Thursday, January 19, 2012

AOL, Time Warner, Buffett

History is magnificent. It makes us grow in lollapalooza ways.
In the year 1999, a book was published named 'The Warren Buffett Portfolio'; I am currently reading this book and it is a very good read. I expected it to be just another Buffett book, but the author has done a brilliant job of editing the material.
One of the chapters speaks of Bill Miller's Legg Mason Value Trust fund and how he runs (then) a value + growth fund, how he is able to buy into growth stocks and stay put. There is some hoopla about Cramer accusing Bill of buying into growth stocks like Dell and AOL and calling them value! Bill Miller shoots off a letter to Cramer and says something that should be remembered.
He says that he bought into AOL in late 1996 at USD 15 per share and into Dell in 1996 at USD 4 per share. Sadly, I don't have the historical numbers. As some may know, AOL merged with Time Warner in 2000. At the time of the merger, AOL was at around USD 73 per share (link) and valued at USD 163 Billion. The combined entity was estimated to have a value of USD 350 Bn.
The year was 2000, and this deal marked what could be the brink for the IT bust :D

In 2009, Time Warner decided to spin off AOL. AOL was being valued at USD ~ 6.3 Bn. Read the prior paragraph again :D
Possibly, this could be the equivalent of a share price of USD 2.8 after 10 years or so.

Point:
Bill Miller may have made money but eventually he was proved wrong when he estimated a value of USD 110 to USD 175 per share for AOL stock. Please refer pages 101-103 of the book I cited above.
Why was he so off the mark in terms of valuation, when he was an acclaimed investor?
He was an acclaimed investor because the market served him well then. He also got into these companies at very good valuations but somewhere down the line, he lost focus - he began speculating. "Just a little bit more money!"
When one forgets the principles, one will have to pay the price.

Am happy that I have seen this bit of history :)

Of course, in the course of 10 years or so, the management may have destroyed the company's (AOL's) value, but that does not justify the 95%+ difference from peak to trough.

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