These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Michael Kao’s presentation is titled “Multiple ZONES of Optionality” — which sounds conceptually a little bit similar to his “asymmetric investing” pitch from the Spring Congress in Las Vegas. Back then he was pitching Tag Oil as a low downside/high upside “option” on potential drilling success, since they had existing decent cash flow and production. Drilling success has been elusive, though neither have they really failed — it’s been more of a slow wither so far.

So what’s the idea this time around? He’s got a few energy stocks near the top of his concentrated portfolio, according to the last quarter’s 13F, like Sandridge and Hornbeck (TAG is listed in Canada, so we don’t know if he still owns it or not), and he also has a big slug of Cubist Pharma … will it be one of those big positions he’s talking about? Something else? Let’s see what he has to say.

Kao says that his fund is opportunistic and event-driven, and that they invest across the capital spectrum — with lots of diverse themes and asymmetric payoff potential.

Kao says his “unusual” securities he’s talking about today are, in fact, an unusual convertible bond called ZONES. ZONES stands for Zero Premium Option Notes Exchangeable Securities — COX calles them PRIZES, Comcast calls them ZONES.

These are 30 year convertible securities, launched in 1999, that we exchangeable into shares of Spring PCS — with the underlying credit from the cable companies (Comcast, Cox, etc.), and a low coupon. Sprint was around $100 a share back then, during the dot-com bubble, it fell to $2 a share a couple years later so the ZONE security dropped too. They were issued as equity-like securities, but cratered to be valued like bond securities in 2003 or so when Kao first got involved.

What’s unusual is that the underlying bond is based on Comcast creditworthiness (high grade credit), but the conversion is into Sprint stock — if it was a Sprint bond the base value as a bond would be much lower.

These were effectively busted convertibles that traded down to 30 cents on the dollar when Comcast senior bonds were trading at $1.20. So initially he went long on the capital structure ...