Friday, October 31, 2014

Links

Howard Marks' comments on Oaktree's call (LINK)

Michael Lewis on Charlie Rose discussing the 25th anniversary edition of Liar’s Poker (LINK)

Walter Isaacson does a reddit AMA [H/T Will] (LINK)
Related book: The Innovators
Jim Grant: Complexity: The Hidden Cost of Central Bank Actions (LINK)

Aswath Damodaran on Amazon (LINK)

Aswath Damodaran on HP (LINK)

The Great Philosophers: Henry David Thoreau (LINK)
Related book: Walden and Civil Disobedience

Thursday, October 30, 2014

Links

Atul Gawande on Charlie Rose discussing his latest book, Being Mortal (LINK)

Talks at Google: Steve J. Martin discussing the book The small BIG: small changes that spark big influence (video) [H/T ValueWalk] (LINK)

Benedict Evans: Mobile Is Eating the World (LINK)

Frank Martin's latest: Why 1925? [H/T Santangel's Review] (LINK)

Jim Grant on Bloomberg (video) [H/T ValueWalk] (LINK)

Andrew Smithers: Fiscal stimulus – is it just a sugar rush? (LINK)

Buffett Pal Gottesman Says Don’t Expect Another Berkshire [H/T Will] (LINK)
Related book: Berkshire Beyond Buffett
Are You Sacrificing Your Health? (LINK)
Related book: The Primal Blueprint
Robert Sapolsky: Given chimps’ murderous tendencies, are we doomed to be violent? (LINK)
Related books (Sapolsky): A Primate's MemoirMonkeyluv: And Other Essays on Our Lives as Animals
Related recent post: Robert Sapolsky interview with Nautilus

Wednesday, October 29, 2014

Links

Larry Cunningham gives a Google Talk on his book Berkshire Beyond Buffett (video) [H/T ValueWalk] (LINK)

Capitalize For Kids Conference Notes (LINK)

This University Teaches You No Skills—Just a New Way to Think (LINK)

Kevin Kelly: The Three Breakthroughs That Have Finally Unleashed AI on the World (LINK)

The Red Cross’ Secret Disaster (LINK)
IN 2012, TWO MASSIVE STORMS pounded the United States, leaving hundreds of thousands of people homeless, hungry or without power for days and weeks. 
Americans did what they so often do after disasters. They sent hundreds of millions of dollars to the Red Cross, confident their money would ease the suffering left behind by Superstorm Sandy and Hurricane Isaac. They believed the charity was up to the job. 
They were wrong. 
The Red Cross botched key elements of its mission after Sandy and Isaac, leaving behind a trail of unmet needs and acrimony, according to an investigation by ProPublica and NPR. The charity’s shortcomings were detailed in confidential reports and internal emails, as well as accounts from current and former disaster relief specialists.
E.O. Wilson on Charlie Rose discussing his book The Meaning of Human Existence (LINK)

Nova: How does the brain work (video) [H/T The Big Picture] (LINK)
Dr. Neal DeGrasse Tyson & NOVA science NOW delve into magic and the brain, artificial intelligence, magnetic mind control, and the work of neuroscientist and synesthesia researcher David Eagleman. Can we really believe our own eyes? Will machines one day think like us? Can magnetic wands effectively control brain functions and treat depression?

Tuesday, October 28, 2014

Links

Graham & Doddsville's Fall 2014 Issue (LINK)
The new issue features Wally Weitz of Weitz Investment Management, Guy Gottfried of Rational Investment Group and the team at Development Capital Partners.  Additionally, you will find pictures from the 2014 “From Graham to Buffett and Beyond” Dinner in Omaha, news about the recently launched 5x5x5 Student Value Investing Fund and two investment ideas from CBS students.
Steven Romick's Q3 Commentary (LINK)

Expeditors' latest investor Q&A (LINK) [Which includes a great Steve Jobs quote: "People think focus means saying yes to the thing you've got to focus on. But that's not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I'm actually as proud of the things we haven't done as the things I have done. Innovation is saying no to 1,000 things."]

Tracy Britt Cool named CEO of Berkshire Hathaway owned Pampered Chef (LINK)

Edward Snowden Explains Why He Blew the Whistle on the NSA in Video Interview with Lawrence Lessig (LINK)

The Great Philosophers: Michel de Montaigne (LINK)
Related book: The Complete Essays of Montaigne [Also available as an audiobook via MP3 CD or on Audible, which is one of the things I started listening to while on vacation last week.]
Investing quotes of the day:

Warren Buffett on EBITDA from the 2002 Berkshire Meeting (Source):
It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it. 
We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report. 
People who use EBITDA are either trying to con you or they’re conning themselves.
Charlie Munger on EBITDA:
I think that, every time you see the word EBITDA, you should substitute the words “bullshit earnings.”
Seth Klarman on EBITDA (from Margin of Safety, and previously posted HERE):
It is not clear why investors suddenly came to accept EBITDA as a measure of corporate cash flow. EBIT did not accurately measure the cash flow from a company’s ongoing income stream. Adding back 100% of depreciation and amortization to arrive at EBITDA rendered it even less meaningful. Those who used EBITDA as a cash-flow proxy, for example, either ignored capital expenditures or assumed that businesses would not make any, perhaps believing that plant and equipment do not wear out. In fact, many leveraged takeovers of the 1980s forecast steadily rising cash flows resulting partly from anticipated sharp reductions in capital expenditures. Yet the reality is that if adequate capital expenditures are not made, a corporation is extremely unlikely to enjoy a steadily increasing cash flow and will instead almost certainly face declining results. 
It is not easy to determine the required level of capital expenditures for a given business. Businesses invest in physical plant and equipment for many reasons: to remain in business, to compete, to grow, and to diversify. Expenditures to stay in business and to compete are absolutely necessary. Capital expenditures required for growth are important but not usually essential, while expenditures made for diversification are often not necessary at all. Identifying the necessary expenditures requires intimate knowledge of a company, information typically available only to insiders. Since detailed capital-spending information was not readily available to investors, perhaps they simply chose to disregard it. 
Some analysts and investors adopted the view that it was not necessary to subtract capital expenditures from EBITDA because all the capital expenditures of a business could be financed externally (through lease financing, equipment trusts, nonrecourse debt, etc.). One hundred percent of EBITDA would thus be free pretax cash flow available to service debt; no money would be required for reinvestment in the business. This view was flawed, of course. Leasehold improvements and parts of a machine are not typically financeable for any company. Companies experiencing financial distress, moreover, will have limited access to external financing for any purpose. An over-leveraged company that has spent its depreciation allowances on debt service may be unable to replace worn-out plant and equipment and eventually be forced into bankruptcy or liquidation. 
EBITDA may have been used as a valuation tool because no other valuation method could have justified the high takeover prices prevalent at the time. This would be a clear case of circular reasoning. Without high-priced takeovers there were no upfront investment banking fees, no underwriting fees on new junk-bond issues, and no management fees on junk-bond portfolios. This would not be the first time on Wall Street that the means were adapted to justify an end. If a historically accepted investment yardstick proves to be overly restrictive, the path of least resistance is to invent a new standard.

Monday, October 27, 2014

Nebraska Furniture Mart: A Net-Net and 4x Earnings when Berkshire acquired it?

I had either forgotten this valuation or not paid enough attention to it before, but it is pretty interesting. From the book The Snowball:
The Blumkins had never had an audit, and Buffett did not ask for one. He did not take inventory or look at the detailed accounts. They shook hands. “We gave Mrs. B a check for fifty-five million dollars and she gave us her word,” he said. Her word was as good as “the Bank of England.”
… 
Soon after, Berkshire’s auditors conducted the Nebraska Furniture Mart’s first inventory. The store was worth $85 million. Mrs. B, seized with a severe case of remorse after she had sold it for a total value of $60 million, including the share retained by the family, told Regardie’s magazine, “I wouldn’t go back on my word, but I was surprised…. He never thought a minute [before agreeing to the price], but he studies. I bet you he knew.” Buffett, of course, could not have “known,” not literally. But he had certainly known there was a whopping margin of safety in the price.
And while this is probably a pre-tax number, here was a hint at what NFM was making around that time, which occurred after Mrs. B had left NFM to start a competing business, before eventually selling back to NFM:
Some time earlier, Buffett had created a saying. “I would rather wrestle grizzlies,” he said, “than compete with Mrs. B and her progeny.” Stuck wrestling grizzlies, Buffett acted as he always did when any of his friends’ relationships broke down. He refused to take sides. Mrs. B thought that was disloyal. “Warren Buffett is not my friend,” she told a reporter. “I made him fifteen million dollars every year, and when I disagreed with my grandkids, he didn’t stand up for me.”
...................

UPDATE - 10/28/2014

Thanks to Will who was kind enough to point out a 2014 Annual Meeting response from Buffett on the valuation (Q9 in these notes):

Q9: Station 9, Omaha.  Did you buy the Nebraska Furniture Mart at 85% of book value, or 2x earnings?
WB: I wish we had bought it that cheap.  We paid 11 or 12x p/e for 80% of company, and it was not a discount to book, $60m was the equivalent full purchase price, and there was a second transaction involved.  $60m for 100%, was not a bargain purchase, it was more than book at the time.  It would have been a multiple 11x or 12x pre‐tax.  It had $100m sales, pretax 7% margin, or about 4.5% after tax.  That is ballpark.  It was great business, but it was not a bargain.  It was great opportunity to join with this great family. There was another company from Germany trying to buy it at time.  Erskine Bowles was representing them actually.  On my birthday in 1983, in August, I gave a letter to Mrs. B, and Louis her son told her what was in it.  I asked, did she owe any money, did she own building?  No, and yes she did. 
So there's a little discrepancy between that comment and the above excerpt from The Snowball. I guess it can be reconciled a bit if earnings grew quite a bit from the time of Berkshire's purchase until Mrs. B left, and if the inventory was offset by a large accounts payable balance (given that there was no debt and the building was also owned). 

.................

UPDATE 2 - 10/28/2014

Thanks to Jeff for being less lazy than me and digging through Buffett's letters for the info. I thought they didn't break NFM out until later, but Jeff was kind enough to bring it to my attention. 

It appears that NFM averaged just a bit over $15 million per year pre-tax in the 3 years after Berkshire purchased it in 1983. And given that it still made $3.8 million in the last 3 months of 1983 when Berkshire owned it, NFM probably also made close to $15 million or so in 1983 as well, maybe a bit less. So it does appear that Berkshire did in fact pay about 4-5x pre-tax (and about 8-9x after-tax) for the business.

Links

James Montier: Shareholder Value Maximization: The World's Dumbest Idea? [Montier starts in the video around 5:30] (LINK)

The Apollo Asia Fund's Q3 report (LINK)

Hussman Weekly Market Comment: Fast, Furious and Prone to Failure (LINK)

Jason Zweig: So You Think You’re a Risk-Taker? (LINK)

Bill Ackman and His Hedge Fund, Betting Big [H/T Will] (LINK)

Jim Koch: The Steve Jobs of Beer (LINK)

Jared Diamond talks with The Guardian (LINK)
Related books, HERE.
On the Obsessive Focus of Bill Gates (LINK)
One trait that differentiated [Gates and Allen] was focus. Allen’s mind would flit between many ideas and passions, but Gates was a serial obsessor. 
“Where I was curious to study everything in sight, Bill would focus on one task at a time with total discipline,” said Allen. “You could see it when he programmed. He would sit with a marker clenched in his mouth, tapping his feet and rocking; impervious to distraction.”
.....
Related book: The Innovators
Related previous post: Bill Gates quote from Charlie Rose interview (or, how the world's best companies are built by fanatics)
a16z Podcast: The (Definite) Optimism of Peter Thiel (LINK)
What is Silicon Valley’s greatest reigning monopoly? How did PayPal manage to emerge from the dotcom implosion? Can you build a great tech company and keep it private forever? And how did Elon Musk manage to wreck an uninsured, million-dollar car with Peter Thiel in the passenger seat speeding on the way to a VC meeting? Marc Andreessen and Thiel discuss all of it in a wide-ranging conversation that toggles off the topics in Thiel’s new book “Zero to One.”
Munger Gives $65 Million to U.C. Santa Barbara [H/T Daniel] (LINK)
Charles Munger, the vice chairman at Berkshire Hathaway Inc. (BRK/A), is giving $65 million to the University of California at Santa Barbara for a housing facility where visiting scientists can gather to discuss physics. 
Construction of the three-story residence is expected to be done in two years, the university said in a statement. The gift by Munger, the long-time business partner of Warren Buffett, is the largest single donation in the school’s history, according to the statement. 
“Once you see what a combination of calculus and Newton’s laws will do and the things you can work out, you get an awesome appreciation for the power of getting things in science right,” Munger, 90, said in the statement. “I don’t think you get a feeling for the power of science — not with the same strength — anywhere else than you do in physics.”
What Will Set Warren Buffett’s Company Apart When He’s Gone? (LINK)
Related book: Berkshire Beyond Buffett
Buffett’s Model Not Challenged by IBM Loss (video) [H/T Will] (LINK)
Oct. 21 (Bloomberg) -- Lawrence Cunningham, author of “Berkshire Beyond Buffett,” talks with Betty Liu about how the value lost in IBM impacts the effectiveness of Warren Buffett’s investment plans. He speaks on “In The Loop.”
Talks at Google: John Mihaljevic, "The Manual of Ideas: How to Find the Best Investment Ideas" (video) (LINK)
Related book: The Manual of Ideas: The Proven Framework for Finding the Best Value Investments
Steve Keen: Time for a Copernican Revolution in Economics (LINK)
Related book: Debunking Economics

Profit margins and investor expectations...

From the book Capital Account:
Companies that 'gouge' their customers in order to enhance profits tend to create overly optimistic expectations among investors. For instance, when Philip Morris announced that it was slashing cigarette prices in an attempt to stem market share erosion on 'Marlboro Friday' (April 22, 1993), its share price collapsed. This occasion provided a vivid demonstration of how excessive profit margins, being unsustainable, may actually be more dangerous to investors than modest ones.

Sunday, October 26, 2014

Review of Guy Spier's "The Education of a Value Investor"

A quick review of Guy Spier's excellent book, The Education of a Value Investor, which I just submitted on Amazon as well.
This book is about Guy's personal journey -- the good and the bad. As others have written about the book, he's extremely honest about the path he took to get to where he is today. And while his complete story is still one that is being written, his openness describing his path is what makes this book one that can make just about anyone a better investor. Even if the things that personally work for him don't fit your personality in the same way, he'll make make you think enough about certain things -- especially your environment and the people you surround yourself with -- that I imagine would cause almost anyone, and not just investors, to seriously consider making at least a couple of changes in their lives. 

And while far from strictly being an "investment book" (which makes it more interesting to readers of all types) there is still plenty of investment wisdom, and several things that I'll be adding to my own investing checklist. For example, one of the investing mistakes he discusses was his investment in Tupperware. The "Checklist Item" that may have prevented this investment mistake was "Is this company providing a win-win for its entire ecosystem?" While I already have this on my list as far as being careful of investing in tobacco companies, casinos, or public lottery companies (which he also discusses), I hadn't thought of it as much in regards to a company like Tupperware. It was selling a product that its customers wanted, that they couldn't really get elsewhere, and Tupperware was the market leader. Sounds good, right? But the problem was that they weren't giving their customers a good deal. They were overpricing their merchandise. So while there may be money to be made for a while, especially if you get in early and buy a company like this cheap enough, there is a big competitive risk in the future that isn't easy to see just by looking at the past. How loyal do you think customers are likely to be when someone comes along with essentially the same product at a much better price (especially when it then becomes clear how much customers were being overcharged in the past)? 

I also liked the CarMax example Guy wrote about. It stressed to me the importance of looking at how customers pay for their purchases. There's a big difference between a business whose customers have the money to pay for their products at the time of the transaction and ones that rely on outside creditors to provide their customers access to credit. While CarMax has other advantages of scale that still make it a decent business and allowed it to recover after credit had dried up, there are many other businesses that make a living relying on the credit of others that don't have any competitive advantages and can quickly and unexpectedly have their business models become at risk in the wrong environment. While things may work well if the wrong environment doesn't occur in one's investment horizon, I think the big key from Guy's examples and checklist items is to stick to areas where your odds of success of winning are higher, and areas where you are less likely to encounter unexpected and unfavorable surprises. As Charlie Munger likes to say, "All I want to know is where I'm going to die so that I'll never go there." 

So all in all, I think Guy has written a book very worthy of 5 stars, for investors of all levels of experience, and a book that I think would also be interesting to those outside of the investing world.

Charlie Munger: advice on getting ahead

From Poor Charlie's Almanack:
Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Step by step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts.... Slug it out one inch at a time, day by day. At the end of the day--if you live long enough--most people get what they deserve.

Saturday, October 25, 2014

John Keats on “Negative Capability”

Link to: John Keats on “Negative Capability,” Embracing Uncertainty, and Celebrating the Mysterious
[S]everal things dovetailed in my mind, & at once it struck me, what quality went to form a Man of Achievement especially in Literature & which Shakespeare possessed so enormously — I mean Negative Capability, that is when man is capable of being in uncertainties, Mysteries, doubts, without any irritable reaching after fact & reason — Coleridge, for instance, would let go by a fine isolated verisimilitude caught from the Penetralium of mystery, from being incapable of remaining content with half knowledge. This pursued through Volumes would perhaps take us no further than this, that with a great poet the sense of Beauty overcomes every other consideration, or rather obliterates all consideration.
.................

That quote reminded me both of Nassim Taleb's work, as well as this quote from Richard Feynman:
“I think it's much more interesting to live not knowing than to have answers which might be wrong. I have approximate answers and possible beliefs and different degrees of uncertainty about different things, but I am not absolutely sure of anything and there are many things I don't know anything about, such as whether it means anything to ask why we're here. I don't have to know an answer. I don't feel frightened not knowing things, by being lost in a mysterious universe without any purpose, which is the way it really is as far as I can tell.”