Arnold Schwarzenegger Recalls His Best and Worst Financial Bets

Great article in the WSJ on Arnold Schwarzenegger. In the article he talks about his various some of his best and worst investments. It’s worth sharing.

Schwarzenegger was a big influence on my life growing up. His story is unbelievable. He came from nothing. Really nothing. He had dreams, vision, and a plan.  For those not too familiar with his body of work and accomplishments, I highly suggest you read his book, Total Recall. I wrote a review here.

Below is the article from the WSJ.


Arnold Schwarzenegger Recalls His Best and Worst Financial Bets
By Chris Kornelis from the WSJ

Arnold Scharzenegger has had one of the most impressive—and oddball—careers in popular culture, from two terms as governor of California to four (going on five) turns as sci-fi icon the Terminator. The financial bets he has placed have been just as diverse. Some have been high profile, like his ownership position in Planet Hollywood. Others have flown under the radar.
In 1970, for instance, when he was a young Austrian expat with enormous biceps, he read that an airport for supersonic aircraft was being planned for the Mojave Desert. So, he spent $15,000 on 10 acres of land that had neither clean water nor electricity.
“The idea was that within a short period of time they were going to come in and bring electricity and water and roads and subdivide it, and [there] was a whole plan for the area,” says Mr. Schwarzenegger. “So, we said to ourselves, ‘We’re going to make a lot of money. We’re going to become millionaires.’ ”
But soon after he bought the land, supersonic flight was banned over the U.S., and the airport never materialized. Recently, though, those 10 acres of barren land—which he still owns—have risen in value as a nearby town has developed. The last appraisal came in close to $1 million, he says.
Still, Mr. Schwarzenegger says his best and worst bets have had less to do with writing checks and more to do with investing his time and effort in getting ahead—as well as having a clear vision of what he wanted to achieve and preparing for a job.
INVESTMENT: Relentless training as a bodybuilder
GAINS: Millions of dollars, movies, the governorship of California
By the time Mr. Schwarzenegger was 15, his mom charged him rent to live at home. After seeing videos of the U.S.—“the Golden Gate Bridge, Empire State Building, the huge highways, the big Cadillacs with the big wings in the back”—he didn’t just want to leave his parents’ house, he wanted to leave his home country, Austria.
Mr. Schwarzenegger decided that his ticket to America would be through bodybuilding. He began to train. He joined the Austrian army and continued training, his sights always set on moving to America. After he won the Mr. Universe competition in 1967—at 20, the youngest champion—he got an invitation from Joe Weider, one of the godfathers of the sport, to train in the U.S.
“Coming to America opened up all the doors that I didn’t even think about,” he says. “My movie career happened, and then my political career, and the money, the millions that I made, it goes on and on and on. Everything that I have accomplished in life is because of America. So this was really the most important and the best decision that I’ve made.”
THE TAKEAWAY: Mr. Schwarzenegger says he made it to America because he had a vision. From the time he was a teenager, he could visualize himself onstage winning Mr. Universe and using his success as an entrée to a life in America.
“The No. 1 lesson of being successful is having a vision,” he says. “Because when you have a vision of where you want to go in life and what you want to be, then it is just a matter of doing the work to get there.”
As he diversified his professional goals—whether it was being an investor or governor—Mr. Schwarzenegger says he employed the same principle. It is one the things he tries to instill in young people today.
“There’s just too many people floating around and not having a vision, especially young kids,” he says. “They don’t know what they want to do when they get out of college, they don’t know what to do when they get out of high school, what kind of work should they do. Should they go intern somewhere? There is no goal.”
Worst Bet: ‘Hercules in New York’
INVESTMENT: Time and cultural cachet
LOSSES: Future jobs and cultural cachet
As a child, Mr. Schwarzenegger looked up to men like Steve Reeves and Reg Park, bodybuilders who parlayed their muscles into film roles like “Hercules Unchained” and “Hercules and the Captive Women,” respectively. So, when Mr. Weider called him in 1969 and asked him if he wanted to go for the title role in the film “Hercules in New York,” he went for it.
Mr. Schwarzenegger hardly spoke English, so Mr. Weider instructed him not to talk during the meeting with the producer. (Mr. Weider told him Mr. Schwarzenegger was “a German Shakespearean actor.”) Mr. Schwarzenegger got the job but had to talk to make the film. It didn’t go well.
“I just said [the lines], but there was no emotion there because I didn’t even know what I was saying,” he says. “I didn’t have any acting training, and even though the director complimented me, I knew I was kind of in a bit over my head.”
The performance was so bad that his lines had to be overdubbed. His phone stopped ringing. “It really took me back with my career of becoming an actor for several years because I didn’t get an offer or anything,” Mr. Schwarzenegger says.
THE TAKEAWAY: “You have to find the sweet spot between having courage and being confident,” he says, “but also knowing that you’re deep into it and you’re not ready for something.”
Mr. Schwarzenegger says he got so caught up in his initial success as a bodybuilder that he didn’t slow down and take care of the basics before he capitalized on opportunities. But he doesn’t think of the experience as a total loss. Looking back, it taught him an important lesson.
“We learn not only just from our success, but we learn actually more from our failures,” he says. “I really learned to never do anything that you’re not really prepped, overly prepped for. Just like in bodybuilding, don’t go in the competition if you haven’t done the reps. The same is with anything else. Don’t do it if you haven’t done the reps or if you didn’t put the mileage behind it.”
Mr. Kornelis is a writer in Seattle. Email him at reports@wsj.com.
Appeared in the June 11, 2018, print edition as ‘Schwarzenegger Recalls The Good and the Bad.’

 

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Disney Podcast

I recently found out that one of my article was the subject of a podcast

I wrote an article on Disney that received a lot of reaction (may or may not be behind a paywall, SA’s policy often changes).  In the article I share my thoughts and insights on the future of Disney. Interestingly, the editor of SA picked up my article for their latest podcast. I didn’t know they did this and I’m not in it. But it’s a good extension to my article.

Thoughts On Value Investing

I frequently hear some members of the value investing community complain that “value investing no longer seems to work”.  In my view, paying less than something is worth will always work. I guess what these investors may mean is that paying low multiples for mature, easy to understand businesses no longer seems to work.

Value investing has for reputation of paying a low multiple for a business and wait for the market to recognize its true value. But if you tried it, it doesn’t seem to always work that way. I have seen companies trading at 5x price-to-earnings (P/E) dropped to 2x P/E. The idea of only trading stocks on a low multiple of earnings is absurd. That would be too easy and it’s not supposed to be easy. If it was the case everybody would be rich doing that.

All businesses are worth the cash that they generate between now and eternity, discounted at the appropriate rate. The path that different companies’ cash generation takes can vary enormously. Some businesses may have outlived their useful purpose and be in liquidation. Others may have reached maturity and the current level of cash flow might be expected to continue indefinitely. Still others may have negative cash flow today as they invest to build growing cash flow in the future. At an appropriate price, each of these companies can be considered value investments. Only the size and the duration of the future cash flow relative to the price can tell you if it’s cheap. “There are no bad assets, just bad prices”.

I’ve own stocks with a P/E ratio that many money managers would label as high. I try to find out the free cash flow per share the company is generating, and I value the business based on that rather than GAAP P/E numbers. You need to ask yourself what are the fundamentals of the business in relation to its price? If you paid 20 times for a business that was compounding the economic value per share in the mid-teens and have some level of confidence it is likely to do that for a reasonable period of time, you should do all right. Here’s a stock tip: when Warren Buffett analyze a stock (which is a partial interest in a real business not a piece of paper) they discount the cash flows, not the P/E ratio.

Graham’s Net-Net Stocks

“Heavy ideology is one of the most extreme distorters of human cognition.” – Charlie Munger

Hardcore disciples of Graham and Dodd wouldn’t probably agree with my post. But have you tried investing in “net-net stocks”; companies trading below its net working capital. Of course I would love buying a company for less than its cash but there’s a reason why these companies are cheap. First, to do that, you really need to know what you are doing and it’s a lot of work. Maybe with a small amount of money you can make it work. However I doubt the risk and potential returns are worth the headache. True net-nets are hard to find and the one that comes off a filter are of dubious quality. Thomas Hobbes described the life of mankind as “nasty, brutish and short.” This is what you get on the list that typically pass the Ben Graham net-net working capital screen. Investors are much more efficient today than during Graham’s era.  Let’s just say there are better alternatives, like buying a high quality company.

You need to keep learning. You need to adapt. You need to evolve. You need to be mentally flexible. Nobody demonstrates this better than Buffett. Buffett evolved from the cigar-butt approach he learned under Graham to being the largest investor in Apply. He’s been at it for over fifty years and his style has evolved many times.

One might think that Buffett buying 140 million shares of Apple would dispel the notion that value investing as an analytical style is about buying “cheap stocks.” Quality is a key part of value and may not be reflected in current price creating a bargain or a margin of safety. The point is some bargains are only visible if you understand qualitative factors. I guess the holy grail of investing is buying a high quality company in high growth market with negative capital need at a discounted price.

Buy and Hold

Many also say that buy-and-hold investing no longer beat the market the way it did in the past. Buy and hold shouldn’t be your philosophy. What I want to do is own businesses that are exceptional until they are no longer exceptional. It’s a nuance on the notion of buy and hold. But it’s easy to call it buy and hold. There’s a saying in the investment world: “let your winners run, and cut your losers.” One of my greatest mistakes was selling my winners way too early. Peter Lynch said that “selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

Technology

Historically value investors eschewed the tech sector because 1) its outside the circle of competence and 2) the tech sector is too fast moving. For long-term investors, basing investment decision on cash generation into the future, the sector was un-investable. Clearly, companies like Google, Apple or Amazon are far two entrenched in our modern, Internet-driven economy to be considered un-investable for the above reason. The change brought about by the Internet, mobile, and soon AI is fundamentally changing the economic basis of nearly every established business (look what Uber did to the taxi industry). A refusal to engage intellectually with these changes not only means that you miss out on the investment opportunity they throw up, but it blinds you to the fundamental changes taking place at every “easy to understand” business. It’s important to expand your circle of competence. In the past P&G or Coca-Cola were easy to understand branded consumer products. Today Apple is the modern-day incarnation of branded consumer goods company.

To conclude, what is within and what is beyond our circle of competence must continue to evolve over time. Risk comes from not knowing what you are doing, so it is wise to stay within your circle of competence. As for value investing, over time you need to keep re-calibrating the definition of value investors. The beauty of some systems is that they have the ability to evolve so as to adapt to new conditions.  Value investing evolves over time and keep an open mind on what constitutes value.

Greenblatt: Opportunity Is There If You Know How to Value Business

Greenblatt discusses active versus passive investing and some of the reasons why he still believes active investing is the better option saying:

“I was asked to give a speech at Google last year and I started it this way… I said even Warren Buffett says that most people are better off just indexing and I said I agree with him… I didn’t stop my lecture there. I said… but then again Warren Buffett doesn’t index and neither do I don’t… how come? It’s because the opportunity is there if you know how to value businesses. Which most people do not… To take advantage of the fact that the market is emotional over the short term… often!

On The Future Of Disney And ESPN

My latest article on Seeking Alpha focus on Disney and the future of the business. The full article is available on their website here.


On The Future Of Disney And ESPN

By Brian Langis

Summary

  • Focus on the long-term, 5 to 10 years.
  • Disney’s approach to streaming ESPN and Disney+ could determine the future of television.
  • Disney could be viewed as a service company in the future – that would benefit the stock.
  • The Media segment is Disney’s biggest segment and is under pressure. It will take ESPN+ to replace the losses.
  • In 2006-2007, analysts and shareholders hated Netflix for investing in the streaming platform instead of focusing on DVD rental.

The following article are some thoughts and insights on the future of Disney and ESPN. If you are looking for a DCF model of the next ten years this is not the right article.

I love Disney (DIS). I have two small children and Disney helps with me with parenting. I’m also a Disney shareholder, so is my daughter when I gave her one share at her first Christmas. As a shareholder I do need to follow the company for myself and my family.

Part of the investment thesis is based on Disney’s capacity to transform itself from a traditional TV/Media to digital streaming with ESPN+ and Disney+ (I don’t think Disney has released the name for their streaming platform, so I’m calling it Disney+). A Disney+ app set to debut in 2019 will offer on-demand viewing of Marvel, Pixar, Lucasfilm and other television and movie content. Yesterday Disney released their Q2 results. Below is the revenues break-down by division Q2:

  • Media and networks: $6.14 billion vs. $6.09 billion expected
    Parks and resorts: $4.88 billion vs. $4.69 billion expected
    Studio: $2.45 billion vs. $2.19 billion expected
    Consumer and interactive: $1.08 billion vs. $1.14 billion expected

The Media segment is Disney’s biggest segment and is under pressure (-6% net income last quarter) however the Parks and Studio division is helping absorb the subscriber loss bleeding at ESPN. “The Worldwide Leader” in sports is going through an identity crisis (what’s going on with SportsCenter?), is losing rapidly losing subscribers (peak ~100m vs ~80m today) due to cable cutting , and is hit by escalating rising cost attached to their massive sports-right contracts. To help the transition to digital and to “save” ESPN, the Company unveiled a paid streaming service as ESPN looks to combat mounting subscriber losses that have weighted on the bottom line of Disney. Disney has big plans to sell its stuff directly to consumers (Direct-To-Consumer or D2C). ESPN+ is a first step. D2C bypass intermediaries and allows Disney to control the user experience.

Read the here.

 

Red Notice

Red Notice.jpgI have a pile of things I need to read and I have a pile of things I want to read. And there’s Red Notice by Bill Browder which was on neither pile. I picked up for $20 at the book store just because it looked good. I actually heard about Bill Browder a couple years ago from his frequent TV appearances. He also had a documentary on Netflix. Here’s a little known fact: Bill Browder is the grandson of the head of the American Communist Party who ran for President a couple times.

Bill Browder has a story and it’s one hell of a story. This book has two parts. The first part, my favorite, is about his early day investments after the breakup of the Soviet-Union. Browder was where nobody else wanted to invest. This mean he bought stuff for ultra-cheap. He would invest in companies at 0.5x P/E and such. Assets where absolutely mispriced. The gap between price and value was extremely large. Capitalism wasn’t a well understood concept and they were basically just giving stuff away for free. Nobody knew how to value anything except for vodka and cigarettes. You could buy companies at a tiny fraction of its oil reserve. The book a couple examples of his investments and it’s fascinating. I kind of wish he made another book only about his investment in Eastern Europe/Russia after assets where privatized.

The second part of the book is the main reason why it was written. It’s the part where Browder goes to war against Putin. Browder was deported from Russia after trying to expose corruption in the country. He hired a lawyer named Sergei Magnitsky to be part of the team to help him out. Then in 2008 Sergei Magnitsky uncovered a massive tax fraud. He found evidence that a group of well-connected Russian officials had stolen a whopping $230m. He was arrested and tortured to make him withdraw his testimony. He didn’t. His conditions grew critical and he died. Then Browder went on a crusade to seek justice. It looked impossible and it wasn’t easy. The Russian says that Browder is the real criminal and has commited fraud. Russian issued a “Red Notice”, like the title, which refers to the extradition request served by Russia on Interpol, demanding Browder’s arrest. It was denied.

Browder is behind the The Magnitsky Act, a law named after Sergei Magnitsky, which was signed into law in 2012 by President Barack Obama. The law is intended to punish Russian officials responsible for the death of Russian lawyer Sergei Magnitsky in a Moscow prison in 2009. The bill received bipartisan support. At the moment, I believe the law has been expanded to cover the globe, not just human right abuse in Russia.

In the book, Browder has an interesting theory about Putin. At first Browder was a Putin supporter. Browder was an activist investor. He would go after corruption and exposed crook at companies and it worked…for a while until it didn’t it. Doing what he was doing as a foreigner it was surprising that nobody killed him. People die in Russia for much less. Browder believed he was protected by Putin at first. When Putin was first elected, he wasn’t the Putin of today. Putin didn’t have all the power. The Russian oligarch did. And Browder was going after the oligarch. Putin and Browder’s interest were aligned. Then the oligarch folded to Putin because he started jailing them and Putin gain the power. That’s when Putin and Browder weren’t working together anymore but it conflicted. So Putin tried to get rid of Browder and it got messy.

“This book reads like a thriller, but it’s a true, important, and inspiring real story. Bill Browder is an amazing moral crusader, and his book is a must-read for anyone who seeks to understand Russia, Putin, or the challenges of doing business in the world today.”Walter Isaacson, author of Steve Jobs and The Innovators

Magic: The Gathering or Stocks?

Last week I posted about Lego’s 7,500+ Piece Millennium Falcon set. You can find one for about $1,000. While on the topic of shopping, I just saw a set of Magic: The Gathering cards going for $199,998 on Ebay. I don’t know anything about the game and I’m not qualify to provide any insights on the cards. However, I do know something about investments and this sounds like a lot of money for a bunch of playing cards. I remember seeing people playing in the 90s, who knew that your cards would be worth something one day? I know that rare things could be worth of money over time, but I had no idea that very expensive playing cards were a thing. For the people who bought packs when it was cheap, good for them. I should have bought that instead of hockey cards. My hockey cards are worth as much as the paper it was printed on.

It’s hard to make sense of sound financial advice when you see things like that. If you want a successful retirement,  we are told to buy some stocks, some bonds, some gold, keep some GICs and invest in some non-correlated assets. We are constantly reminded about how important a diversify portfolio is.

Or you can forget about all that and buy Magic: The Gathering booster packs.

Magic The GatheringMagic The Gathering 2.JPG

LEGO’s 7,500+ Piece Millennium Falcon

I just ran into this on the Internet and here’s a little weekend project in case you have lots of free time. It’s back in stock but they fly out of shelve very fast, explaining the $1,000+ going rate from resellers. It’s probably one of these collectibles, that if left unopened for a very long time, becomes their own retirement account over time.

LEGO has a 7541 Pieces Millennium Falcon on Amazon.

Image result for LEGO 7,500+ Piece Millenium Falcon

Is this the most expensive most Lego set of all-time?

In case you are wondering no I have never completed it and I don’t have it. But it’s cool.

Falcon pieces

Martin J. Whitman – Value Investor

Martin Whitman, an incredible value investor and teacher, passed away at 93 years old (Business Wire). Below are a short compilation of links on the value investing legend. The shareholder letters are great. I learned a lot from Martin. You can more investment wisdom by other great investors archived here.

“The financial world is so complex and unpredictable that a fair amount of our analyses will prove to have been flawed…. A dirt-cheap price is an anchor to windward against misperceiving current situations, or being unable to make accurate forecasts.”

—Marty Whitman

No Cash Left Behind

From the Onion.

*Please look up what The Onion is before sending me emails or commenting.

Greed is Good...