Capital Allocation Presentation

Phil Ordway from Anabalic LLC has made a great presentation on capital allocation. In everyday parlance, capital allocation is “how you use cash”. Everything involves tradeoffs based on opportunity cost and how you evaluate these tradeoffs is essential.

For those who read the excellent book The Outsiders (read it if you did not), you will enjoy Phil’s presentation. The presentation goes a beyond effective capital allocation. It address three things companies need to do that everybody would agree on.

  1. Effective Capital Allocation
  2. “Good” shareholders
  3. Meaningful communications with stakeholders

Point #2, “good” shareholders, is interesting and definitely not talked about enough. I’m glad Phil brought it up and should be the subject of further studies. Just having the “right” shareholders can make a significant difference. Think of the effect of having Warren Buffett as a shareholder did for Graham Holdings (The Washington Post). Point #3, meaningful communications with stakeholders, is not done properly. Most companies have some kind of Investor Relation “IR” department but don’t communicate properly.

This presentation is for investors, board members, executives, and anybody that runs a company.

Here’s a bonus presentation from William Thorndike, author of The Outsiders”.

Advertisements

Podcast: Investing in Cuba

Print
Copyright Eric Schleien

I was back on the The Intelligent Investing Podcast with Eric Schleien of GSCM to discuss Cuba. In a previous post I talked about my recent trip to Cuba. While the post has more of a global approach to Cuba (politics, economy, reforms etc…), the podcast is more geared towards investing. Of course they are opportunities but it’s not easy to invest in Cuba and it would require a lot of work (even more if you American).

The podcast is a about 45 minutes long, perfect for the work commute. If you can’t stand my accent, or you prefer reading, Eric published a transcript on SA.

Other platforms:

Charlie Munger’s Commentary on the 1960s Buffett Partnerships Fee Structure

Charlie Munger used Monish Pabrai as an example because he’s one of the rare to used the original Buffett Partnerships free structure. Monish went 10 years without taking fees, just living off his capital. That’s tough. But this is the right way to do it. It’s extremely rare to see investment managers use that formula because it’s  simply too hard.

The formula is 0/6/25:

  • 0% Management fee
  • 6% Annual performance hurdle with high water mark. That means you need a minimum of 6% gain to start getting paid. The high water mark is the highest peak in value that the investment has reached. The manager cannot collect an incentive fee unless the fund’s value is above the high water mark and returns are above the hurdle rate.
  • 25% fee on gains over 6%

A good question is do you think that formula would incentive a manager to take higher risk just to get over the hurdle rate? Or does it align the interest of the shareholders with the manager? I think the answer depends on the manager.

Graham & Doddsville Fall 2018 Issue

Here’s the new Graham & Doddsville Fall 2018 Issue from the Columbia Business School. There are some great interviews in it with some good ideas to further study. Here’s the archives for the past newsletters.

And here’s the Fall 2018 issue:

Graham & Doddsville Fall 2018 Issue

Getting Into The Weeds

My latest article, Getting Into the Weeds, hit #1 on Seeking Alpha! It’s an extension of The Intelligent Investing Podcast I did with Eric Schleien (GSCM). Eric’s podcast is doing very well and about to break the top #100 in the investment space.  In the article I take the time to dig deeper into specific sector of the marijuana industry.  With the legalization in Canada coming tomorrow (October 17) it’s good to have a sense of the buzz surrounding the space.

Just to be clear, I’m not an investor in the space. I’m also not recommending investing in the space. While on the sidelines, I know a lot of people making plenty of easy money on cannabis stock. We have seen Canopy Growth (WEED) go from $2 to $75 in a very short-time. Tilray, a company with just $20 million in first-half revenue, was briefly worth $30 billion. That’s more than Twitter, CBS, Harley-Davidson, Fitbit and American Airlines. At its height Tilray’s enterprise value surpassed 85x bullish estimates for its 2020-year sales and 340x that year’s estimated cash flows. Fast easy money is tempting and contagious. I’m happy for them but I believe the party is not going to last. We have seen this story repeat itself in the past.

To me the investor’s high on the marijuana sector is a red flag, and signaled that a sobering up may be imminent. The speculative craze is fueling a future crisis. This is the same story that repeats itself over and over. The tech bubble that ended in 2000, the pre-crisis U.S. housing craze, and the cryptocurrency bubble are some of the most recent examples of speculative manias. In each case, a defensible investment thesis – that technology will eventually dominate the economy, American housing prices could only move in one direction, and the blockchain was going to revolutionize everything – was extrapolated to a form of ridiculousness where no price was too much to pay for related investments.

There are some serious questions about just how profitable these companies can become under legalization. I think most investors do not understand what the space looks like, how competitive it is, what the margins look like. Distribution costs, advertising and sales taxes will further erode profit margins and cause price compression, possibly squeezing companies whose production costs are too high out of the market. Some of the companies that have gone public suffer from weak management, and investors need to be ready for a fall in marijuana prices because too many suppliers have entered the market. I see the valuations being attributed to places that have virtually no production, virtually no off-take agreements, which don’t operate in multiple countries and have a very limited R&D.

I’m not a market timer, I don’t have a crystal ball, and I don’t what’s going to happen. But I know that a company without profits can’t survive in the long-run. Right now these stocks are being valued like junior mining companies. They are valued in the “promised” of future riches. Eventually, once they start producing (legal sales in our case) they are valued based on their fundamentals (cost, margins, distributions, market, profits etc.). This is similar to a junior mining company transitioning from exploring to producing.

It’s a space that I suggest proper judgement.

Article: Getting Into The Weeds

Podcast: #36: Getting into the weeds on marijuana stocks (we aren’t so high on them) + Update on BAM & TSLA ItunesGoogle. First 23 minutes is a recap on Brookfield Asset Management and Tesla. Weed talk at the 23 minute mark.

Enjoy!

Brian


Getting Into The Weeds

By Brian Langis

  • Canada is legalizing marijuana for recreational use on October 17, 2018.
  • The changes that are underway closely mirror the process that alcohol went through after prohibition ended in the 1920s: liquor regained social acceptance and the product proliferated.
  • Investors need to figure out what something is worth and try to buy it for less. Investing in the marijuana industry is not different in that regard.
  • Most investors do not understand what the space looks like, how competitive it is, what the margins look like. There are questions about just how profitable these companies can become.
  • The long-term prospects for marijuana are very positive. The question is how much are you willing to pay for it?

The cannabis sector has been on a two-year high. Cannabis related stocks are trading at sky-high valuation. “The sky is the limit” as the saying goes. Since August, the segment has surged to a new level of hysteria on a wave of announcements. The sector got a boost when Constellation Brands (STZ), the brewer of Corona and Modelo, agreed to add $4 billion to its investment in Canada’s lead weed company Canopy Growth (CGCWEED). The hysteria got a new boost when Coca-Cola (KOconfirmed an interest in spiking sports drinks with cannabidiol (NYSE:CBD), the non-psychoactive ingredient of marijuana. And thanks to the DEA approving Tilray’s (TLRY) plan to import pot from Canada, a company with just $20 million in first-half revenue was briefly worth $30 billion. Continue reading “Getting Into The Weeds”

Podcast: Getting Into the Weeds

I had the privilege to be back on The Intelligent Investing Podcast with Eric Schleien (GSCM) to talk about the cannabis industry. With the legalization of marijuana tomorrow in Canada (October 17, 2018), it’s good to get  sense of what’s going on in the space.

The first 23 minutes is a re-cap of the previous two podcasts we did together. We looked at what happened to Tesla and Brookfield Asset Management since. On the subject of Brookfield, they recently had their investor day in NY and all their presentations are posted on their investor relation website here. I suggest you take a look at that great company.

Then we get into the weeds.  Choose you favorite platform to listen:

#36: Getting into the weeds on marijuana stocks (we aren’t so high on them) + Update on BAM & TSLA

Behind The Idea Podcast: Disney

Two weeks ago I was on the Behind The Idea podcast with Daniel Shvartsman to share my views on Disney. The Atlantic’s Derek Thompson also contributed at the 50 minute mark.

Here’s the write-up:

https://seekingalpha.com/article/4198481-rest-disneys-story-brian-langis-derek-thompson-podcast

And this is the podcast itself –

https://soundcloud.com/behind_the_idea/behind-the-idea-29-the-rest-of-the-disney-story-wderek-thompson-and-brian-langis

This comes about the article on Disney I wrote back in May that got quite a reaction. The article has some thoughts and insights on the future of Disney and ESPN. Disney is a leader in content and that it has to figure out distribution in the modern internet era. It was a short article that I wrote fairly quickly. The podcast gave me an opportunity to expand on my analysis of Disney. There’s also some discussion on value investing and other stocks.

I hope you enjoy the podcast!

Topics covered:

Brian Langis interview – 2:00 minute mark to 49:00 minute mark

  • 2:00 – Reviewing Brian’s thesis and a new hope for Disney
  • 7:45 – What are you watching for in the transition to streaming? When does the tipping point come?
  • 16:00 – How big a deal is Fox (FOX) (FOXA), how much to worry about $20B extra? The running cost of content and the offense/defense game.
  • 20:00 – Looking at Netflix (NFLX) across the aisle from Disney
  • 24:45 – Getting to the numbers for Disney. What is the story there?
  • 28:30 – How do we avoid getting attached to Disney shares when we enjoy Disney products?
  • 35:30 – Talking value investing in an expensive market, and a cheesy answer. Getting to Alimentation Couche Tard (OTCPK:ANCUF) and Dollarama (OTC:DLMAF) as examples.
  • 41:00 – What has changed in the past five years for your investing?
  • 45:30 – The Iger risk for Disney.

Derek Thompson Interview – 50:00 minute mark to 1:30 minute mark.

  • 50:00 – Setting the scene on Disney, one of the most interesting companies in the world
  • 54:30 – Why does Disney have a good chance of pulling off the transition to streaming?
  • 56:30 – Why relinquish ESPN to decline? What barriers are there?
  • 1:01:30 – What do the economics look like once Disney makes it to streaming land?
  • 1:08 – Are we at the tipping point where video is too easy to make, thus drowning out Disney’s advantage?
  • 1:16 – How important is Fox?
  • 1:19 – Vertical integration – is this business different? Why not work together with Netflix?
  • 1:27 – Let’s get into the fintwit discussion

 

Is Tesla a Fraud?

Print
The Intelligent Investing Podcast – Copyright 2017 Eric Schleien

I had the pleasure to be back on The Intelligent Investing Podcast with Eric Schleien. This is a big one. We are talking about Tesla and the problems that company is facing. We examined its valuation, its history, the bull case, and the short case.

Enjoy!

Is Tesla a Fraud?

The Intelligent Investing Podcast – Stocks & Poutine

Print
The Intelligent Investing Podcast – Copyright 2017 Eric Schleien

I had the privilege of being a guest on The Intelligent Investing Podcast with Eric Schleien. Eric is an excellent host and I had a blast doing this. We mainly talked about Brookfield Asset Management (BAM) and we also touched on Shopify (SHOP), investor behavior that led to inferior returns, and poutine. Eric also found some crazy filings on Reddit. What was originally supposed to be a 30 minute podcast turned into over an hour. Time flies when you are having fun. I’ve listened to a few episodes and Eric’s podcast is a great way to learn more about investing and to get exposed to investing ideas.

If you like listening to podcasts like I do, Google has a new podcast app, called Google Podcast.  If you are on Android, I find it better than their default Play Music app which I’m not fond of.  If you are with iOS (iPhone), you can also use Google Podcast. The app has a minimalist design which I like.

You can listen to The Intelligent Investing Podcast by Eric Schleien here:

Even though we talked about Brookfield Asset Management (BAM), we barely scratched the surface. I am currently writing a post on Brookfield Asset Management that I hope to linked to the podcast soon. BAM is a huge organization with a rich history that’s over 100 years old that goes all the way back to Brazil. I wanted to elaborate on some points. Once completed it can be seen as a companion to the podcast.

Where, Oh Where Are the .400 Hitters of Yesteryear? by Peter L. Bernstein

Peter L. Bernstein, the editor of Journal of Portfolio Management and the famous writer of two popular finance books — Capital Ideas: The Improbable Origins of Modern Wall Street and Against the Gods: The Remarkable Story of Risks. In this article, Bernstein has taken on  has taken Stephen Gould’s theses in Full House: The Spread of Excellence from Plato to Darwin about the 0.400 hits in baseball , and correlates it to the business and portfolio management. In his book, Gould talks about the the disappearance of the .400 hitter. What happened? Do batters have less skill than they used to have? Gould rejects that possibility as highly improbable, especially in a society that cultivates talent with as much zeal as U.S. society does. Bernstein said that “Portfolio managers performance data reveal patterns that are very similar to what actually happens in the baseball world”.

This article demonstrates that potential .400 hitters in the stock market are falling short of their goal because growing numbers of today’s investors are sufficiently educated, sophisticated, and informed to block their way, just as batters capable of achieving a .400 average have fallen short of that goal since the old days because defending teams have developed sufficient skill to block their way.

Where, Oh Where Are the .400 Hitters of Yesteryear? by Peter L. Bernstein