Viking Raid

Viking RaidViking Raid: A Robert Fairchild Novel by Matthew McCleery is the 2nd book of his that I read. You can read the review of his excellent first book, The Shipping Man, here. I almost read the whole book while waiting for a connection flight. While the book builds off the first one, I found the 2nd one different. The first book was a home-run so I looked forward to reading this one. Unfortunately, like many sequels, Viking Raid didn’t meet my expectation. After setting the bar the high, Mr. McCleery found himself a victim of his success. The same thing happens with sequels of successful movies or albums. Very often it’s a tough act to follow. The first book was mainly about shipping. It was a crash course in shipping that combined finance and adventure. The best way to learn is when you are having fun and The Shipping Man did that. I expected Viking Raid to be somewhat similar but it wasn’t. I highlighted parts that I like in the first book. Parts that I could go back to later on as a reference. I didn’t highlight anything in the 2nd book. The idea of writing a book about a dry topic like finance and making it interesting is an achievement on its own. So credit to McCleery for taking on this difficult endeavour. There should be an award to each finance author that writes a finance book that doesn’t make you fall asleep. Viking Raid is categorized as a shipping book, but its mostly about the business of financing ships. Both books are about getting financing for the ships. Like I mentioned, the sequel is different. This latest book is more about Robert Fairchild, the main character, being sent around the world to accomplish a mission.

My favorite thing about the book are the epigraphs at the beginning of each chapter. It’s a short paragraph at the beginning of each chapter which either provides biographical information or about a selected shipowner or features relating to the shipping industry. That’s where I got most of my learning. The shipping industry is not an industry like the others and that’s what makes it unique.

At the beginning of the book there’s something there’s a table called the The Viking Law. I’m not sure when it was written or if its really from a viking era. It’s probably one of the earliest form of “management” if there was such a thing as the word management back in the viking era. I was able to find a reproduction online and there it is below:

The Viking Law
Source: Pinterest

I recommended you read Viking Raid while travelling, especially when you think you travel itinerary is a rough one because Robert Fairchild has a torturous travelling schedule. It will definitely relieve some of your pain.

The Kyeema Spirit. One of the largest oil tanker in the world. It looks like the ship on the cover of Viking Raid.
One of the largest oil tanker in the world. It looks like the ship on the cover of Viking Raid.

Omaha Pilgrimage Again

This is my notes and observation from my recent trip to Omaha for the 2016 Berkshire Hathaway Meeting.  You can also read a copy on my blog at brianlangis.com


As you know every mother in this country tells her daughter at an early age: if you’re choosing between two very old and rich guys pick the one that’s older — 85 year-old Warren Buffett poking fun at partner Charlie Munger, who is 92, as to why he can get the girl more often.

For the second year in a row I had the privilege of attending the Berkshire Hathaway (BRK) Annual General Meeting (AGM). BRK has been one of the most lucrative investments in the last forty years. Listening to Warren Buffett and Charlie Munger taking questions from journalists, analysts, and shareholders for nearly six hours is a very enriching experience. You also get to see them eat See’s Candies peanut brittle and drink Cherry Coke out of a wine glass the whole time. That’s what I call product placement. In his opening statement Buffett didn’t hesitate reminding everyone that he was the young one. You learn a lot from listening to successful old wise men.

This year was BRK 51st AGM under Warren and Charlie and the first time it was broadcasted via live streaming online for the world to watch. That was a wise decision considering that the event has become huge success. When 45,000 descend on Omaha, it’s definitely noticed. The more money Buffett made, the bigger it got. Success attracts success as they say. People who asked me why do you bother going if the meeting is streamed online? Well part of the answer is that I booked my plane ticket and hotel before BRK announced the change, but there’s also a real reason.  The most interesting aspects of making the trip are the extraordinary people you meet and the associated events. There are investments panels, breakfasts, cocktails, dinners, conferences, presentations and various networking events that you can attend. Since this is my second year, you gain a sense on how to better allocate your time.

You don’t go to the AGM because you expect Buffett or Munger to say something new or some kind of magic investment formula. They won’t. They will say the same thing you read in the shareholder letters or past interviews. That seems to disappoint some people. But it’s crazy to think they were going to say something totally new or shocking. That’s not what made them successful in the first place. They are consistent and disciplined in their approach. As they themselves mentioned at the meeting, you don’t go to church to hear something new; you go to church to hear the old things harped on again and again. Munger and Buffett are teachers are heart. They also made their playbook available.‎

You can still watch the AGM with the recording available until May 29th available @https://finance.yahoo.com/brklivestream. The meeting Q&A was being simultaneously translated into Mandarin. China’s interest in Buffett and Berkshire is border line fanatics. I don’t exactly know why since China has its own multi-billionaires and successful business people. I don’t see any Americans being fascinated with Chinese billionaires.

By the way you don’t need to be a shareholder to attend the AGM. You do need credentials that you can buy for $5 on Ebay. Every shareholder is entitled to 4 credentials so there are plenty of extras available. Some folks decided to sell the extras for $40 or more on Ebay. BRK didn’t like that and decided to by-pass sellers by flooding Ebay with $5 credentials. This reminds me of the tactic BRK employed against funds pooling money in the 90s to buy the expensive Class A share for a fee.  That led BRK to create the popular Class B share to anyone who wanted it.  Since its creation the Class B has spitted to make it possible for the mom and pop investor to invest along Buffett. The Class B share is now worth 1/1500 the price of a Class A shares.  One Class A share cost $210,000 and one Class B cost $140.

Outside before the opening Friday of the exhibition hall.
Outside before the opening Friday of the exhibition hall.
The CenturyLink Center is getting packed before the AGM.
The CenturyLink Center is getting packed before the AGM.

I arrived in Omaha around midnight Thursday night. You know you are on the right plane when everyone on it is reading a Buffett book or a shareholder letter. My connection for Omaha left from NYC and I wonder if NYC has direct flights to Omaha any other time of the year.

Friday was filled with the Farnham Street breakfast, a visit to the exhibition hall, eating Dairy Queen, Creighton’s University Value Investing panel, and Whitney’s Tilson cocktail. It was funny how a lot of people at Whitney’s cocktail didn’t know who he was but if you mentioned he was the guy from 60 Minutes that famously shorted Lumber Liquidator they were all like “oh yeah I know that guy”.

This year I had the pleasure of chatting with one of Berkshire Hathaway’s investment managers, Todd Cobbs and Board of Director member Meryl Witmer. They are both really interesting gave me insights on Buffett and the BRK culture. Warren Buffett also dropped by the exhibition hall Friday to visit the booths and to take pictures. At the speed his walking and moving around there’s no way he’s 85 years

Buffett taking pictures with attendees Friday at the exhibition hall.
Buffett taking pictures with attendees Friday at the exhibition hall.

Saturday was the BRK meeting and this year I decided to show up a little later around 5am in the morning instead of 4am last year. As a second year veteran, you know which doors are faster than the others. Getting there super early in the morning looks like a freakish thing to do but it goes by really fast since you mingle with the crowd the whole time.

Security was boosted a couple levels this year. There were a lot of security guards in the crowd and for the first time you had to go through a metal detector and get your bag checked. It did slow down entering the building but security was much faster than the TSA. I wonder if this has to do with the multiple death threats on Bill Gates and Warren’s head by ISIS and Al Qaeda.  Not sure what they have against Bill Gates, he was there Saturday morning at the newspaper throwing contest and I was impress at how humble and nice he was. Mr. Gates also had to pay for Warren’s dilly bar since Warren didn’t have any money on him (Warren owes a $1 to Bill).

Bill Gates Saturday morning before the AGM.
Bill Gates Saturday morning before the AGM.

The meeting always start with an opening film that wasn’t streamed to the world and I highly doubt you will find a copy on the Internet. They have a very strict no filming policy. The movie is one of the best parts of the meeting. The short movie (~45min) contains a lot of celebrities who have volunteered their time and Warren Buffett promised them he wouldn’t make money off it. The film is a collection of short clips and skits featuring humor. Last year final’s scene starred Warren Buffett getting ready to fight Floyd Mayweather and this year it featured Arnold Schwarzenegger as the new host of the Celebrity Apprentice. Arnold had to deal with Warren and Charlie (labeled the other terminator). In real life Warren Buffett will not be a contestant but will act as an advisor to Arnold once the show is aired.

BRK outperformed the market by maintaining a disciplined approach. Sure the marketing irrational exuberance will occasionally outpaced BRK in the short-run, like during the tech bubble of the late 1990s; he knows he has the winning strategy for the long run. Even the best investments will endure extended periods where their strategies simply don’t perform.  When you try to outthink and over trade the market, you often do more harm than good. Whatever strategy you chose, the key is to find something that works and follow it through the inevitable ups and down. This will most likely improve your odds of investment success.

From 1965 through the end of last year, Berkshire shares have risen 1,598,284%, compared to the 11,355% return on the S&P 500. $1,000 with Buffett 51 years ago would be $15.3 million today.  But it’s going to be hard to move the needle that fast from here.  Because of size, it’s getting harder and harder to make to grow at a fast pace. But the amount of money they make is just monstrous. BRK is sitting of $58.3 billion at the end of March and is looking to make another big acquisition. of the question during the meeting was about the companies Mr. Buffett likes to buy, noting that they have changed from companies that throw off plenty of capital to ones that are far more capital intensive (e.g. Berkshire Hathaway Energy, BNSF, PCC etc…) Buffett said it’s a problem of prosperity and the ideal business is one that takes no capital” but still grows. But most of those are not of a size that they would move the needle at Berkshire. When Berkshire was smaller, See’s Candies was one that fit the bill.

Below are some notes, thoughts, lessons, and highlights of the BRK weekend:

Exhibition Hall

The Friday visit to exhibition hall is one of my favorite things during the weekend. The exhibition hall is where BRK has multiple companies on display that you can visit and shop. There are shareholder discounts on many items and it’s hard to turn down a $2 Dairy Queen vanilla Oreo blizzard and $1 Dilly bar. I like the place because it allows me to visit different companies from different industries and to talk to many executives. These people clearly love what they do and they love talking about their company.

The latest new baby to the Berkshire family is Precision Castparts Corp. (PCC). This baby is big since it was BRK’s largest acquisition ever at over $32 billion. PCC is a manufacturer of complex metal components and products.  You couldn’t miss this baby once you entered the exhibition hall. Their booth and their nice products was the first thing you saw when you entered the exhibition hall. PCC had a lot of staff on hand to answer questions and their product is state of the art stuff. With few exceptions, every aircraft in the sky flies with parts made by PCC. I was surprised of their presence since the deal recently closed at the end of January.

5 6 7

Some of the pictures I was allowed to take.
Some of the pictures I was allowed to take.

Clayton Homes, the largest manufacturer of modular and mobile homes, made an impressive display with a 3 bed, 2 bath, and 1,475 sq. ft. for only $78,900. Most major appliances are included too. You just need to provide a piece of land. For $80k, this is a really nice home. So why is it so cheap? Well Clayton is able to get a volume discount on material since they build 35,000 homes a year. The other trick is that they don’t have any waste. The pic below of the two bins is the only waste left once Clayton finished a home. They don’t waste anything!

Below are pictures of the $78,900 home “The Patriot” that was on display:9 10 11 12

One of the most notable absences is IBM and Watson. Not that I cared. Last year IBM had one of the high quality corner spot when you walked in. I guess Warren didn’t want to remind anybody of his puzzling tech bet on IBM that’s not going too well (at the time of this writing, BRK just disclosed a position in Apple made by his portfolio managers and they are bankrolling a bid to buy Yahoo, is Warren finally embracing technology?).  As for IBM, BRK now owns over 8% of the company. I also didn’t see Wells-Fargo and its lifestage carousel.

More than a year since the Burger King and Tim Hortons highly mediatized merger I would have expected a BRK/Tim Hortons booth but they weren’t there. I wonder if this is because of the ill feelings that might remain from the take over and tax aversion tactics employed by 3G Capital in the acquisition. Even though Warren and Charlie has been praising 3G Capital’s management style, the Burger King-Tim Hortons merger as hit a nerve with shareholders last year.  A lot of shareholders are uncomfortable with the BRK/3G partnership.  3G has been associated with job slashing and efficiency which seems to contrast with Buffett’s nice folky reputation. But I’m only speculating as to the reasons why BK-Tim Hortons wasn’t there. The Kraft Heinz Company, another deal backed by 3G, was present with an Oscar Mayer wienermobile and the place was packed.  Berkshire’s stake in Restaurant Brands International, the owner of BK and Tim Hortons, is only ~4.2%, so it might not be significant enough to have a booth (although they financed part of the deal with $3 billion in preferred shares that pays 9%!).

thewienermobile was present. This pic is from Instagram since I could never get a clear shot.
thewienermobile was present. This pic is from Instagram since I could never get a clear shot.

On Berkshire Hathaway’s Credit Rating

When asked why Berkshire’s credit rating is not AAA, Munger pounded on that question right away. He bluntly said that credit agencies were wrong.  Standard & Poor’s gives BRK a AA+. It has been downgraded since 2009, when it used to be AAA.

Charlie Munger sitting all by himself after the Q&A.
Charlie Munger sitting all by himself after the Q&A.

Markel Corp.

For the second year in a row, I preferred the Markel Corp. (MKL) Sunday morning brunch and not just because the breakfast is far better than the BRK one. Markel is dubbed the “mini-Berkshire” and is a successful BRK clone. It’s a conglomerate that uses its insurance float to invest that’s compounding the gains. Steve Markel and Tom Gayner are the Warren Buffett and Charlie Munger of the company. In the last couple years Markel has been on fire and I regrettably don’t own a single share. MKL trades at $950 per share. It was less than half of that when I started following the company.

Is it a fair to compare the MKL to BRK?  While BRK fills the CenturyLink center, MKL host their meeting at the hotel across the street with a few hundred people. It’s like comparing a sold-out Bon Jovi concert at the Madison Square Garden vs the up and coming band at your local theater. You can’t touch Bon Jovi but you can have a beer with the up and coming band. I prefer the MKL meeting because 1) its smaller, 2) the executives are approachable while Charlie and Warren, and 3) I learn a lot more.

I find the questions and answer with Tom and Steve more pertinent and practical.  Tom and Steve don’t mind getting technical while Charlie and Warren avoid getting into details. Warren’s answers can be long and vague that I sometime forget what the question was.  The true is that BRK is a victim of their own success.  I’m not saying that Warren’s answers are not pertinent because they are.  It’s one of the reasons why people make the trip. But the crowd and make-up of the questions is different. I think the MKL meeting attracts more of a crowd of sophisticated investors which allows Tom and Steve to get into specifics while the BRK meeting is more entertaining with a movie and jokes. This was the first question from a shareholder at the BRK meeting: “What would you have done differently in life in your search for happiness?” while one of the questions at the MKL meeting at to do with return on equity. These sorts of inquiries are the reason that the Berkshire moved a few years ago to have journalists and analysts ask some of the questions. The MKL meeting is probably what the BRK meeting looked like in the early years. BRK use to have its meeting in a cafeteria, imagine that. Just like its stock price, MKL’s meeting is growing every year. They will have to upgrade soon to a much bigger room.

Coca-Cola

Every year there is a question regarding BRK’s investment in Coca-Cola meanwhile more than one in three American is obese, with consumption of sugar-sweetened beverages such as Coke a contributing factor. Every year the question seems to get tougher. Last year Buffett answered with a non-answer, stating his own personal consumption of Coca-Cola (he’s 1/3 made out of Coke he said) in validating his investment. This year, journalist Andrew Ross Sorkin’s question was more pointed. He asked Buffett not to bring up his personal consumption habit of Coca-Cola when asked “why Berkshire shareholders should be proud to own Coke?” Well Buffett ignored the directive and started talking about his own personal consumption habit. He said he has not seen evidence that convinces him that he will make it to 100 if he suddenly switches to water and broccoli. He also continued that because there are so many more women who live to 100 than men, if you really wanted to improve your longevity prospects, for a guy in his position, you have a sex change. Munger didn’t like the question because it ignores the benefits of soft drink, which are made mostly of water that people need to survive. In general, Munger said citing the disadvantages of something without taking the advantages into account are “immature and stupid”.

Hedge Fund Rant

In 2008 Buffett made a very public bet with a hedge fund called Protégé Partners. The bet was that a group of five hedge funds picked by Protégé wouldn’t be able to beat a simple S&P 500 index fund over 10 years. 8 years into the bet, the S&P 500 is crushing the crushing the hedge fund and Buffett is not shy to show the results. The S&P is up 65.7% and the hedge fund group is up only 21.9%. Then Buffett went on an epic rant against Wall Street. It might be a tough time to invest in a hedge fund, but it’s not a tough time to be in the hedge fund business because of high fees. Fees were at the center of Buffett’s rant. Basically he told everyone that travelled to Omaha to buy the S&P Index fund and sit on it instead of putting your money with hedge funds. Buffett was building on an argument he’s been making for years about why backing U.S. businesses in aggregate, through low-cost funds, is the more certain way to prosper over the long haul. He also said not to hire consultants.

Valeant – Sequoia Fund

I was impressed on how diplomatic Buffett was on a question regarding the Sequoia Fund and Valeant. The Sequoia Fund is the fund that Warren Buffett referred people to after he closed his partnership. He still has close ties to the fund and to my knowledge, is one of the two funds that Buffett has endorsed. Valeant’s story is well documented so I won’t rehash everything that’s been said in the media. While Munger has repeatedly publicly trashed Valeant, Buffett has been mute on the topic. However the unofficial behind the scene chatter said that Buffett hates Valeant more than Munger. That’s why I was impressed at the delicate and diplomatic response Buffett used when responding the question. While answering the question Buffett also said that he approached to make a significant investment in Valeant which he obviously declined.

Over 45 years through the end of 2015, Sequoia Fund has returned 14.0% per annum versus 10.8% for the S&P 500 index, with $10,000 invested at Sequoia’s inception worth $3.9 million, versus $1.0 million for the same amount invested in the index. While Sequoia has beaten the market over the past decade, through the end of 2015, their investment in Valeant has diminished a record that we have built over two generations. At one point Valeant represented over 40% of their portfolio! The position became a controversy at Sequoia after Valeant started running into trouble. Sharon Osberg, Buffett’s bridge partner, resigned from the Sequoia’s Board after expressing her objections over the large size in Valeant and the decision to buy more. Sharon Osberg is obviously Warren’s eyes and hears at Sequoia since they talk a couple times a week. The Sequoia Fund is currently Valeant’s largest shareholder with 9% of the company, slightly more than Bill Ackman’s Pershing Square.

That’s all folks. The trip was definitely fun. It’s too early to say if I will go next year but if you have never been I highly recommend you go at least once. They are not getting younger!

Cheers,

Brian

15

Pershing Square / Bill Ackman Video in Hitler’s Bunker

This is a hilarious video on some of the problems Bill Ackman’s Pershing Square is going through right now. If you follow the investment world a bit, things are not really rosy at Pershing Square. I don’t know who the creator is (2/20?) and it’s full of typos. The video is about Ackman’s two major bets going totally wrong on him. Of course I’m talking about Herbalife and Valeant. It’s usually to not a good idea to make fun of somebody when they are down, but I hope Ackman sees the humor in it. Now I wonder if Ackman will move to Boston and opened a mutual fund.

Lessons From the Great Minds of Investing

The great mind of investing
This is another exceptional Google Talks. This time Google hosts William Green, the author of The Lessons From the Great Minds of Investing. I met William Green last year following an investment panel at one of the Berkshire Hathaway events associated with the AGM. He had stacks of books that you could buy before it was released to the public. I had a chance to browse the book and its absolutely beautiful. It’s a big book, coffee table style. The striking feature are the beautiful black and white pictures. The extraordinary photographs credits goes to Michael O’Brien. The book provides insights and wisdom from 33 of the greatest investors of our time. Unfortunately I didn’t end up buying the book. The book is too big to travel on a plane with and it’s expensive. But it’s on the buying list and it would definitely make a great gift.

Back to the talk. This is a good talk. William shares a mix of stories and lessons he learned from spending time with some of these great investors. He’s a good storyteller. That’s what makes the talk entertaining. He has some good stories on John Templeton, Howard Marks, Bill Miller and the late Irving Kahn. If you have an hour to kill or to educate yourself, it’s time well spent.

Twitter: @williamgreen72

None other than Buffett. The Great Minds of Investing
None other than Buffett. The Great Minds of Investing

Negative Interest Rates for Dummies

If you ever borrowed money, you are most likely familiar with the concept of positive interest rates. That’s the world where you pay interest on the money you borrowed. Lately, you probably been hearing more and more about negative interest rates, where depositors are actually charged to keep their money in an account and borrowers are paid interest on their debt. I admit that the concept of negative interest rates can take a while to sink in. Imagine a bank that pays negative interest.  The common reaction is “Wait, what! Instead of paying interests on my mortgage I’m receiving interests? Why would a bank do that? I don’t follow you…” or the other popular reaction is “If the bank charge me interest on my deposits I’m taking my money out”. Well it hasn’t gone that far, yet.

Negative interest rates are a last ditch effort by a central bank to stimulate the economy by effectively imposing a tax on the excess reserves that banks hold at the central bank. Banks earn interest on the money, called reserves, they park at the central banks, just like savers park money in a bank. In countries where there’s negative interest rate, the banks have so far mostly taken on the cost on holding excess reserves at the central bank.  At the moment, they haven’t pass the cost on to the consumer, out of fear that doing so might spark a bank run. In some cases, in the Denmark, where some homeowners are getting paid interest on their mortgage. In Switzerland, there’s a bank that’s charging clients to hold their deposits. There’s definitely side effects, both positives and negatives.

Why is this happening? The economy is weak and needs a boost. Banks are a pillar of the economy and are not lending as much as they should. Maybe the standards to borrow are too high following the financial crisis. Maybe there is not enough demand. Whatever the case is, banks are keeping excess reserves at the central bank and are receiving interest on them. Theoretically, low interest rate is suppose to stimulate demand for loans and as a result grow the economy. Central banks provide an ample supply of cheap money to banks in order to encourage lending to various individuals and businesses. But that’s not happening. The banks are “hoarding” the money. You are not growing the economy if you have money parked doing nothing. So to stimulate lending and to get these excess reserve out in the real economy, central banks are charging banks for their holdings.

Denmark set negative interest rates as early as 2012, followed by the European Central Bank in 2014. Since then, they’ve been joined by Switzerland, Sweden, Japan, and Hungary. For some, it’s a bid to reinvigorate an economy with other options exhausted. Others want to push foreigners to move their money somewhere else so they can keep their currency down in an attempt to make their exporters competitive. With the European Central Bank trying to “tank” their currency, Sweden and Switzerland responded. Policy makers are also trying to prevent a slide into deflation, or a spiral of falling prices that could derail the recovery. By weakening their currency, they hope to import inflation by making goods coming into the country more expensive, raising domestic prices.

There are other consequences as well. Retirees are feeling the pain as they need income to live on. The days where you could get a guaranteed 5% on your money have been behind for a few years now, but this is something else. Pension plans, insurance companies, retirees, are being driven in riskier asset classes to make up for the loss income. This works in the short-run as long asset prices are increasing, but is not necessary a sound investment policy. In the long-run, who knows what the consequences are? It’s uncharted waters. There are other side effects, Sweden is dealing is a potential housing bubble and people are on a borrowing frenzy. It might ended up badly once rate rises. The best analogy I heard about the dilemma is the joyful feeling of eating McDonald’s right now. It’s delicious in the moment but the perverse effect of eating it will show up later.

Both Canada and the U.S. have their current interest rate at 0.50%. After decreasing them last year Canada just announced they were maintaining their rate. The U.S. are slowly starting to increase them after almost ten years of no increase. There is debate on whether they should go negative. Rates are just above zero, so nobody knows if going negative will actually make a difference. So far the North American central banks are looking at the experience in other countries and will judge the results.

Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. It’s a bid to boost the economy. Is it working? So far the experiment doesn’t prove to be fruitful. Instead of boosting lending like the theory states, banks are taking on the cost which hurt their income, and as a result tighten credit. If banks are not profitable, they don’t lend.  Another perverse effect, banks have been unwilling to pass on negative rates to individual depositors, and have tried to compensate for profits by jacking up mortgage rates, even as headline interest rates fall. These are not the results they were hoping for. Taking such action is suppose to help the economy, not hurt it.

This is where a herd of academics, bankers, analysts and economists are getting in a never ending debate, and the person with the argument that nobody understands usually wins. You get the feeling that nobody knows what they are doing. Falling prices, banks paying you money, it’s a confusing world. I hope this clarifies the insane world of negative interest rate.

Berkshire Hathaway 2016 AGM

*Updated April 20th.

I will be in Omaha for the 2016 BRK AGM. I will be there from Friday April 29th to Sunday May 1st. I’m planning to leave not to long after the Markel Corp. meeting. If anybody wants to meet up, I will be at some of these events:

Friday, April 29:

  • Noon-3pm: Berkshire Exhibition Hall visiting companies.
  • 3pm: Value Investing Panel at Creighton University
  • 5pm: Yellow BRKers get together
  • Columbia University “From Graham to Buffett & Beyond” dinner????
  • 8pm: Whitney Tilson’s cocktail party

Saturday, April 30:

  • 8am-4pm BRK AGM. I’m watching a 85 and 92 year old take questions for hours.
  • 4pm – YPO has an event with Tom Gayner (Markel), Tom Russo from Gardner Russo & Gardner, and and Tim Vick, author of How to Pick Stocks Like Warren Buffett. Not sure if I will go because I’m not a YPO member.
  • Another event by Whitney Tilson and his friend Chuck Gillman. Whitney won’t be there. It’s a casual get-together immediately following the annual meeting.
  • 5:30pm: I might attend the Nebraska Furniture Mart Cookout. It was a lot of fun last despite the long line to get in. Music, BBQ and Budweisers. BTW  Nebraska Furniture Mart which is the largest furniture shop in the US.
  • There are various investment events Saturday night, not sure where I will end up.

Sunday May 1

  • So far I’m not register for the BRK 5km race. I did it last year. I may or may not go.
  • 10am: Markel Corp. brunch. I really enjoyed it last year. Smaller and more personal than the BRK meeting.

There are various events associated with the BRK AGM, so the schedule is subject to change.

Chasing Hot Stocks Is Expensive

I enjoy reading CEO Prem Watsa’s annual letters, with the latest one here: 2015 Fairfax Financial Holdings Annual Letter. He’s been labelled the “Canadian Buffett”. Like Buffett, Watsa also runs an insurance conglomerates that preach value investing.

I have clipped two tables below that are particularly interesting. The first table demonstrates what happened when you chase hot stocks and the 2nd one is the latest valuation of the “unicorns”. In the first table, the only one in the group that might not belong there is Netflix, since its returns over a five-year (chart) period is monstrous. On the other hand, Netflix never looked cheap and people investing in it in the last two years were pretty much jumping on the bandwagon that they missed, hoping to score a quick financial gain. A lot of the stocks below, like Twitter and Groupon, are trading below their IPO price.

If you tune in to your favorite popular financial 24hr media channel, it would seem that there only ten companies in the world to talk about. However, the best opportunities are where nobody is looking.

Bubble stocks
Fairfax 2015 Annual Report, page 22.

The 2nd table shows the latest valuation funding from the so call “unicorns”.  A unicorn is a private startup company valued at $1 billion dollar or more. They are interesting and very disruptive in some cases like Uber and Airbnb. But it’s also important to make money. Since these companies are private, there’s no way of knowing if they are profitable. An educated guess tells me that most of these companies are bleeding cash. That’s why they constantly need more funding. And the next round of funding is always at a higher valuation. You can play that game as long the capital markets/private investors like you. But, what we are witnessing according to the table and news, valuation in the private startup world is falling apart. There a new label going around: unicorpse.  That means the bubble is bursting. Many of them cannot fund their losses internally for more than a few months and now have almost no access to external funding. Layoffs have begun in many of these companies. Money is being raised at lower valuations than the previous round of financing and the cycle is now in reverse. Uber is worth $62.5 billion?!?!

Fairfax Financial 2015 Annual Report, page 22
Fairfax Financial 2015 Annual Report, page 22

If Donald Trump Published an Academic Article

There are a lot of Trump jokes out there and this one has actual brain and work put into it. It’s worth sharing. This joke is named “If Donald Trump Published an Academic Article”:Trump Academic Paper

 

Dream Big

Dream BigDream Big by Cristiane Correa is a quick easy 200-something pages book to read. If you want to know more about the Brazilian trio behind 3G Capital that bought American icons Budweiser, Burger King, and Heinz, this is your book. The mostly focus on beginning and rise of Jorge Paulo Lemann, Marcel Telles and Beto Sicupira. Jim Collins, the author of Good to Great, provides the foreword.

Dream Big is the story of three Brazilians that’s taking over the world. This is not a how-to guide. You are not going to be a management guru after reading this book. You will learn some stuff but you will have to look else where for a practical program and advice. Sure, you will read a little bit about zero-based budgeting but it’s not going to tell you how implement it. There are other books for that.  Nevertheless, it’s a fascinating story.

In Brazil, Jorge Paulo Lemann, Marcel Telles and Beto Sicupira were well known for their success with Garantia, a Brazilian investment bank. Outside Brazil, notably in America, they were practically unheard of until they put their hands on Anheuser-Busch with its trademark brand Budweiser. Then they bought Burger King and Heinz not too long after. Three giant America icons now in the hands of some Brazilians investors. You can also add Kraft and Tim Hortons to the list. They took the corporate and financial world by storm. As you can imagine, a lot of questions were raised. How did this happened? Who are these guys? What’s going on? Who are they invading next? Why is Warren Buffett partnering up with these guys? The true is that these guys have been working at their craft for a really long time before they started swallowing American giants. The book walks you through the purchase of Anheuser-Busch.

What’s the secret to their success? There’s no secret or magic formula. Their method is  a simple, straightforward business approach. They didn’t reinvent the wheel. They took the best management concepts and applied them. They preach one thing: Meritocracy. It’s all about performance. Status, credentials, age is irrelevant. Look for good people, train them, keep them, and reward the best. They have this 20-70-10 rule they got from Jack Welch’s GE. Make it rain on the top 20% of your employees. These are your money makers. Considerable rewards, in cash, equity, promotion, are available to those who hit tough targets at company, unit and individual level. The other 70% are good employees, so you maintain them. The bottom 10% are fired. This is similar to the 80-20 rule, where 20% of your employees are responsible for 80% of your results.

“Costs are like fingernails. You have to cut them constantly” – Beto Sicupira

One way to look at the future of recently acquired Kraft, is to see how the previous deals played out. You can’t bring up 3G Capital and not talk about job cutting. The first thing that pops into people’s mind if you mention 3G, it’s job losses. 3G doesn’t have a great reputation and I think they don’t care.

The reality is these guys wants to create long-term value. Yes they cut cost, but they also invest where it’s going to be productive. It’s the 2nd part that the media ignore. But it’s also not sexy and not as dramatic as closing a plant. 3G is not the slash-and-burn type. They keep their businesses for really long time. The true harsh reality is that you are not making society better by wasting money and not being efficient. A company that has too many employees and is bloated is not contributing as much as it should to society. 3G streamlines away a company’s inefficiencies and improves it. For example, when they bought Anheuser-Busch, one of the first thing that got eliminated was the board’s fleet of private jets called “Air Bud”. Executive are now flying coach. 5-star hotels also got the scrap. Now its 3-star hotels, sometime having to share a room.  Once they are done they buy another company. We live in this wonderful high-tech world with never ending improving living standard because of focus on productivity and innovation. A small trip to the good old Soviet Union or Cuba will give you a glimpse at the opposite, and everyone has a job.

3G’s companies is popularizing zero-based budgeting, a system where, instead of basing budgets on the previous year’s, managers started at zero every 12 months and had to make a case for why they should get more. These guys are deadly efficient with their money. Managers are handed out this book: How to Double Your Profits in 6 Months or Less (brutal title). The books states that there’s 78 proven ways to cut costs dramatically. I haven’t read the book so I don’t know but it seems to work for 3G.

3G Capital’s method and culture is definitely not everyone’s cup of tea and they know it. There’s short-term social cost to their method but in the long-run I believe the benefits outweighs the cost. It remains to be seen what will be their next giant target.

Apple Computer’s IPO

Apple Computer's first logo. 1977
Apple Computer’s first logo. 1977

One of my most popular article to date on Seeking Alpha. It’s was a top trending article for two day and it has received a lot of good comments. I’m proud of the achievement but again any article on Apple, Facebook, Google, or the cool stock of the moment will get you trending. It’s great, but it also goes against what Seeking Alpha is about, which is shining a light on companies with limited or no coverage. SA still serves that purpose and it’s great for that, but it’s still hard to get attention sometimes on little unknown companies. Apple has so many analysts so I’m not sure why people bother writing articles about it on SA. There are so many companies that are bargains but nobody has never heard of them.

Anyway here’s a preview of my article on Apple’s IPO. The full article is free on SA. I suggest you go read the comments. There’s a lot of good stuff there. It’s almost like a trip down memory lane for so many people.

Enjoy!


 

Apple Computer’s IPO

Summary

  • Apple was a 205-bagger from 1990 to today (3-17-2016), without calculating dividends.
  • But you needed an 80% loss twice in order to get it.
  • Not your classic buy and hold fairy tale.

I’m a big fan of history and business. Combine both of them and you have quite a passion. While reading on what makes companies into multi-baggers, Apple Inc. (NASDAQ:AAPL) came up. I started researching old documents on Apple Inc. which eventually led to the IPO. I wanted to know, what at the time, made Apple a multi-bagger. Multi-bagger is a term popularized by Peter Lynch, author of One Up on Wall-Street and a manager at the Magellan Fundat Fidelity Investments from 1977 to 1990. Peter Lynch often uses the term “10-bagger,” which is when a stock goes up 10 times in value. I hope I’m not shocking anyone by stating the fact that Apple qualifies as a multi-bagger. Actually Apple is a multi, multi-bagger. My research led me to the Apple IPO, which was pretty interesting itself. So I decided to make an article out of it to share some of my research and findings. I might write an article on multi-bagger companies later. At today’s price of $105, Apple is a 205-bagger plus from 1990 to today, without dividends. For those who observed Apple’s share price from outside, the stock performance seemed to be an unbeatable machine. However, a closer look would reveal that it wasn’t always a fantastic engine.

In 1977, Apple Computer (now known as Apple, Inc.) was a very different company and Steve Jobs was a very different entrepreneur. Apple had its IPO in 1980 which I review in detail below. By looking at Apple’s stock price today, around ~$105 post-split, investing in Apple at the beginning would have looked like a no-brainer. You always hear people saying that if they bought Company X when it first came out, they would have been multi-millionaires today. The real story for early Apple investors, however, wasn’t all sunshine and rainbows. This is not your classic “buy and hold” fairy tale. If you would have bought Apple at the beginning and held on to it, you would have been clinically depressed for a good part of your life, unless you get joy out of pain. I did open my article by mentioning that Apple is a multi-bagger, but you needed an 80% loss twice in order to get it.

First, let’s start with the IPO then I will walk you through the performance history.

The Successful IPO

*Price per share mentioned are pre-splits numbers unless mentioned otherwise.

Source: Clipping from The New-York Times, December 15, 1980 – By Vartanig G. Vartan – Business – Print Headline: “New Stocks Drawing Intense Investor Interest”

I like how the clipping above had to mention that Apple was a Californian company that makes personal computers. For part of the research, I have to thank the Computer History Museum and The New York Times archives for my research. The Computer History Museum has two special documents from Apple Computer during the early days of personal computing. The first is thePreliminary Confidential Offering Memorandum – a document supporting a private placement of funds for Apple before the IPO. The document also contains the product and marketing plan. Computer History Museum CEO John Hollar noted the plan also “goes to great lengths to explain why anyone would even want a personal computer (e.g., forecasting eight reasons “that indeed, by 1985, a household using a computer will have significant advantages over one that doesn’t”), and that every single competitor listed is no longer in the PC business.” And if you are really interested, the second document is thePreliminary Macintosh Business Plan, which is post-IPO.

Source: Apple’s Preliminary Confidential Offering Memorandum

Apple Computer Inc., now renamed Apple Inc., had its IPO (prospectus) more than thirty-five years ago, on December 12, 1980, with 4.6 million shares priced at $22 ($0.39 a share post-split). Since then the stock has split four times, including three 2-for-1 splits (1987, 2000, 2005) and recently one 7-for-1 split (2014). That means your 100 shares would have multiplied into 5,600 shares today, or 56 times your original holding. Apple raised $101 million. Apple sold 7.4% of the company of the 54.2 million shares outstanding at the time. On that day, the Dow soared 21.59 points to 958.79, staging its biggest one-day rally since spring 1980. The Dow jumped because of a surprise half-point reduction in the prime rate by Wells Fargo to 20.5%! (Yes, you read that correctly, interest rates were extremely high back then, don’t ever forget that it could happen again).

During fiscal year 1980, Apple had sales of $118 million, up from 774k in 1977. Earnings also came at $11.7 million, or EPS of $0.24, compared with $41,575 or EPS of $0.01 in 1977. Now, think of how much Apple makes every minute. In 2015, Apple had sales of $233.7 billion and $53 billion in net income. Apple had a second offering of 2.6 million shares that quickly sold out in May 1981.

I found old news clipping below from The New York Times archives on Apple’s IPO.

Source:The New York Times, December 13, 1980. First Business Page, Part 1.

Source:The New York Times, December 13, 1980. Page 3 of the Business Page, Part 2.

Source: The New-York Times, Business Digest, Saturday, December 13, 1980.

As the article states, the IPO was a major success. The shares jumped immediately to $29, peaked at $29.25, and closed at $28.75. The offering happened to be the largest IPO in 15 years at the time since Comsat (side note: Comsat is the same company that owned the Denver Nuggets from 1989 to 2000, and bought the NHL Quebec Nordiques and moved them to Denver as the Colorado Avalanche. Comsat was acquired by Lockheed Martin Corp. (LMT)). The original offering was estimated at between $14 and $17, but due to strong demand was raised to $20 and $22.

Sorry, to cut you short, the full article is on SA or they will ask me to take it down. Thanks.