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.