The company with the world’s most expensive stock announced Friday that it was purchasing a company that sells nothing for more than 4 cents. While the price per item may be low, they make it up in volume, hitting $990 million in sales in 2005 and projecting $1.2 billion in 2006. Profit numbers were not available nor was the purchase price.

The story of Berkshire’s(BRKA,BRKB) purchase of TTI reads like many of the company’s recent acquistions. Paul Andrews, who founded the company in 1971 after being laid off by General Dynamics, decided to sell this summer and his instant first choice was Berkshire Hathaway. Though he viewed it as a long shot, he sent word and information to Buffett through John Roach who had previously sold Justin Industries to Berkshire Hathaway.

According to Dallas-Fort Worth Star Telegram

Buffett said it took him about an hour to read through the materials before he decided he wanted to buy the company. But first he wanted to meet Andrews.

Buffett and Andrews later met for 5 hours and cemented a deal.

Though Buffett himself has conceded that the huge amount of money chasing deals has made them hard to find, this deal illustrates some of the competitive advantages Berkshire continues to enjoy.

First, Berkshire offers the promise that the business will continue and that they will continue to have a role. In fact, Buffett expects it. For owners who have built their businesses up from nothing and don’t want to see them absorbed into a division of a faceless corporation or worse, leveraged up and sold to the public, this can be very attractive. As Buffett puts it:

We don’t marry people to change them. It doesn’t work very well in business, and it doesn’t work very well in life.

Second, Buffett uses no investment bankers. He quickly runs his numbers, makes a decision and makes an offer. There is no army of analysts descending, no months of paralysis as decisions are made.

Third, the aura around Berkshire and Buffett is a draw. The idea of being associated with them forms part of the attraction for potential sellers.

Without numbers, it’s hard to determine what impact the deal might have on Berkshire. No matter how profitable the company is, $1 billion worth of sales isn’t going to have a material effect. But if the rate of return can exceed that on the company’s huge cash balance and the company can continue to deals like this, well then as Senator Dirksen was alleged to have said, “A billion here, a billion there, and pretty soon you’re talking real money.”

Disclosure: I own shares of Berkshire Hathaway

Maybe I was too harsh on Brian Hunter last week. This morning, I was greeted with a jolt of my own. One of my positions was down 80% in a single day. Fortunately for me, this isn’t the prelude to a death spiral. There’s no margin call to be answered. Such is the power of diversifying risk, especially when the underlying investments are as risky as development stage biotech.

Nuvelo(NUVO) is down over 80% today to around $3.90, after it announced that two separate trials involving its lead compound, alfimeprase failed to meet their primary endpoints. Nuvelo and its partner Bayer also suspended enrollment in two additional ongoing trials while they “examine the data.” While the company has not yet fully conceded that this product is dead, investors are treating it as such, and past experience shows they are probably right.

After today’s move, the company is valued at not much more than cash on hand. With a market cap of $200 million and $150 million in cash, the market has taken a rather dim view of the company’s prospects. The company has two other drugs in the clinic and at least one other candidate poised to progress to the clinic.

All indications are that management did all the right things. Earlier clinical results were sufficient to land a large partnership with Bayer. Trial design seemed to be meticulous. Though results in one of the 2 trials rose to the level of statistical significance they were not good enough to meet FDA standards for approval. The company has hypothesized that catheter placement has a greater effect on blood flow than was anticipated and resulted in the drug being flushed away from the clot relatively quickly.

Whatever the problem, the events highlight the risks of investing in these stocks. There is no such thing as a “slam dunk” in developing drugs. I was fortunate enoguh to buy NUVO at $1.95 and sell some above $16, but it’s still painful to watch anything go down 80% in one day. At this point, much of the event risk has been eliminated, and I’ll continue to hold NUVO. In fact, if it drifts down further towards its cash level, I’ll add it to my basket of biotech(which reminds me, I really need to write up the rest of the basket). Most importantly, it’s a sobering reminder: as these stocks shoot upward, sell some. Monrings like this underscore that point all too clearly.

Disclosure: I hold a position in NUVO

Bloomberg has posted a piece which explains in wonderful detail the events leading up to the spectacular implosion of Amaranth several months ago. In many ways, it reads like a shorter version of When Genius Failed, Roger Lowenstein’s excellent account of the collapse of Long Term Capital Management.
I wrote earlier about my belief that the stellar performance of many hedge fund managers was the product of luck, which was bound to run out, and not skill which could be expected to persist:

There are 9000 hedge funds out there, and most of them are run by people who have had good track records- but how many of these track records reflect skill(and are reproducible), and how many reflect luck(which will run out)? Hedge fund managers are self-selected from those who have had success, but I suspect that many of them aren’t any more prescient than our scammer. They’re the coin flippers who’ve gotten 10 heads in a row, and given the huge amounts of leverage in use, I think we will continue to see additional falls from grace.

Much of this is a direct result of compensation policies which incentivize traders to take huge risks. Huge bonuses are to be had for big returns which don’t need to be returned upon future bad performance, but traders don’t share in losses. Which brings me to the most incredible part of the Bloomberg piece.

Brian Hunter, the trader responsible for the positions that brought Amaranth down made 15% of the profits from his trades. In 2005, he took home $75 million. What’s he doing now? Bloomberg reports:

In Calgary, Hunter is still building a new home for his family, and people familiar with his plans say he’s talking about getting back to trading. “He will find a way to get involved again,” says former Deutsche Bank colleague Stanziale. “Otherwise, it would be too much intellectual capital wasted to have him on the sidelines.”

Hunter, despite the billions of dollars of losses he caused, still has his $75 million and is building a new house. Worse, the lesson hasn’t been learned. He’s still thought to be so brilliant that if he weren’t trading other people’s money again, at least one person laments the terrible waste of intellectual capital. Might he find future success? Yes, but you’re just as likely to find it betting it all on black at your local roulette table.
P. T. Barnum famously noted that there’s a sucker born every minute. If so, Brian Hunter will have a fertile market from which to draw new investors.