ESG Corporate Governance Poll

Professor Lawrence Cunningham has a poll and interesting article on his MarketWatch column.

Opinion: If investors really want companies to fight climate change, they should put their mouths where their money is

I’m not going to re-copy the full article and I suggest a read because it’s possible this is where things are heading in terms of shareholder voting on ESG. Here’s a segment:

Consider this modest, if radical, proposal: At annual shareholder meetings this spring, a board could sponsor a publicly disclosed poll regarding whether and to what extent the company should invest its pretax profit in environmental and social initiatives.  The poll would be simple and non-binding to provide a cheap, clear way to gauge preferences.

The poll would state a proposed percentage of pretax profits that the shareholders might wish to allocate to environmental and social causes, such as 10%.  The board would commit to target an allocation based on the percentage of shares voting yes.  For example, if 50% voted yes, the board would commit to allocating 5% (that is 10% of 50%) of 2021’s pre-tax profits to such causes during 2022.

The board could poll the shareholders as to any proposed profit percentage — from 0% to 100% — that makes sense given a company’s specific circumstances in terms of shareholder base and current levels of environmental or social investment.

I answered Professor Cunningham’s two questions:

  1. If you were a director, would you support conducting such a poll? 
  2. As a shareholder, what would your vote be?

Here’s my answer (cleaned up and edited for blog) that I’m sharing:

1) As a director, I would not support such a poll. 

2) As a shareholder I would vote no if such a question was proposed.

Your question caught me off guard at first. Then I wonder why? Probably because there’s money on the line. “Skin in the game”. What do I want as an investor? Financial return. I’m delaying instant gratification for more down the road. If I want to save puppies my personal capital allocation decisions come into play.
Your question reminded me of something Howard Marks says often: “it’s one thing to have an opinion and it’s another to act on it”. 

Such a poll might be novel at first. Get attention. Start a trend. Spark a conversation. Revolutionize shareholder voting. Then it opens the flood gate. It starts with saving the planet and then you have PETA trying to hijack the vote to save the puppies (one Pamela Anderson ad from the 90s might be enough to swing the vote).

You also run the risk of alienating your Quality Shareholders base at the expense of short term/transient shareholders with a different motive. If Quality Shareholders support the mesure, then it warrants a conversation. But if it’s just to please the latest woke/SJW/virtue signaling trend then it’s a great way to go bankrupt fast.

Consumers vote with their dollar. We are already doing that with our personal capital allocation decision. The market might reward “green” companies with a lower cost of capital and punish “dirty” companies with a higher cost. If a business doesn’t align with my values, I stay out of it. Collectively that speaks louder.

By the way, I already have your answer. They did a poll in Canada and they asked what was the most urgent issue? The top answer was climate change. Then they asked how much would you be willing to contribute to fight climate change? The average answer was $100. We all recognize the problem but we want somebody else to pay the bill.

Also, to a question like “The poll would state a proposed percentage of pretax profits that the shareholders might wish to allocate to environmental and social causes, such as 10%?” I don’t believe it’s simple or clear enough. To what cause? Who is keeping track? What’s the performance? Who’s auditing? What are the standards?….It just never ends and it’s never enough. 

By encouraging shareholders to become Quality Shareholders, you can form a solid base for better long-term results. And like you mention in your book, how a company communicates and acts with its shareholders is really important.

I believe this conversation is important. Everybody is waving their virtue flag at the moment but doesn’t elaborate on the steps to achieve X goal. “Let’s take care of all the stakeholders”…well at what expense. The consumer? The workers? The shareholders? The supplier? Who pays the bill?

I’m curious to see how the experiment goes. It’s a good base for a future conversation.


Hillary Clinton 2024???

I saw her name float around over the last couple weeks, not making much of it. Who cares? Why are we even talking about this? And then it was trending on; Hillary Clinton’s 2024 Election Comeback. Oh boy. So there’s something to it. But really? How did we get to that? How unpopular is Joe Biden and Democratic? Clinton already lost two elections (in all fairness Joe Biden lost twice before becoming President)? I just don’t get why she’s the solution to the country’s problem. Yes she’s qualified for the job, but she’s not what we heal the United-States. 

I don’t want to rehash everything but her and Bill have too many bodies in the closet. She’s a symbol of the establishment (elite, out of the touch…) She’s at the center of so many conspiracy theories and scandals. Like I said, I think she is qualified to be President in terms of knowledge and experience. You could say the same about Joe Biden and look at how that’s going. Hillary should have won in 2016. But that’s over and she’s not the future. Think about this. How are you going to get some red blooded right wing guy to vote for Hillary? It will never happen.

The country is deeply polarized and she’s not the person to fix that. Maybe what they are doing is the old political trick of putting a trial balloon out there and getting a feeler. Maybe there’s nothing to it. But come on, of course she is thinking about it. She can’t get over 2016.

How would Clinton go on about that? She would challenge Joe Biden? What about Kamala Harris? Kamala Harris is not the future of the Democratic Party. She doesn’t click, doesn’t connect and is unpopular.

President Biden’s low approval rating, doubts over his capacity to run for re-election at 82 have created a leadership vacuum in the party, which Clinton could fill. If Democrats lose control of Congress in 2022, Clinton can use the party’s loss as a basis to run for president again. 

Midterm 2022 elections are not looking good for the Democrats. Republicans have their flaws and issues. I’m not going to get into that. But the Democrats look so easy to beat. It’s like they want to get crushed.

I anticipate Republicans control of both chambers of Congress. The Democrats and the White House are disorganized. Democrats need to move away from far-left positions that isolate key segments of the electorate. Hyperpolarization is dangerous and makes the country ungovernable (that goes for both sides). 

I hope there is still enough civic responsibility — not everywhere, but enough — that the political class feels that the current toxic political climate, which leads to nowhere and is dangerous, is an indulgence that the U.S. simply could not afford for a long time.

I’m not saying a Democrat candidate needs to flip a Republican or vice versa. That’s not what I’m saying. But politicians need to get off Facebook and start talking to each other face to face and respect each other. First, focus on what they have in common. They all want the same thing. Better education, a better economy, jobs, less crime, better health etc… Then start getting stuff done. Civic-minded Americans politicians need to create a broad national unity coalition whose main mission is to make the basic functions of government work again and safeguard the integrity of American democracy.

Being President loses a lot of its power when you don’t have a Congress that will get things done. The next President needs to be somebody that can close the divide. Somebody that can talk to red and blue states. Somebody that can build a bridge between the left and the right. The President needs to be a leader for all Americans. 

Hillary 2024? I don’t buy it. I’m going with a wild prediction here: Joe Biden with a Republican running mate for Vice-President.

Notes on Alimentation Couche-Tard (ATD)

I had a conversation with a friend on Alimentation Couche-Tard. I though it was interesting so I cleaned it up and made it into a post.

Disclosure: Long

The conversation started with the question “What are your thoughts on their (ATD) long-term growth plans given the transition away from fossil fuels for transportation?”

I decided to provide a more comprehensive answer. This is a two-part answer.

Part 1

  • ATD is a story about growing free cash flow and capital allocation. They do it all. Acquisitions, buybacks, dividends, re-investments and debt pay down.
  • They are well managed. They don’t have an ego. They can buy a massive chain or some local regional chain with 4 locations. If you read Alain Bouchard’s book, Daring to Succeed, they are big on decentralization and letting people make decisions. They let people on the floor make decisions, they know the local flavor better than head office. The head office in Laval (across the water from Montreal) is basically a support center. I don’t recall the exact quote, but Alain Bouchard said something like “they don’t make any money here (HQ), so no need to be extravagant”.
  • They recently collapsed two classes of shares. A and B are one class now. The founders had a sunset clause that just expired. They still hold 23% of the vote (68% before, 10 votes/share). There’s one symbol now and that’s ATD. One share, one vote. There should be about 1,062,024,676 shares outstandings.
  • I don’t know if you noticed but they have been buying back B shares by the ton before the share class collapse. They bought back some A shares too. 17m under the last program and authorized to buyback another 14.3m before April 2022. During Q2, ATD repurchased 6.3m shares as part of its share buyback program. In fiscal 2021, the company repurchased more than 33m shares for $1 billion.
  • Balance sheet is very healthy: Net debt to EBITDA (adjusted): 1.23x. This provides management with ample financial flexibility to fund future acquisitions.
  • They have a 5% market share in the U.S. It’s highly fragmented. There’s consolidation.
  • They are very disciplined in their acquisition process. They walked away before, like in the Speedway auction.
  • They have extended their acquisition parameters. The shares had a setback when they went after France’s Carrefour. It was a massive acquisition ($20b) and the market didn’t expect the change of strategy. It was a long shot and the French government was opposed to it from the beginning. The stock has recovered since.
  • Last quarter: In the U.S., fuel gross margin jumped to 36.39 cents per gallon, which management attributed to “a favorable competitive landscape and a strong sourcing efficiency.” 
  • ROE and ROCE stood at 21.2% and 15.1%, respectively.
  • Last quarter they hiked the dividend to 26%. The annual dividend is $0.44 per year with a yield of 0.85%. It’s low and not exactly a dividend play. But ATD has been growing their dividend rapidly over the years. When I bought ATD it was paying 6 cents per share.
  • There’s talk that ATD is looking at EG Group. It would be a good strategic fit. Bloomberg report. EG is #4 in the US. #1 in Europe.
  • Potential risks: The company faces challenges/headwinds including: 1) labor turnover and shortage of workers; 2) supply chain challenges; 3) rising cost pressures; 4) lower fuel volumes as people stay at home and drive less often.
  • I think industry headwinds should be manageable

Part 2 – Energy transition

Question: What are your thoughts on their long-term growth plans given the transition away from fossil fuels for transportation?

  • ATD is not just sitting there doing nothing. Gas stations will face a tough transition to EVs. Couche-Tard wants to be the exception. They are trying to bridge the gas to EV future.
  • EVs take longer to charge, often cost less to refuel, use chargers that don’t work in every car brand, and many EV owners can recharge at home.
  • BCG report grimly predicted in 2019 that up to 80% of fuel retail locations may be unprofitable in the following 15 years amid the transition to EV.
  • First it’s important to note that ATD is a convenient store first, and a fuel retailer second.
  • The distinction is important. ATD’s roots are in retail. They started as a convenient store. The founders are convenient store junky. The store was always first. Fuel came later. The strategy was always to get people in the store. That’s where the high margins are (Gross margin ~34% in the store). Fuel brings it revenues but low margins. The key is to get people in the store. That’s why the stations face the store with it’s splashy ads.
  • Gas station stores were mostly started by oil companies. So it was fuel first and the store was neglected. That has changed over the years when oil companies sold their retail operations, like Marathon did with Speedway. 
  • ATD has a bunch of locations (can’t recall exact number on the top of my head) without fuel stations. The purchase of Circle K Hong Kong has no fuel stations.
  • Some of the Couche-Tard stores in Montreal are a retail lab (e.g. self-checkout, localized pricing, data, AI etc..). I think they partner up with McGill but I could be wrong on the exact details.
  • Energy transition has been in ATD’s plan for a long time. EV critical penetration is well in the distance. ATD has an EV lab in Norway where EV penetration has been strong for many years. It gives you insight into the future. Norway has converted around half its annual new car sales to EV. Canada is around 3.5% and I assume the US is around that. 
  • ATD said little on their North American EV future. But Norway offers hints of how Couche-Tard’s overseas experience could guide its domestic strategy.
  • I’ve seen some Couche-Tard stores here with charging stations, some with the Level 3 charging stations (480 volts). It’s super fast compared with the 12 hours it can take at home (Level 1 or 2).
  • Energy transition will be a lot more gradual than we think. Despite the increasing EV penetration and higher fuel efficiency in vehicles, fuel sales have been up (except for the 2020 Covid shutdown). Fuel is not going away anytime soon.
  • Better fuel efficiency plays in ATD’s hand. 1) ICE are pushing turbo engines for better fuel efficiency. Turbo engines require super/supreme grade. 91 octane or up. Margins are higher on these sales. 2) Because of size and scale ATD has an advantage. Only the better operator will be able to navigate the declining fuel sale environment. Independents will sell or close. Basically less fuel retailers and competition. There’s a lot of small local or regional operators that will face pressure to fold or sell.
  • Independent operators are already getting slammed because of higher cost due to COVID. 
  • ATD is expanding their charging network in Europe. They have 876 charge points, primarily in Scandinavia.
  • ATD also continues to develop and expand its EV offer, completing its first destination charging installation within a Norwegian hotel chain. Circle K owns and operates the charging service and it will further expand its partnership with this hotel chain.
  • Circle K is setting the bar for what EV charging stations can offer drivers. And while ATD doesn’t break out its financial results by country, it said last month that same-store sales in its most recent quarter were especially strong in Europe. On the earnings call, CEO Brian Hannasch said its efforts in Norway are “building the foundation” for its future North American business.
  • One of the main challenges is attracting people. ATD is experimenting with their locations. Because EV charging can take a while, they want to make their stores a place to go, with decent food offerings, drinks, clean washrooms, playgrounds, sitting areas and shopping. Here in Canada because of the lack of EV infrastructure people just watch Netflix in their car. So it’s a work in progress.
  • A Norwegian vlogger frequently documents stops at Circle K and other stations, and at one stop last month counted a queue of 9 cars waiting for fast chargers. Youtube
  • All of this is a work in progress. Everyone is trying to figure out the transition.
  • It doesn’t say much on the profitability of these initiatives as they are trying to figure out the model. But I would look at what’s happening in Norway to have an idea of what’s coming here.



Blockchain and Music NFTs

Source: Link

This section was Originally posted on Seeking Alpha

It’s hard to bring up the subject of non-fungible tokens (NFTs) without some background. It’s an emerging space and not the easiest to understand.

NFT is the Collins Dictionary’s word of the year. The term burst into popular consciousness in March 2021 when artist Beeple managed to sell one of his digital wares for $69 million.

According to Collin’s an NFT is a unique digital certificate, registered in a blockchain, that is used to record ownership of an asset such as an artwork or a collectible. Despite this straightforward definition, I still find it difficult to define it without getting into a technical explanation of cryptocurrency, blockchain protocols, and the range of crypto art assets. I’m not going to do that. It’s a space I’m still figuring out. The crypto dream is still a niche conviction. The blockchain barely works and whose use cases are vanishingly small and niche for the moment.

For artists, there’s no doubt NFT’s have been a conduit for a better life. When you buy a NFT, you buy an idea, a certificate of ownership, but I think more importantly you buy yourself a membership into a new community. Like a special club. Take CryptoPunks, it has spawned a subculture into a higher gear. Some Punk owners consider other Punk owners as “true friends”. Something that the physical world doesn’t always measure up to. And having one of those CryptoPunk avatar gives you the Internet equivalent of “street creed”. It gives you clout in online discussions (because somehow owning a Punk is evidence of higher wisdom or investment prowess). I know it’s a lot to wrap your head around.

There seems to be four categories of people regarding NFTs:

  1. The absolute believers. They see the writing on the wall. The blockchain will change everything from how you buy shoes to saving the planets. Why not music too?
  2. The ones that think this is an absolute joke, a major scam that will collapse. Who cares if your Twitter avatar is a pixelated punk? If anything the blockchain barely works and whose use cases are small and nice. “Blockchain is a solution in search of a problem.” Who would pay $250,000 for a jpeg of an ape? Just right click and save. (The same line of thinking could apply to the non-blockchain world where somebody bought a duct-tape banana for $120,000.)
  3. There are ones that don’t understand it, can’t figure out how kids are getting rich off this stuff, and want to go on with their lives without ever hearing the word bitcoin, NFTs or blockchain ever again.
  4. There’s something there but I don’t know what yet.

The reality is probably a mix of four personalities. The music industry is not escaping the NFT craze. Is the blockchain a threat or an opportunity to the music industry? It’s probably both and it’s too early to tell. We are in the early innings. Who knows what shape it will take. Like any new innovative exciting space it’s so hard to tell what’s legit and what’s fraud. It’s impossible to know what will stick and won’t. Consider me an observer of the space.

I think, a platform that allows anyone to purchase the right to earn royalties from their favorite songs, seems to have the right idea. Artists can sell ownership. Investors can buy ownership. Their Series A round was led by a16z with support from The Chainsmokers, Kygo, Nas, and other artists. What does this have to do with UMG and streaming? These guys want to flip the legacy music business model upside down.

Royalties mean cash flow. Cash flow means that I can value it. So it’s definitely worth something. So I guess the ownership structure is less important here. Does it really matter if you own 50% of a song via a NFT or a certificate of ownership? Also, in most cases, buyers of NFTs of songs aren’t purchasing the actual rights to the recording or composition. Meaning they’re mostly paying for virtual bragging rights. Here’s what I can tell you with guarantee: If you are an IP lawyer, you have work for the next 100 years.

UMG is not sitting on the sideline. UMG joined the Bored Ape Yacht Club to launch a new label called 10:22PM. They have formed Kingship, a metaverse brand under which they will make music. Universal is collaborating with NFT collector Jimmy McNeils for the Kingship line, which will feature four apes comprising a trio of Bored Apes and one Mutant Ape. So we know it’s a band. But what does it contain?

It’s pretty broad but according to the announcement, these NFTs will feature music and “events in the metaverse”. 10:22PM founder Celine Joshua said, “I started 10:22PM to push the boundaries of innovation in the music industry and with KINGSHIP, we’re literally inventing what’s possible in real time.”

At the moment, it’s hard to make anything out of it. The Kingship website is pretty bare. You can enter your email for notification. The Instagram and Twitter pages are pretty quiet.

Universal Music Group N.V. – The Music Never Stops

Here’s my latest article on Seeking Alpha. This is a preview. You can read the full article directly on Seeking Alpha here.

Why Universal Music Group?

For me this is an appealing investment. I like the idea of owning a piece of the music industry.

UMG earns revenue every time their music is played. UMG has predictable recurring revenue that requires almost no capital to grow. There’s zero marginal cost. You can listen to it over and over. A lot of their content is timeless. UMG is a predictable free cash flow generation business.

UMG’s shares offer investors a way to participate as an owner of unique under-monetized, must-have, irreplaceable robust content and has the scale and global customer relationships to leverage it, UMG will greatly benefit from the accelerated consumption of online content in the U.S. and around the world.

In conclusion, UMG is the IP rights holder (content is king) and has many distributors fighting to distribute its content, UMG is in a position to succeed. And unlike other streamers, UMG is not competing for “consumer eyeballs”. It just needs its ears.


  • People want music. That’s not going to change. It’s a need. It’s essential. It’s part of us. It’s how they consume it that’s changing. Streaming is taking over.
  • Streaming will continue to grow at a good rate. Consumer spending on music generated an all-time high. This is a huge tailwind.
  • Spotify, YouTube Music, Apple Music, Prime and other streamers work from Universal Music. It’s the streamers that bare the cost of attracting subscribers.
  • Universal has transfer pricing power. The music streamers’ margin goes to the label. If Spotify raises prices, Universal can raise theirs without losing business.
  • Bill Ackman: “if you own UMG, you own a royalty on people listening to music”.


ADR:OTC:UNVGY (1 ADS: 0.5 Ordinary) (Unsponsored ADR Citi’s Depositary Receipt Services, entitled to dividends but no vote)


Universal Music Group N.V. is primarily traded on the Euronext Amsterdam under the sticker UMG.

Note: Currency amounts are in Euro € unless mentioned otherwise. USD-EUR 0.89 Price of 1 USD in EUR as of December 21, 2021.

Universal Music Group N.V. (UMG) is a world leader in music entertainment with three main operating businesses: recorded music; music publishing; and merchandising. UMG operates in 60 countries and has a vast catalog of recordings and songs stretching back over a century and comprises the largest. UMG is home to some of the biggest names in music.

Universal Music’s origins date back to 1934 when it became the US branch of UK based Decca Records. In 1962 it merged with MCA. In 1995 Seagram took control of MCA and was renamed Universal Studios with the music division labeled Universal Music Group. In 2000 Vivendi bought Seagram’s entertainment assets. Universal Music and Pictures are not attached anymore. Universal Pictures is owned by Comcast.

UMG has 1.8 billion shares outstanding trading at ~€24. This implies a market cap of ~€43.5 billion ($49b). UMG had revenues of €7.4 billion and €1.487 billion in EBITDA (20% margin) FY2020.

Results for the first nine months of 2021 are on the upside:

Source: UMG Q3-2021 Results

UMG is a new publicly traded company. On September 21, 2021, with more than 99.9% shareholders approval, Vivendi SE (OTCPK:VIVEF) spun-off 60% of the shares it owned. Vivendi retains a 10% stake in UMG for a minimum of two years. It’s worth noting that Vivendi has owned UMG since 2000 through its acquisition of beverage giant Seagram. Below is a table of the main shareholders:

Source: UMG Prospectus Page 2. Concerto and Scherzo are collectively referred to as the Tencent-led Consortium. They own 20%.
Netherlands won out because it “has been one of UMG’s historical homes,” even though the business is based in the U.S. Another attraction might be that Dutch corporate governance laws offer strong protections against takeovers.
I will explain the thesis with two stories.
The first story is my own personal experience buying music. I bought my first CD when I was a teenager. It cost me $28 back in 1996. That’s $49.36 in today’s money! Even though the CD had 12 songs, I bought it for only one song. So I paid $49 in today’s money for one song. Then I bought my 2nd CD, a double album so I could listen to one song for $44. I don’t even want to break down the math inflation because it’s insulting to my intelligence. For the reader that’s pondering moving on because of my teenage stupidity, be reassured that I haven’t bought a CD in over twenty years. But that’s what people did back then. It was also the period where the music industry was at its most profitable. It was a terrible proposition for the consumer and a great one for the music industry.

Then Napster happened. Illegal music sharing software hit the music business hard, really hard. It was game over for the music industry. The gravy train was gone. Consumers were rebelling. What followed was 20-years of decline in CD sales.
Then streaming happened.
Source: IFPI Global Music Report 2021

Go to Seeking Alpha for the full article.

Inflation Memo

Higher than expectation inflation is the “breaking” news of the day. November 10 headline

But are we really surprised? Going out for errands will conclude that much.

I hesitated writing this memo because 1) it’s reactionary and 2) we don’t need another Fed bashing memo. Twitter is on the top of that.

I’m not a Fed hater. I know it’s cottage industry to criticize everything they do. It’s too easy to say they don’t know what they are doing. It can’t be easy to manage an economy. You are not running the Fed to be loved. They are in a tough spot. Do nothing and inflation becomes a major issue. Or raise rates too aggressively to kill inflation and risk crushing the recovery. The Fed reiterate inflation is “transitory”, meaning once the supply issues are fixed it will come back down. They have been saying that for over a year. Right now inflation has been permanently “transitory”. I hope they figured it out.

We know inflation is mostly a supply chain issue. And we now know demands fuels it. There’s some psychology involved.

Demand push inflation psychology: Because consumers expect their dollar to buy less good and services in the future, they go nuts now, which of course push prices even higher. We all do that. Buy now or the price will sky rocket. So we are in this never ending loop where one increase leads to another.

And of course it’s now political. If inflation doesn’t get under control the Democrats will pay the price in the next elections. Inflation is a regressive tax and the people who can’t afford it are hurt the most.

‘Reversing this trend is a top priority for me’ said Joe Biden this morning. Ok, great. But I can’t reconciliate that statement with record breaking deficit and the massive spending bills the Democrats are trying to pass. It’s like saying I have a drug problem and the solution is more drugs.

I can’t help to note that for how long has the Fed tried to boost inflation? 10 years? Mission accomplished.

Mission Accomplished – Source: CNBC

Again, why are we surprised?

This is history on repeat. Out of control spending + out of control money printing = inflation. I learned that in Economics 101 under fiscal policy and monetary policy. They clearly flunked their class. We have the tools to fight it: control the money supply.

Expectations Investing

*11/8/2021 Update: After the publication of the review, Michael J. Mauboussin was kind enough to share his thoughts on Twitter. I added his Tweet was added at the end. I also added some comments following his comment.

Columbia University Press sent me a copy of Expectation Investing by Michael Mauboussin and Alfred Rappaport to read and review. So thank you very much.

This book is a special one. It’s not a new book. It’s a classic that just celebrated it’s 20 anniversary. This edition has been revised for modern time. It takes into account changes to accounting, the rise of intangibles investments, the shift to passive investing, among other things. Even a great home need a fresh coat of paint.

If you have been in the investmentverse, Michael Mauboussin and Alfred Rappaport don’t need an introduction. They are both pillars in investment research. I consider myself privilege to review their work.

Mr. Mauboussin is known for his top-notch research and knowledge. He is a researcher at Morgan Stanley Investment Management. He’s very generous with sharing his knowledge. He’s active on Twitter (in a good positive way). His work is always on some “must read” investment list.

Al Rappaport is professor emeritus at Kellogg School of Management and one of the most respected experts on markets. He’s known as the economist who developed the concept of shareholder value in the 1980s and he wrote a book on the topic: Creating Shareholder Value: A Guide for Managers and Investors. According to Wikipedia Al would be 89 years old today. I don’t know what he’s up to now but he left us with a high-quality body of work to learn from. Here’s an article he wrote for the Harvard Business Review, Ten Ways to Create Shareholder Value, that includes a subtext on Berkshire Hathaway by M. Mauboussin.

Most financial textbooks share three things in common: massive, boring and expensive. Not this one. Expectation Investing is 272 pages of wisdom. You can get a copy from Columbia University and Amazon for less than $30. There’s a Howard Mark quote on the cover that says: “…a gradual-level course in intelligent investing”. A graduate level class in finance cost more than $30. And it’s not just that. You can actually make a lot more money if you apply their method properly. This is great value, especially if you include inflation.

Sometimes it is good to go back to basics. Investors who seek market-beating returns need to find stocks with meaningful differences between their price and value. The problem is that price is known but value is not. It takes the textbook material out for a spin in the real world. I wish that was the book I had to read in school.

While reading the book I got reminded by what one of my professor said during a 4th economic class. He said something like “here’s what you learned the last 3 years, and now I’m going to show you why it doesn’t work”. Expecting Investing has that feel, “here’s what you have been thought, and here’s a better way.” It take the classic financial textbook stuff and reverse it on its head.

For example, a popular tool to value a company is the discounted cash flow model (DCF). You begin with a cash flow forecast to estimate value. The book suggests to inverse the common practice. It’s basically a inverted DCF. You start with the price and work you way back. The idea is that stock prices are a treasure of information about market’s expectations of a company’s future performance. So you’re basically asking, “What is the market saying at this share price? You can have investment success if you manage to estimate the level of expected performance embedded in the current stock price.

Another example: When it comes to forecast period, most valuation texts advocate arbitrary five or ten year periods. Other says you should use a business cycle. Why? Well we all kind of accepted that’s the way because that what everybody does, so who I am to question big expensive books. Expectation Investing suggests that the forecast period is the time that market expects a company to generate returns on incremental investment that exceeds its cost of capital. Why didn’t I think of that first? Thank you for the dose of common sense.

I can go on and on but the point is that the book’s insights are powerful and will make you think. You will have many takeaways.

This is book is for people who are serious about valuation work. Valuation is a subjective art, not a science. I mean it’s much easier to slap a multiple to earnings and call it a day. We know that value equals the present value of a company’s future cash flows. Few investors disagree with this in theory, but many are wary of analytical models that value, or “discount”, future cash flows because they find them too speculative. Include me in that group. That’s why I find the inverted DCF and the “expectation infrastructure” attractive.

If you are a student of “the game of investing”, this is a book for you. If you are going to invest time in reading this book, be prepared for an adventure in high-level investing. It will certainly offer a deeper understanding of a different investing approach. The combination of Michael Mauboussin and Alfred Rappaport’s insights will make you a better investor if you’re inclined. You learn how to read stock prices. If you can them effectively, you can apply your strengths and take advantage of opportunities the market gives you. It will make you a more complete investor.


I’m not really in a position to critique guys like Mauboussin and Rappaport. This is a great piece of work but everything is not perfect. Here’s a couple things I though of:

  • If you are new to investing, don’t start here. I’m not saying not to read it. Read it. But you might not grasp everything on the first read. It definitely help to have some background in investing and valuation.
  • Not easy to put into practice. Let’s call it a work in progress.
  • There’s too much reason in the method suggested. It’s too logical for this world. If you are in the portfolio management business, you know timing is not on your side. That’s why most portfolio managers are closet indexers or engage in momentum trading. Unfortunately such a great strategy is not applied broadly. But that’s not the authors’ fault. And if you are a long-term investor, this is an edge you can have.

Thank you for reading,


November 8, 2021 ****Update****

Mr. Mauboussin, thank you for reading and commenting. I had the easy job. The credits goes to you and Rappaport. To encourage the mission and for those interested in becoming better investors, here’s the link recommended by Mauboussin:

After a quick drive through of the site, I definitely recommend serious investor to visit it. It’s an extension of the book. If you dig the book, you will dig the site. There’s chapter summaries, tutorials, applicaple practical examples.

Thanks again,


Empire of the Summer Moon

I got around finishing two excellent books. Empire of the Summer Moon by S. C. Gwynne and The Son by Philipp Meyer. Since they both deal for the same topic I read them together.

Quanah Parker

Empire of the Summer Moon deals with the rise and fall of the Comanches, the most powerful Indian tribe in American history. They were the Mongols of North America. They were your average Indian tribe until they master the horse, then they became king. The book delves into the Parker family, in particular Cynthia Ann Parker and her son Quanah who became the greatest chief of the Comanches. The book also covers life on the frontier from that era: Texas, the Civil War, slavery, racism, the buffalo, other tribes, the Rangers, Mexicans, the settlers, and bunch of interesting (or crazy) characters. There are so many real life stories that are incredible. There’s a lot of depth in the research.

The Son is a work of fiction. The book follows the rise of one unforgettable Texas family, the McCulloughs, from the Comanche raids of the 1800s to the oil booms of the 20th century. It builds on what I’ve read in Empire of the Summer Moon. It covers a lot of the same theme. The author has done an excellent job. It’s very well done. The book covers multiple generations and it all fits together. I saw that AMC made a TV series with Pierce Brosnan. The trailer wasn’t convincing. I never heard a thing about the show. Plus the fact that it was on a Saturday night at 8pm says a lot. But again people can just watch shows whenever and wherever now. I just don’t think a show on cable TV can replicate the brutality of the book. But unless I watch it I won’t know if it’s good.

Reading them together reinforce the themes I was reading. They gave me a more complete picture of life on the frontier back and life inside the Comanches. The Son is a work of fiction but the setting is real. We like to paint a romantic picture of the “good old days” where was life was simpler. It’s not. There’s nothing romantic about that era. Getting scalped was not romantic. It was brutal. You couldn’t go on Facebook and complain that your toaster doesn’t have a bagel setting. People died from horrible death. Life was hard.

I’m warning you. These are dark books. They are graphic. They are violent. They are not feel good. Mario doesn’t save the princess. But they are a different read. I’m glad I read them. I encourage people to read them. It’s important to have a proper history of what happened. To understand what happened. To acknowledging history and the awful things that happened.

Thanks for reading,


Warner Bros. Discovery: A Streaming Giant In The Making

The full article is available on Seeking Alpha. This is just a preview. I’ve written about Discovery in the past. Here are the previous posts if you are catching up Part IIIIIIIVVVI.


  • A conservative valuation points to some upside.
  • This is an investment for the patient investor.
  • Do not underestimate the creator of the 90 Day Fiancé.
  • WarnerMedia and Discovery have some of the best assets in its class.
  • The future company will be a juggernaut in the DTC streaming space.

I bought Discovery Inc. (NASDAQ:DISCA) back on March 29 at $41.50 following the Archegos meltdown. For a stock that was once trading at $77 back in March, it felt like I was getting a bargain. When somebody, in this case Archegos, is dumping shares of a good company at bargain prices, I’m a buyer. When somebody is in a desperate situation, and needs to sell, the buyer is in a good position. I’ve been following the company for years and an opportunity presented itself. There was “blood on the street” as we say and I moved in. But short-term noise took over the narrative. DISCA fell, and fell, came back for a bit, and then fell off a cliff. At this moment DISCA is trading around $25 despite being a good company.

Chart: DISCA 2021 YTD Performance

Discovery is my worst investment in a long time. Of course nobody bats 1.000. They can’t all be winners. I bought companies in the past that fell 10% after I bought them. It happens and it mostly works out. DISCA sticks out like a sore thumb. I’m down 38% in almost seven months. Simple arithmetic says that’s a big hole to come back from. Losing money hurts. It double hurts when everything else I could have bought is going up. It triple hurts when you are public about the purchase (previously documented on the blog). You don’t want people to lose money. But again let me reiterate that this is not investment advice and you should do your own research.

The languishing stock price warrants some reviewing. Why is it that I do my best research after a stock is down a lot? I need to ask questions and to be honest with myself. Was this a mistake? Am I trying to make the story work? If so, when is the story going to work? Do I sell? If this is truly a bargain, should I buy more? If I liked it at $41, wouldn’t I love it at $25?

What do investors see?

I can’t predict the future, but I can try predicting the present. So what do investors see?

  • The turning point seems to be the WarnerMedia merger. After the Archegos selloff, DISCA bounced back near my break-even point of $41.50. But following the merger announcement, the market reacted negatively. A lot of debt, deal complexity, and uncertainty clouds the story.
  • DISCA is getting kicked around. Sentiment is negative. Sometimes the reason for a lower stock price is a low stock price.
  • A complex deal to buy WarnerMedia weighs heavily. We still don’t know how it’s going to be structured. Is the Reverse Morris trust structure going to be a dividend or an exchange offer for AT&T holders? Details remain scarce.
  • We don’t know how the streaming services will be rolled out and priced. Well they know but won’t tell us. This is a nightmare if you are a Wall-Street analyst that needs key numbers to plug in the financial model.
  • Discovery has three classes of shares trading at three different levels. It’s not efficient.
  • The overhang from AT&T shareholders selling post the deal close. Most T shareholders are in for the dividend. Warner Bros. Discovery (Newco) won’t distribute a dividend.
  • Cable TV is bleeding subscribers. There’s a lot of FCF in that segment but there’s no growth and Wall-Street cares about growth.
  • A crowded streaming space that’s getting more crowded. Growth in streaming is slowing.
  • The deal won’t close until mid-2022 or later, if they get the regulatory green light. That’s another ~nine months? That’s an eternity for today’s investment timeframe.
  • Warner Bros. Discovery will have a lot of debt, ~$55b.
  • HBO is the best, but they have made missteps under AT&T ownership.
  • Some are doubtful that Discovery can achieve $3b a year in synergies. That’s a big number. That’s $30b in value at 10x multiple. Great if they achieve it but remains to be seen.


Combine all of this and you have dead money. This means DISCA won’t likely significantly move until we have better visibility, more certainty on the deal. However, having said that, I had success with stocks in “purgatory”. It’s the place stocks go when they fall out of an orbit. They are in the “nobody cares about them” bucket. They stay in that zone for a while until some event push brings them back. This is where Discovery is. You can value Discovery as a stand-alone business, but we lack crucial details on the merging entity. A stock in “purgatory” can present an opportunity. It’s an uncrowded fishing pond. This means you can take advantage of this opportunity to build a position. If you have an investment horizon a little longer than the average investor you can do well in that space.

The full article is available on Seeking Alpha.

What’s Next For Apple and Tim Cook

The Original Apple Logo. That’s Isaac Newton.

Tim Cook has juste celebrated his 10 year tenure at the helm of Apple. Under his reign Apple’s market cap went from $350 billion to $2.4 trillion. No other CEO has created more absolute value for shareholders. Sales went from $108b to $274b in 2020. Net profit went from $26b to $57b.

Before him Apple was being run by co-founder Steve Jobs. Not the smallest shoes to fill. Do you remember what was being said back then? Steve Jobs was Apple. Steve Jobs was the guy behind the 2nd coming of Apple. Steve Jobs was behind some of the most iconic innovation in consumer electronics. Steve Jobs was one of the greatest business man ever. Steve Jobs was celebrated. Steve Jobs was bigger than life.

So who’s Tim Cook? The supply chain guy? Not exactly the profile you look for when trying to inspire employees to create “insanely great” products. The Apple fanboys weren’t thrilled and worried that the company was destined to decline.

After ten year, Tim Cook can look back with satisfaction. Tim Cook has created more value than Steve Jobs. The question now is who is worthy enough to replace Tim Cook when he’s done? Who can take a $2.4t company to the next level? I’m sure they are looking at the supply chain employee list.

Tim has maintained Apple’s record of innovation and its brand. He took Steve Job’s creation and made it better and bigger. This is definitely a business school case study. This is the greatest business transition of all time.

Under Tim Cook, Apple exploited four trends:

  1. Global supply chain – it has built an immense production network with China at the center.
  2. Chinese consumers – $60b in sales, 5x what it was ten years ago. China loves Apple and Apple loves China.
  3. Government were lax about tech giants with high market share – 60% revenue market share in America and a dominant position in OSs. Just look at the nice billions ($8b-$12b annually) it gets from Google in return for making it the iPhone’s search engine.
  4. Low taxes – Thanks in part to legal structure using tax havens, Apple’s tax rate was around 17%

However these four trends are becoming less favorable.

  1. Geopolitical tensions threaten global supply chains.
  2. China under President Xi Jinping is becoming more unpredictable. His policies makes it less attractive to rely on Chinese consumers for 19% of sales.
  3. Governments around the world are targeting big tech. Big tech are easy targets for regulators and politicians.
  4. The tax bill is going up. A deal brokered by the OECD may gradually forcer multinationals to pay more tax.

The next ten years won’t be easy for Apple and Tim Cook. What’s the plan? Apple will continue to shift towards being a subscriber-based firm. It has over 1 billion users who enjoy an array of services (21% of sales). They have one of the most beloved brands. In a toxic digital world, people can trust Apple. Apple is still about beautiful designs and high-quality manufacturing. They will continue to advance and push innovation. The iPhone 13 looks promising (50x faster than the iPhone 4, first iPhone under Cook). They are also pushing deeper into health, news, entertainment, music, gaming and services. And it will continue to try to invent a new generation of hardware. The rumor of a iCar or iGlasses pops up from time to time. Apple is looking into pushing deeper into search.

Apple is also shifting part of their supply chain to America. Long-term assets have risen to 70%, from 38% when Cook started as CEO. I’m sure he’s looking at plans to pivot away from China in case things go sideway. But I think the company has navigated its relationship with China well so far. China is a large market for its product and services, but also Apple creates significant employment in China.

Tim Cook was a big believer in the App Store (Job was ambivalent). Cook understood the importance of network effects. He understood the economic mechanism in digital markets which makes big businesses even bigger. Cook pushed hard on the digital “flywheel”: the App Store attracts more app makers, which attracts more users, which attracts more developers and so on. Today there’s nearly 2m apps, which facilitate $643b in billings. Apple takes a big bite of that.

iPhone 13

A short comment on the new iPhone 13. Every announcement is predictable. There’s no surprises. Every iPhone announced isn’t a huge step up from the previous one. But little incremental improvements, consistently, for a long time is a recipe for success. A faster processor, a better camera, a better battery, higher memory capacity, and more expensive.

I’ve no clue how many they will sell, but I’m sure it will be a lot. There’s a fight among analysts that are trying nail exactly how many people will buy and upgrade their phones. There’s over 50 analysts covering Apple and many more on Seeking Alpha. I don’t have a particular insights. People are looking at wait time on the Apple website for demand signal, or supply constraint. I’m not that guy. All I can say is I’m invested in Apple for more than just a phone cycle and that has worked well.


There’s no doubt that the next ten years will be tougher than the first ten. How do you keep growing? How do you keep these fat 40% gross margins? The App Store commission are trending downward.

But who would have though that Apple would have been a $2.4t company ten years under Cook? Even $1 trillion was a massive milestone. The Apple today is a better version of the pre-Cook Apple. Tim Cook is likely to stick around until 2025 when his current stock grant fully vest (but I doubt it’s about the money).

Disclosure: Long AAPL