happy for Sydney Airport to buy out their management contract but I am equally confident it would be an obscenely high price. Overall it is not worth worrying about and best just to lop 20% of the MAP valuation and wear the fees.
I also assume the management contract would be so tightly worded that there is little room to get out of it. Because I see MAP as likely to continue to deliver growing, though somewhat lumpy cashflow to their shareholders it is likely that MQG will continue to be the beneficiary of the fees associated with the contract.
Thanks for the admission re TIM. I bought some on your recommendation and they've been total turds ever since. Still, it was my decision. I suspect I'll never see the money back.
The Charlie Munger quote is pure gold, and bang on.
If its not something people want, it does not matter what the company does or how good the spin-of-the week, just keep away.
[...] reading Friday’s post about Jim Chanos proving me wrong will have noticed the ensuing debate about the merits, or lack thereof, of Macquarie refusing to [...]
I have taken some thought on your fundamental premise. I totally agree with Charlie Munger's observations (in fact I am a huge fan). But I have my reservations on applying turd analysis to MQG. The infrastructure fees make up 5% of MQG's earnings. The logical implication of your comments and posts is that MQG is providing services that no one needs. Try to think a bit more on that...perhaps try to do some large scale business with no investment bankers...see what I mean?
So do you still think Macquarie needs more capital after freeing up $5b worth of debt post the sale of MCG to CPP?
Steve Johnson are you bullish again on MAC?
Paradigm of a house of cards or a strong moat castle?
$15.00 a share to nearly $40.00 a share nothing has change.
Assets values are still questionable?
Jim Chanos and the shorters must be getting interest again in MAC.
Wait for a trigger raising interest rates?
Or another buffet nugget:
"It's hard to pay a low enough multiple for a business in decline". Apropos re TIM, I think.
[...] For the record, the one time we publicly disagreed with Chanos, he was right and we were wrong. [...]
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