How to Evaluate Businesses

“So how do you really understand and gain that great insight? Pick one business. Any business. And truly understand it. I tell my interns to work through this exercise – imagine a distant relative passes away and you find out that you have inherited 100% of a business they owned. What are you going to do about it? That is the mentality to take when looking at any business. I strongly encourage you to start and understand one business, inside out. That is better than any training possible. It does not have to be a great business, it could be any business. You need to be able to get a feel for how you would do as a 100% owner. If you can do that, you will have a tremendous leg up against the competition. Most people don’t take that first concept correctly and it is quite sad. People view it as a piece of paper and just trade because it is easy to trade. But if it was a business you inherited, you would not be trading. You would really seek out knowledge on how it should be run, how it works. If you start with that, you will eventually know how much that business is worth.” -Li Lu

Li Lu is the only guy that manages Charlie Munger’s money. And he has an incredible story about his up bringing. Twenty-one years ago, Li Lu was a student leader of the Tiananmen Square protests. Now a hedge-fund manager possibly one of the successor to he is in line to become a successor to Warren Buffett at Berkshire Hathaway.

His book seems rare and hard to find. There’s a copy on Amazon: Moving the Mountain. He’s expensive so it’s probably one of these rare books that you might find by accident somewhere. Li Lu also wrote the foreword to the Chinese version of Poor Charlie’s Almanack.

 

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Berkshire Beyond Buffett

Berkshire Beyond BuffettI finished Berkshire Beyond Buffett by Lawrence Cunningham (@CunninghamProf). Prof Cunningham is well known for his work on Berkshire Hathaway (BRK) and Warren Buffett. Prof Cunningham’s books on BRK and Buffett are among the best. He’s been a follower for decades and has direct access to Buffett and its managers.  If you want to read this book, I would assume it’s not your first book about Buffett and BRK. There’s ton of material you can read before this one. If you don’t know where to start, here’s a good start: The Essays of Warren Buffett: Lessons for Corporate America.

This book on Buffett/BRK book is different. This is not a Warren Buffett centric book. It’s more like the bio of BRK. And not just a book full of happy stories about BRK.

BRK is structually complex and highly decentralized. Lawrence had access to many people in BRK organization to realized this book with Buffett’s blessing. Despite its popularity, few people understand Berkshire and many assume it cannot survive without Buffett. They are wrong and this book proves them wrong. This is a comprehensive portrait of the corporate culture that unites BRK’s subsidiaries and the traits that ensure the conglomerate’s continued prosperity.

“The special Berkshire culture is deeply ingrained throughout our subsidiaries, and these operations won’t miss a beat when I die” – Warren Buffett

The book also goes on to explain why many companies picked BRK as their home, even when a more lucrative offer was on the table. It goes beyond the dollar amount. For many entrepreneurs, their business is their baby. It’s their life’s work. And it’s very important for them to preserve it.

I’m glad I read this book. I was looking forward for a book like that for a while. One that goes inside and throughout the subsidiaries. Even the smallest ones. Cunningham talked to many family businesses belonging to the Blumkins, Bridges, and Child and several entrepreneurs like at FlightSafety and Justin Boots.

An interesting question why aren’t there many more companies like BRK? Markel is the closest clone that I can think off. BRK has been cloned before, but you don’t seem to hear about their success. The reason is because it goes beyond the corporate structure. It’s about the attitude. Berkshire takes a partnership attitude toward its shareholders whereas most corporations are hierarchies, with shareholders seen to own a residual claim on firm assets, an equity stake after liabilities are covered by assets. BRK is simple, but hard to replicate.

Here are some characteristics among many others:

  • Decentralized. The managers of the subsidiaries have massive power.
  • It rarely uses intermediaries — brokers, lenders, advisers, consultants and other staples of today’s corporate bureaucracies.
  • No strategic plans administrated by an acquisitions department.
  • Berkshire defined itself as a partnership from the outset: “While our form is corporate, our attitude is partnership.”
  • While American companies borrow heavily, Berkshire shuns debt as costly and constraining, preferring to rely on itself and to use its own money.
  • BRK generates abundant earnings and retains 100 percent, having not paid a dividend in more than 50 years.
  • Berkshire earns some $30 billion annually — all available for reinvestment.
  • In addition, thanks to its longtime horizon, Berkshire holds many assets acquired decades ago, resulting in deferred taxes now nearing $100 billion.
  • The principal leverage at Berkshire is insurance float. This refers to funds that arise because Berkshire receives premiums up front but need not pay claims until later, if it all.

 

Elon Musk

Elon MuskElon Musk is a very interesting character. We know that. But after just finishing his biography it really fresh. He is, quite arguably, the most successful and important entrepreneur in the world. There was a time when electric cars and private space flights seemed silly.  Now they are becoming normal.

At first, this biography by technology journalist Ashlee Vance wasn’t supposed to happen. Before this book Musk rejected all demands for a biography, including this one. But Ashlee did his homework. He told Musk that he talked to over 200 people associated with him over time and they have a story, and not all nice things. In the end Musk collaborated and gave his side of the story. Continue reading “Elon Musk”

A Column of Fire

I got around Ken Follett’s latest 1,000 page brick: A Column of Fire. If you are looking for a good for book for the Holidays or a gift, this book will fit the bill. Like any of Ken Follett’s work, this book historically well researched.

The story starts in the late 1550s with Europe torn apart by religious conflict. This was a time when the Catholics burnt the Protestants and then the Protestants burnt the Catholics on the stake. The real enemies, then as now, are not the rival religions. The true battle pitches those who believe in tolerance and compromise against the tyrants who would impose their ideas on everyone else—no matter what the cost.

Here’s a praised for the book: As Europe erupts, can one young spy protect his queen? International bestselling author Ken Follett takes us deep into the treacherous world of powerful monarchs, intrigue, murder, and treason with his magnificent new epic, A Column of Fire. – Amazon

The Outsiders Lessons

Like I said in the past, I can’t recommend William Thorndike’s The Outsiders enough (More on the Outsiders). It’s one of the best book to have come out on investing in the last couple years. It’s about 8 CEOs that that had extraordinary returns over the long run. Except for Buffett, most people probably never heard of the 7 other CEO mentioned in the book. Here’s a potential blueprint for their success:

From the Preface:

They seemed to operate in a parallel universe, one defined by devotion to a shared set of principles, a worldview, which gave them citizenship in a tiny intellectual village. Call it Singletonville, a very select group of men and women who understood, among other things, that: 

  • Capital allocation is a CEO’s most important job.
  • What counts in the long run is the increase in per share value, not overall growth or size.
  • Cash flow, not reported earnings, is what determines longterm value.
  • Decentralized organizations release entrepreneurial energy and keep both costs and “rancor” down.
  • Independent thinking is essential to long-term success, and interactions with outside advisers (Wall Street, the press, etc.) can be distracting and time-consuming.
  • Sometimes the best investment opportunity is your own stock.
  • With acquisitions, patience is a virtue . . . as is occasional boldness. 

Pages: Preface xvi, xvii

A Man For All Markets

A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market by [Thorp, Edward O.]

A Man For All Markets is Edward O. Thorp’s autobiography. I was looking forward to reading that book I wasn’t disappointed. Even though he is an icon, Edward O. Thorp might not be familiar name, so who is he? Thorp was an absolute intellect that despite his success he managed to stay under the radar. He didn’t subscribed to widely accepted views such as you can’t beat casinos or Wall-Street and he did. The first half of the book is his story. The 2nd half is filled with advice and insights. Plus Nassim Taleb wrote the foreword. So what are some of Thorp’s accomplishments?

  • Thorp figured out how to win at blackjack using card counting. Check. Thorp published the classic book Beat the Dealer. That book launched a revolutions in Vegas. If you like this kind of stuff you will love Bringing Down the House: The Inside Story of Six M.I.T. Students Who Took Vegas for Millions. These MIT guys took Thorp’s strategies and feed it roids.
  • Thorp then built the world’s first wearable computer and used it again to beat the house at roulette. Check. The computer used physics to calculate the momentum of a roulette wheel.
  • Play bridge with Warren Buffett. Check.
  • Thorp discovered what is known today as the Black-Scholes option formula, before Black and Scholes. Check.
  • Discovered that Bernard Madoff was a cheat in 1991. Check. Madoff got busted in 2008.
  • Beat Wall-Street. Check. Then wrote Beat the Market (Out of print, copies are going for $700+). He was the first modern mathematician who successfully used quantitative methods for risk taking.

This is a story of Thorp’s odyssey in science, mathematics, hedge funds, finance and investing. Thorp is not a guy that’s after money or fame. He is a very wealthy man but if he wanted to he could have been extravagantly more wealthy. To preserve his quality of life and to spend more time with his family, he decided not to pursue a number of very profitable business ventures. He like the exploration of ideas. He likes to solve problems. He like mental challenges. That’s what fuels him to beat the dealer and Wall-Street.

Thorp is 85 years and still very sharp. You can listen to him on Masters in Business podcast: Ed Thorp, the Man Who Beat the Dealer and the Market. He reminds me a lot of Buffett and Munger. They might be in their 80s and 90s, but their brain haven’t display any sign of aging.

This is a great book. Read it. Give it. Share it. Enjoy it.

 

The Story of French – A little bit of background on Quebec

I’m reading this random book, The Story of French by Jean-Benoit Nadeau and Julie Barlow.  First, I should mention that you don’t need to have an interest in the French language to enjoy the book.  It’s a book that somebody gave me to give somebody else and I started to flip through it – And none of them are French. It’s actually very interesting and very well researched. It’s more of a history book and the role of French in shaping it. It’s really by accident that I started reading it. Sometimes randomness brings you the best moment.

Here are some screen shots on the Quebec chapter.

The Story of French Quebec 1 Continue reading “The Story of French – A little bit of background on Quebec”

I am Pilgrim

This is my review of I am Pilgrim by Terry Hayes. This is an excellent book and I highly recommended it. My wife also thinks it’s excellent and she’s the one who recommended it to me. We don’t have the same taste of books, so it’s a surprise, or a rare event I would say, that we both appreciate the same book. If you are looking for some summer reading, you won’t be disappointed with this book.

If you read the back of the dust jacket, you might think that the book is all over the place and it’s not for you. And in a sense, it is all over the place. But it was done on purpose. Usually that’s a recipe for disaster, except in this case. All the crazy events eventually ties up. The story takes you a on a wild ride. There’s two part to the story, which is the reason behind why this is a big book. The book combines both a murder mystery and a terrorist plot to unleash a cataclysm on America. The book takes into a series of strange events. The main character, “Pilgrim”, is a great character. He’s smart and insightful.

There’s a sequel to the book coming out next year, The Year of the Locust, which is coming out sometime next year. I also read some stuff about a movie studio picking the rights to the book/character. So this should be interesting but I don’t know how this story will hold up on the big screen. However Hollywood did make an excellent movie about a baseball stat book, Michael Lewis’ Moneyball. So I’m sure they can figure out something. Terry Hayes is a Hollywood guy and his background is in movie scripts, so maybe he can work his magic. And congrats to Mr. Hayes on his first novel. It must be very different from going to movie scripts to a very long novel.

A Negotiation Win

Here’s an interesting quote from Sam Zell’s book, Am I Being Too Subtle? Straight Talk From a Business Rebel:

My definition of a “win” is not binary. It is not a zero-sum game. Negotiation that leads to a winner and a loser rarely leads to a successful transaction or another one down the road. That’s how it’s been  throughout my business career. Sometimes my team argues with me-they can’t believe we’re leaving money on the table. But I want to create an environment where everyone wants to keep playing. (p. 220)

Zell knew that by making other side happy early on he could get more deals in the future. Everybody stays in the game and everybody keeps playing. Great mottos for anyone in business or investing.

The Forgotten Highlander

the-forgotten-highlander

I just read the The Forgotten Higlander: An Incredible WWII Story of Survival in the Pacific by Alistair Urquhart. Alistair who has died aged 97, was a prisoner of the Japanese from 1942 to 1945, surviving both the infamous ‘Death Railway‘ and the atom bomb dropped on Nagasaki. The fact that he lived until he was 97 is a miracle. Alistair, as a POW, was constantly beaten, tortured, starved, malnourished, dehydrated, forced labor, and was hit with every tropical diseases you can think of (Malaria, cholera etc…). You can say that Mr. Urquhart hit hell’s equivalent of winning the Powerball jackpot. When you though that life couldn’t get worse, hell decided to step it up a couple notch. But Alistair was “lucky”. He survived (or maybe the ones that died were the lucky ones). But Alistair refused to die. He worked on the infamous ‘Death Railway‘, where thousands of British, Australian, Dutch, American and Canadian prisoners would perish in the task. He was put on a Japanese ‘hellship’ that was torpedoed. His book, The Forgotten Highlander, is his memoir. There’s a documentary on Youtube: The luckiest man in World War ll

The sad thing is that the POWs that returned were treated like absolute shit. The British government had insisted all POWs take a vow of silence, but like most veterans of the WWII he initially did not wish to speak about what he had witnessed. Britain said that they needed Japan has an allied against Russia, so they didn’t want to “offend” Japan.

Recently Japan marked the 70th anniversary of the end of World War II. Prime Minister Shinzo Abe reiterated his country’s “profound grief” for the millions killed – but stopped short of offering any new apologies. He was remorseful for his country’s actions in the war, future Japanese generations should not have to keep apologizing.

PM Shinzo Abe said Japan “did inflict immeasurable damage and suffering” on “innocent people.” But he added, “We must not let our children, grandchildren, and even further generations to come, who have nothing to do with that war, be predestined to apologize.” Full transcript.

Almost every Japanese prime minister since 1945 has apologized in some fashion or another. But these apologies seem to have never been deemed sufficient. Why? To be fair, the Japanese people also suffered greatly during WWII. It’s the only nation that took the full massive devastation of atomic bombs — not one, but two. Unfortunately almost all of those who perished in Hiroshima and Nagasaki were civilians.

Japan has committed some of the most horrendous war crimes. It’s not widely discussed and it’s downplayed. In school you are taught that the Japanese bombed Pearl Harbor and the U.S. dropped the bomb. That’s it. The issue is politically sensitive. I mentioned that the allied needed Japan as an ally after the war. That’s part of it. We are constantly reminded of the atrocities Nazi Germany committed. We can’t forget the horror of the Holocaust. We know about concentration camps, we know about Schindler’s List and Anne Frank. But we never talked about the crimes committed by the Empire of Japan. Japan did attacked the U.S., not Germany. What the Japanese did to the Chinese is on par or worse than that the Nazi did, think Nanjing Massacre. (It’s not just Japan, we don’t talk about Stalin’s brutality the same way we talked about Hitler’s.) Maybe it’s a cultural thing. Much of Nazi victims are Europeans with western culture (including European Jews), and Americans identify better with them compared to Chinese and South-East Asians who became the victims of the Japanese. The Japanese war crimes just wasn’t a Western problem, it was far from our eyes. We see the same attitude today towards massacre in Africa. We treat it as  “just another African problem”.

Japan has turned it around since the end of the war. Today Japan is a pacifist country. It’s sophisticated, developed and rich. Their army only participates in humanitarian missions. I’ve been to Japan. It’s a great country with amazing people that has accomplished so much after WWII.