The Streaming Wars: Its Models, Surprises, and Remaining Opportunities - by Matthew Ball (LINK)
Star of the North: How Warren Buffett Bought the Best Industrial Firm in Israel [H/T Linc] (LINK)
William Nygren at the Ben Graham VI Conference (video) (LINK)
Joel Greenblatt at the Ben Graham VI Conference (video) (LINK)
Bob Robotti at the Ben Graham VI Conference (video) (LINK) [His Subsea 7 thesis starts around the 7-minute mark.]
40 Years Later, Lessons From the Rise and Quick Decline of the First ‘Killer App’ ($) (LINK)
Meditations On Meditation - by Blas Moros (LINK)
The Promise and Price of Cellular Therapies - by Siddhartha Mukherjee (LINK)
Monday, July 15, 2019
Here's a reply from Buffett and Munger at the 2007 Berkshire Hathaway Annual Meeting—to a question posed by Frank Martin (Question 24)—that I thought was worth posting separately here. Going back and (slowly) reading the transcripts with the benefit of hindsight has been a fantastic learning experience, and this excerpt is a great example. All three of them clearly saw trouble ahead given the excesses that existed. And given that belief—and the belief that timing the downturn and its magnitude with precision was nearly impossible—Buffett and Munger gave this advice about how to act:
WARREN BUFFETT: ...We don’t have the faintest idea where the S&P will be in three years, or where the long-term bond will be in three years, but we do know which we would rather own on a 20-year basis.
CHARLIE MUNGER: Warren, we’d also expect that the current scene will cause some real disruption, not too many years ahead.
WARREN BUFFETT: That’s true, but if you go back a hundred years, you could almost say that in almost any period. You will get disruptions from time to time, and it’s very nice if you have a lot of cash then and you have the guts to do something with it.
But predicting them or waiting around for them, that sort of thing, is not our game. And I mean, we bought $5 billion worth of equities in the first quarter, something like that.
And...it would be a joke to even compare them to 1974 or a whole bunch of other periods. But we decided we would rather have them than cash, or we would rather have them than sit around and hope that things get a lot cheaper.
We don’t spend a lot of time doing that. You can freeze yourself out indefinitely.
So any time we find something that we think is intelligent to do, we just do it, and we hope we can do it big.
Saturday, July 13, 2019
From Security Analysis:
Exact Appraisal Impossible. Security analysis cannot presume to lay down general rules as to the “proper value” of any given common stock. Practically speaking, there is no such thing. The bases of value are too shifting to admit of any formulation that could claim to be even reasonably accurate. The whole idea of basing the value upon current earnings seems inherently absurd, since we know that the current earnings are constantly changing. And whether the multiplier should be ten or fifteen or thirty would seem at bottom a matter of purely arbitrary choice.
But the stock market itself has no time for such scientific scruples. It must make its values first and find its reasons afterwards. Its position is much like that of a jury in a breach-of-promise suit; there is no sound way of measuring the values involved, and yet they must be measured somehow and a verdict rendered. Hence the prices of common stocks are not carefully thought out computations but the resultants of a welter of human reactions. The stock market is a voting machine rather than a weighing machine. It responds to factual data not directly but only as they affect the decisions of buyers and sellers.
Interestingly, I can't seem to find a direct source for the more popular version of Graham's weighing machine quote. Warren Buffett has quoted it a couple of times, including in his 1987 letter:
As Ben said: "In the short run, the market is a voting machine but in the long run it is a weighing machine."
And in his 1993 letter:
As Ben Graham said: "In the short-run, the market is a voting machine - reflecting a voter-registration test that requires only money, not intelligence or emotional stability - but in the long-run, the market is a weighing machine."
And in the revised edition of The Intelligent Investor, Jason Zweig writes:
As Graham liked to say, in the short run the market is a voting machine, but in the long run it is a weighing machine.
So I'd be curious if anyone knows where Graham used the weighing machine reference in regards to the long run. I don't see a direct source, but given the personal relationship Warren Buffett and others had with him—and considering that Buffett and Zweig used the words "said" and "say" in their references—it may have just been something he communicated verbally instead of in his written works.
And on a related note, this Seth Klarman quote from the Preface to the Sixth Edition of Security Analysis is one that I also think is worth re-reading, and including with the others in this post:
As Graham has instructed, those who view the market as a weighing machine—a precise and efficient assessor of value—are part of the emotionally driven herd. Those who regard the market as a voting machine—a sentiment-driven popularity contest—will be well positioned to take proper advantage of the extremes of market sentiment.
Friday, July 12, 2019
"When you’re trying to determine something like intrinsic value and margin of safety and so on, there’s no one easy method that could be simply mechanically applied by, say, a computer and make anybody who could punch the buttons rich. By definition, this is going to be a game which you play with multiple techniques and multiple models, and a lot of experience is very helpful. I don’t think you can become a great investor very rapidly any more than you could become a great bone tumor pathologist very rapidly. It takes some experience and that’s why it’s helpful to get a very early start.... We’ve never had any system for being able to make correct judgments on the values of all businesses. We throw almost all decisions into the too hard pile, and we just sift for a few decisions that we can make that are easy. And that’s a comparative process. And if you’re looking for an ability to correctly value all investments at all times, we can’t help you." --Charlie Munger (2007)
"We know how to step over one-foot bars. We don’t know how to jump over seven-foot bars. But we do know how to recognize, occasionally, what is a one-foot bar. And we know enough to stay away from the seven-foot bars, too." --Warren Buffett (2007)
On Writing - by Chris Pavese (LINK) [A big thanks to Jason Zweig for the writing series last year (Part 1, Part 2, Part 3), and to Chris for this summary of some key points. I've also added Chris' highlights of Jason's series to the end of my file on writing tips.]
Lucy Kellaway on turning 60 — and starting out afresh [H/T @jasonzweigwsj] (LINK)
Shopify and the Power of Platforms - by Ben Thompson (LINK)
The Amazon Arbitrage - by David Perell (LINK)
History of Public SaaS Returns and Valuations (LINK)
Six Reasons Why the Rebate Rule Failed—And What’s Next (LINK)
Value Investing with Legends: Taking a Top-Down Approach to Value Investing [with Jean-Marie Eveillard] (LINK)
Venture Stories Podcast: The Intersection of Financial Services and Marketplaces (LINK)
The James Altucher Show: 470 - Ramit Sethi: (Part 2) (LINK)
Related book: I Will Teach You to Be RichRevisionist History Podcast: Good Old Boys (LINK)
Stuff You Should Know Podcast: How Sloths Work (LINK)
Have You Seen Britain’s Tiny Potential Tree-Killer, the Adorable Spittlebug? (LINK)
A Groundbreaking Study Is Good News for Cats—And People - by Ed Yong (LINK)
Wednesday, July 10, 2019
"Markets will do crazy things over time. When Charlie and I were at Salomon, they’d always talk to us about five sigma events or six sigma events, and that’s fine if you’re talking about flipping coins, but it doesn’t mean anything when you get human behavior involved. And people do things that — intelligent people do things — very intelligent, educated people do things — that are totally irrational, and they do them en masse. And you saw it in 1998. You saw it in 2002. And you’ll see it again." --Warren Buffett (2007)
"When people talk about sigmas, in terms of disaster potentialities in markets, they’re all crazy. They got the idea that bad results in markets would be predicted by Gaussian distributions. And the way they decided on that outcome was it made everything so easy to compute. They don’t follow Gaussian distributions. You have to believe in the Tooth Fairy to believe that." --Charlie Munger (2007)
Sub-Zero Yields Start Taking Hold in Europe's Junk-Bond Market (LINK)
Central bankers hinting at more monetary stimulus have depressed yields so much that even some European junk bonds trade at levels where investors have to pay for the privilege of holding them.
The number of euro-denominated junk bonds trading with a negative yield -- a status until recently associated with ultra-safe sovereign borrowers -- now stands at 14, according to data compiled by Bloomberg. At the start of the year there were none.
Extreme Makeover: Rich Barton Has A $700 Million Stake In Zillow And Plans To Turn It Into A Home-Flipping Machine (LINK)
Inseparable Pairs - by Morgan Housel (LINK)
Dr. Fox - by Chris Pavese (LINK)
The James Altucher Show: 469 - Ramit Sethi: (Part 1) (LINK)
Related book: I Will Teach You to Be RichMoney And Politics, Not Technology, Stand Between Us And Self-Driving Cars (LINK)
Daniel Ruiz talks about the auto sector (videos) (Part 1, Part 2, Part 3, Part 4, Part 5, Part 6)
AI Trained on Old Scientific Papers Makes Discoveries Humans Missed (LINK)
Venture Stories Podcast: Value Hacking and How To Avoid The Fake Growth Epidemic with Mike Maples (LINK)
What Ego Edges Out… - by Ryan Holiday (LINK)
The Story of Humans and Neanderthals in Europe Is Being Rewritten - by Ed Yong (LINK)
Book of the day: Master of the Game - by Connie Bruck
Monday, July 8, 2019
"It's not that I'm so smart, it's just that I stay with problems longer." --Albert Einstein
John Hempton on The Jolly Swagman Podcast (LINK)
Share buybacks are as American as mom, apple pie and hot dogs on the Fourth of July.
You’d never guess that given the many politicians on both the left and the right who say share repurchases are a newfangled, evil spawn of deregulation.
My Questions About Negative-Yielding Debt - by Ben Carlson (LINK)
Marketing 3.0: How L’Oréal is embracing new marketing codes [H/T @ivan_brussels] (LINK)
Raoul Pal with a Twitter thread about some of the macro risks he sees in Europe (LINK)
Short Seller Targets Anta in Another Attack on China’s Biggest Sportswear Company ($) (LINK)
Carson Block’s firm takes aim at Anta in report titled ‘Turds in the Punchbowl’
Huawei staff share deep links with Chinese military, new study claims (LINK) [The paper is available HERE.]
Cyberweapons: A Real Worry - by Kevin Kelly (LINK)
Ben Thompson on The Talk Show With John Gruber Podcast (LINK)
Techmeme Ride Home Podcast: The Man Who Could Have Been Bill Gates? (Part 1, Part 2)
Robert Greene: "The Laws of Human Nature" | Talks at Google (LINK)
TED Talk: Grief and love in the animal kingdom | Barbara J. King (LINK)
Ancient life awakens amid thawing ice caps and permafrost [H/T Linc] (LINK)
What Snowball the parrot’s spontaneous moves teach us about ourselves
Sunday, July 7, 2019
Here is a write-up I posted on MicroCapClub last month for those that may be interested in the micro-cap space. But first, please read the relevant disclosure below.
Disclosure: I am the portfolio manager at Sorfis Investments, LLC ("Sorfis") and the separate accounts that Sorfis manages own shares in Tandy Leather Factory, Inc. We may in the future buy or sell shares and are under no obligation to update our activities. This is not a recommendation to buy or sell a security. Please do your own research before making an investment decision.
Tandy Leather Factory, Inc. (TLF)
Shares outstanding: 8,934,024
Market cap: $48.7 million
Cash: $17.7 million
Enterprise value: $31 million
Tandy Leather Factory is a specialty retailer of leather and leathercraft related items. Leather is ~40% of sales, hand tools ~20% of sales, and then there are a bunch of items that make up a single-digit percent of sales (dyes, finishes, glues, hardware, kits, stamping tools, etc.). They are basically a one-stop shop, and by far the largest player in this niche.
They categorize their customers into 2 types: Retail (~62% of sales) and Non-Retail (~38% of sales). Retail customers are individuals that come into their stores and are the end-user. Non-Retail customers are small businesses, youth organizations (Boy Scouts, 4-H, etc.), hospitals, military, distributors, re-sellers, and other similar, non-individual customers.
At the end of Q1, the company operated 117 stores, which are mostly in low-rent, strip mall type of locations. With the closure of the last U.K. store which was planned for this month, there will be 116 stores, with 115 in North America and 1 in Spain. A few more underperforming stores are also expected to be closed as leases expire in the near future.
In Q4 of last year, the company made both a management and strategy change. I think the previous management, which were long-time company veterans, did a good job over the years, but as is often the case, especially in the micro-cap world, put too much emphasis on top-line growth over economically profitable growth. And when cash flow slowed a bit, they started trying new things, such as starting a district manager program, continuing to operate the international stores (which lacked scale) that were unprofitable, as well as some other things which may have been reasonable experiments, but ended up being bad returns on investment (conference sponsorships, opening on Sundays, etc.). More expectations were also put on store managers to get out and try and sell non-retail/commercial business, which took them away from running their stores and providing great customer service to the retail customer base.
The new CEO (Janet Carr) is focusing more on cash flow. So unprofitable stores will be closed when leases are up. The district manager program has been scrapped in favor zone managers, where 12 district managers have been replaced by 8 zone managers, reporting to 1 retail head manager instead of 2 regional managers. The store managers will also get to spend more time in their stores, as well as new incentives (pay based on cost of living, can now earn overtime, and incentive pay now based on sales, inventory turn, and labor costs instead of just store profit—so that more is in their control). The factory in Fort Worth, which produced about 10% of company product, has been reduced from about 25 employees down to 6, as some of the product it produced can be sourced from cheaper from elsewhere.
But there is also money being spent on other things in 2019. They’ve hired a few people to focus solely on reaching out to commercial customers. This is potentially an area for growth, as we don’t really know how big this niche market is, but there is now a select, lower overhead group operating out of company headquarters focused on it, instead of having a lot of reliance on store managers to also perform much of those duties. They’ve also hired some other people in Fort Worth to professionalize other departments (marketing, merchandising, human resources, logistics), and are investing in technology that is long overdue to be updated (accounting and POS systems).
I think there is a lot of uncertainly about how some of these changes may pan out, but I think there’s little downside buying at these levels. Tangible book value is around $6.30 per share the way I calculate it, which should be pretty close to liquidation value given that the inventory does not go bad quickly, and the inventory that was bad (e.g. faded leather that is hard to sell) or slow moving was written down when the new management team came in at the end of 2018 to provide a clean slate.
And while there is investment and some changes happening in 2019, I think—unless they really make some bad capital allocation decisions—the underlying earning power in 2018 should be the minimum level of earning power going forward. Given that I really do think the inventory write-down here can be counted as a one-off expense, and if we add that plus the portion of the previous management severance expensed during 2018, then the after-tax income at a normalized ~25% tax rate going forward would have been around $4.2 million last year. So besides buying it below tangible book value, we’re also getting about an 8.6% after-tax earnings yield (even without backing out excess cash), which I think is likely to grow in the years ahead.
Helping to protect the capital allocation going forward, we also have two former MicroCap Leadership Summit speakers on the board in Jeff Gramm and Brent Beshore. Jeff’s firm, Bandera, owns around 32% of the company. And another board member that runs an investment firm owns a little under 10% of the company.
While it’s often hard to know what actually causes a stock’s price to drop, and it could be coincidence, there is some probability that worries over the tariffs have caused concern among one or more investors with enough shares to move the price. As part of her immersion process into Tandy, Janet Carr mentioned visiting the company’s tanneries in Mexico during the company’s earnings call in March. And then in the week after President Trump’s tweet about the tariffs on Mexico, volume increased in the stock and many shares traded down just slightly above and below the $5 per share range. It may be a coincidence, but I thought it was worth noting, though the company actually gets a little less than 5% of its leather from Mexico (the sources are diversified, but South American countries seem to be the biggest source). And of the $17 million in imports last year, about $2 million were from China (Taiwan was the biggest at around $5 million).
Janet Carr also received restricted shares for joining the company and will receive some extra shares if operating income exceeds $12 million for 2 years in a row and $14 million in one year, which, given the company made $12 million in 2014 and had operating margins in the 12.4-14.4% range from 2012 to 2016, this is a reachable goal—which should certainly make buyers at today’s valuation happy if it is achieved.
Over the next few years, given the company still has a great competitive position and many of the inefficiencies of the past are in the process of being addressed, I think getting somewhere back in the 10-15% operating margin range is likely achievable, and probably within the next 2 or 3 years. So if we assume no growth and the closure of a few more stores, we’d be around $80 million of revenue which, at a 25% tax rate, gets us somewhere in the $6 million to $9 million range of after-tax income, which would give us a very good earnings yield on today’s sub-$50 million market cap, even before backing out excess cash. The company has also paid out a few special dividends in the past, and has been buying back stock.
What would that cash flow be worth? It’s hard to predict multiples, and I prefer to mostly focus on my downside and earnings yield as a base return. But multiples of small, private businesses with $5 million+ in EBITDA that have a good competitive position, aren’t necessarily growth businesses, but also aren’t too capital intensive tend to sell for 6-8x EBITDA. So assuming a 12.5% operating margin on $80 million of sales, we get $10 million in operating earnings plus about $1.8 million in Depreciation and Amortization, so $11.8 in EBITDA. This would give us a valuation range of $70.8 million to $94.4 million. Assuming 9 million shares outstanding (i.e. buybacks roughly offset extra restricted shares), and $1 per share in excess cash (probably too low), we’d get a valuation somewhere in the $8.85 to $11.50 per share range.
So in summary, there is uncertainty with how some of the changes will play out, but many of the operational things may be “unrecognized simplicities” that a fresh set of eyes can fix fairly quickly and return the business and operating margins back to where they were a few years ago. If margins get back there, I actually expect it to be with slightly lower gross margins, as the company focuses more on gross margin dollars instead of the percentage, but gains efficiency on the operating costs. All in all, I think it is a potential low downside investment with a reasonable path to doubling over the next 2 or 3 years.
Friday, July 5, 2019
"You don’t get paid for what’s already happened. You only get paid for what’s going to happen in the future. The past is only useful to you in the extent to which it gives you insights into the future, and sometimes the past doesn’t give you any insights into the future." --Warren Buffett (2007)
Markel Omaha brunch 2019 (video) (LINK)
Use Your Edge (LINK)
Why Things Break: Easy Causes of Business and Investing Failure (LINK)
Tim Wu Explains Why He Thinks Facebook Should Be Broken Up (LINK)
Related book: The Curse of Bigness
The Absolute Return Letter - July 2019: Energy Misconceptions (LINK)
A Return to Tiananmen - by Peter Zeihan (Part I: The Evolution of China, Part II: The Ending of Hong Kong)
Eric Cinnamond talks small cap, absolute return value investing with Tobias Carlisle on The Acquirers Podcast (LINK)
Grant’s Current Yield Podcast: Middle Kingdom microscope (LINK)
Eric Cinnamond talks small cap, absolute return value investing with Tobias Carlisle on The Acquirers Podcast (LINK)
The James Altucher Show (podcast): 468 - David Epstein: Proof That It’s Never Too Late to Master Something New (LINK)
Related book: Range: Why Generalists Triumph in a Specialized WorldRevisionist History Podcast: Tempest in a Teacup (LINK)
American Innovations Podcast: Biologist Timothy Mousseau Can’t Stop Going Back To Chernobyl (LINK)
AI: Hype vs. Reality: Doctor AI (LINK)
Eric Topol on the Making Sense podcast (LINK)
Humanization, Dehumanization and Other Things Psychologists Do (video) (LINK)
Alex Honnold: A Soul Freed (video) (LINK)
Related book: The Evolution of Cooperation
Why Waves of Seaweed Have Been Smothering Caribbean Beaches - by Ed Yong (LINK)
For Smart Animals, Octopuses Are Very Weird - by Ed Yong (LINK)
"We learn who we are in practice, not in theory." --Herminia Ibarra
Tuesday, July 2, 2019
"What we really want to do is buy a business that’s a great business, which means that business is going to earn a high return on capital employed for a very long period of time, and where we think the management will treat us right. We don’t have to mark those down a lot when we find those factors. We’d love to find them when they’re selling at 40 cents on the dollar but we will buy those as much closer to a dollar on the dollar. We don’t like to pay a dollar on the dollar, but we’ll pay something close." --Warren Buffett (2007)
The Earnings Mirage: Why Corporate Profits are Overstated and What It Means for Investors (LINK)
The P/E Ratio: A User’s Manual [H/T @justvalue2] (LINK)
Availability-Misweighing Tendency (LINK)
Invest Like the Best Podcast: Bill Gurley – All Things Business and Investing (LINK)
The Knowledge Project Podcast: When Good Intentions Go Bad [with Jonathan Haidt] (LINK)
V > Λ: The Inverted Hierarchy (LINK)
The Stoic Magazine (Volume 1, Issue 7, July 2019) (LINK)
"This is the secret of cheerfulness—not depending on someone's help or expecting them to provide us tranquillity." --Marcus Aurelius
Monday, July 1, 2019
"The whole investment world is more and more competitive, and if you talk about a real credit contraction, which gums up the whole civilization, no one would welcome that. And I would predict that if we ever had a really big credit contraction after a period like the one we’re in with all this excess, which is causing so much envy and resentment, that we would get legislation that most of us wouldn’t like." --Charlie Munger (2007)
Once Upon A Time In Tech (LINK) [H/T @AlexRubalcava, whose comments are also worth posting: "If you’re a software investor in private or public markets, you should check out this massive, comprehensive Seeking Alpha post, which is decidedly bearish. Naturally I don’t agree with everything in the post, but I appreciate its depth and rigor."]
a16z Podcast: Entrepreneurs, Then and Now [with Marc Andreessen, Ben Horowitz, and Stewart Butterfield] (LINK)
The Peter Attia Drive Podcast: #60 - Annie Duke (LINK)
Related book: Thinking in Bets
Albert Einstein asked that when he died, his body be cremated and his ashes be scattered in a secret location. He didn’t want his grave, or his body, becoming a shrine to his genius. When he passed away in the early morning hours of April, 18, 1955, his family knew his wishes. There was only one problem: the pathologist who did the autopsy had different plans.Robert Caro Reflects on Robert Moses, L.B.J., and His Own Career in Nonfiction (Transcript, Podcast)
Related book: Working - by Robert A. CaroThe Power of One Push-Up [H/T @Atul_Gawande] (LINK)
Several simple ways of measuring a person’s health might matter more than body weight.Oregon’s Tsunami Risk: Between the Devil and the Deep Blue Sea - by Kathryn Schulz (LINK)
'Apollo 11': 8 moments from the documentary to watch for [H/T Linc] (LINK)