Reading List - January 24, 2010

JCPenney & activist investors

JCPenney just announced two new members of its board - Bill Ackman of Pershing Square Capital Management and Steven Roth of Vornado Realty Trust - after disclosing large stakes in the retailer.  The move by JCPenney is probably the boldest move recently of the reaction shareholder activism, as shareholder activism has recently been on the rise.  For long-term investors, one positive move appears that neither man wants to financial engineer JCPenney to prosperity.  Instead, they want to focus on JCPenney's core businesses. 

2 Big Investors Get Their Say at J.C. Penney (click here)
Penney Shares Rise As Ackman and Roth Join Board (click here)

Below is a link to an article from late last year.  In it, it highlights the difference between the increase in longer-term activist hedge funds that focus on improving the firm's core businesses versus increasing the value through financial engineering.  These hedge funds typically have long lock-up periods where investors cannot receive the initial investment back for a 3-5 year period.  Investors should demand a higher return for their investment.  For 2010, some of these firms did extremely well being up over 30%. 

For Activist Funds, Long-Term Approach to Investing (click here)

John Paulson

John Paulson, whose firm is Paulson & Co, just released his annual letter to investors regarding 2010.  Essentially, Paulson has made some bets on a broad range of assets over his career including mortgages and gold.  What I found extremely interesting is his breakdown of implementation and monetization.  An example from Paulson's own experience, as the article states, is the implementation of shorting credit and monetizing it when the credit bubble burst in 2008.

At root, this is fundamentally the key to value investing or all of investing in general.  When practicing value investing with stocks, the implementation is analyzing a company, calculating its intrinsic value, determining whether or not the intrinsic value is higher than the current market value, and purchasing the company.  The monetization part is selling the company when the company meets its intrinsic value.
John Paulson Recaps Big Bets in Year-End Letter (click here)