“[Warren Buffett] considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American business.” – John Train’s The Money Masters
Below is a massive case study of Dr. Henry Singleton and Teledyne. The document states it was edited by John Chew from CSInvesting.org, a great blog to follow. All the credits goes to him. Not a lot of people have heard of Henry Singleton, a person that Buffets consider the best one the greatest capitalists and capital allocators of all-time. An investor who put money into Teledyne stock in 1966 achieved an annual return of 17.9 percent over 25 years, or a 53x return on invested capital vs. 6.7x for the S&P 500, 9.0x for GE and 7.1x for other comparable conglomerates. Here’s the document:
Dr. Singleton was also featured in The Outsiders by William N. Thorndike, among 7 other great investors. It’s one of the best investment book I’ve read and if you haven’t it should be on the top of the list.
Interesting comments from Greenlight’s David Einhorn. This is taken from the Q2 2017 letter:
Einhorn also add this to add about GM:
I’m posting this because I agree with Einhorn’s view. I have nothing against Tesla or Elon Musk. Like I said in the past, the world needs more Elon Musk. And I would like to buy a Tesla one day. The issue with Tesla is its valuation. It’s absolutely out of whack with any fundamentals. But this is Elon Musk’s gift: the ability to sell. When you think of GM or Ford, you think old dinosaur boring gas guzzling cars. When you think Tesla you think: technology, AI, self-driving, electricity, revolutionized concept, the future…etc.
Anyway Tesla sells dreams:
Disclosure: Long GM. Don’t have any positions in Tesla.
“You can’t con people, at least not for long. You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you don’t deliver the goods, people will eventually catch on.”- Trump wrote in his book, The Art of the Deal.
I just got back from a two week trip to Toronto. The first week was spent exploring Toronto with my family. The second week of the trip was spent attending various investment events and I want to use this newsletter to share my insights. The events are based around the Fairfax Financial Annual General Meeting (AGM). Over time Fairfax has developed a following of investors and numerous events have spun-off from the AGM. There are conferences, stock picking competitions, dinners and plenty of opportunities for new investment ideas. When you spend most of your time reading company filing and looking at financial statements, these events are a welcome change. But first here are some thoughts on Toronto.
I took some time to visit my brother, Torontonian Hugh Langis, co-founder and co-owner of Half Hunter (design studio) and The Station (best co-working office space in Toronto), which I shamelessly just plug in. By the time of my visit it was already spring time in Toronto and it was just warm enough to walk around. There’s only so much you can do with a two and a half year old but if you get the chance, the Royal Ontario Museum is a good spot to take your family. There are plenty of dinosaur skeletons among other artifacts. I have to say that the city of Toronto got a lot better over the last ten years. When I first stepped in the city in 2002, I wasn’t that impress. Toronto is often described as “la ville reine” (the Queen City). When your nickname is linked to Queen Victoria’s reign, entertaining is not what comes to mind. “Banks and malls” is how I had described Toronto. But that has changed. Millennials and hipsters took over the suits and royalists and transformed the city for a better place. Now Toronto is populated with cool indie coffee shops, trendy restaurants and great pubs for happy hour. The places are jammed packed in the middle of the day. I’m not sure if anybody works in Toronto. While it’s fun to see the city alive, I never fully understood how they manage to pay rent considering the booming prices of real estate (more on that later). Toronto is certainly closing the gap with Montreal. Today Toronto can say they have decent smoked meat, poutine, and bagels, all trademarks of Montreal. I also found Toronto to be cleaner than Montreal. Right now, Montreal is going through a rough time with all the constructions and its orange cones scenery. Corruption and a lack of leadership have set the city behind but Montreal will be vastly improved in five years once the mess is cleaned up. When I was in Toronto there was a pulse in the city. The Maple Leafs was in the playoffs (that’s a very rare thing) so were the Raptors. It was also the beginning of the MLB season and the Blue Jays were playing in Toronto. The city felt alive!
Toronto Real Estate
The Toronto real estate situation was the topic du jour while I was in Toronto. Toronto stole the crown from Vancouver for the most ridiculous real estate prices in the nation, and maybe in the world. Owners and sellers are a very happy camp and while potential buyers are very frustrated. Toronto real estate has been considered expensive for at least the last seven years. Now the prices just shot up 33% year over year. What was considered “bubble price” a year ago now looked like a steal. Why did prices shot up 33% in one year? No reason. The fundamentals didn’t change. The economy didn’t boom. Population is modestly growing. Speculation is responsible for the booming prices. Sometimes higher prices are responsible for higher prices. There’s a pure disconnect between price and value. Housing basically should only rise by the extent of inflation, which is very low, and the extent of the productivity of the country, which in Canada is also very low. Real estate agents in Toronto like to cite the “strong demand” for the rise in price. But this runs against simple economic theory. Demand doesn’t increase the more you increase prices. In other words, the more expensive the real estate gets, the less demand there should be, not more. Need more signs that speculation is behind the rise in prices? A month ago Toronto held its real estate conference. The place was crowded with subprime lenders, third party lenders, and exhibits on how to get a second mortgage on your house. That’s should be enough red flags.
Below are my comments in an email on recent market valuation:
Are stocks expensive, yes. Is it a bubble no. Will there be a correction? Of course. When? Who knows. We are in the 8th year of a bull market rally. In the past there was a correction every 18 months on average. Look where we are today. Nobody predicted that. No one. The stock market reached a new high yesterday, again making a mockery of what savvy economic commentators though they know about the world. It’s absolutely ridiculous. Consider how things looked one year ago. The world economy seemed hopelessly trapped in a cycle of low growth and inflation. Markets recoiled at the mere possibility that the Fed would raise interest rates. Now, interest rates and inflation forecasts have risen substantially from last year; financial markets are shrugging off — or even rallying at the possibility of — imminent Fed rate increases; and it is all taking place during the Trump’s presidency. Now there are signs that the “new normal” will become the “old normal”. Good luck trying to make sense of all that.
Now back to market valuation. The famous Shiller CAPE ratio chart is often brought up to explain the next crash. Bears like to cited this chart when predicting the next big crash. The last two times CAPE ratio was this high was 1929 and 2000. You know how that ended. It’s true and it’s a powerful chart that really sinks in. Well there’s a few things that are not mentioned.
1) The Shiller ratio has been a record high for a few years now. It’s been brought up to predict the next crash but still waiting. There’s a popular saying in the business: “I predicted 9 of the last 5 recessions”.
2)Back in 1929 and 2000 the the risk free ratio was at least 5%. That mean a treasury bond, the safest investment of all, would guarantee you least 5%. Today you are getting nothing, or negative return because of inflation. The reason why the stocks are persistently expensive is that there’s no other option to park your money. Where else are you going to put your saving? Bonds are on the block to get slaughtered if interest rate ever normalized. Why would I loan money at somebody for less than 1% or even negative rates? Then you have gold. Very speculative and how to you value gold? It looks good on your wife what else are you going to do with? The return on gold since 1800 is 0.5%, on stocks 6.7%, and 3.5% for bonds. These numbers are from Professor Jeremy Siegel are Wharton. Because of persistently low interest rate, people are stuck with stocks.
3) The CAPE is backward looking. It divides the S&P with the last 10 years of earnings. It would be more accurate if you divide it with the expected earnings. I know it’s predicting but you can have a range. It would come down a bit.
4) Professor Robert Shiller said he would still buy stocks because interest rates are super low. He also said that you are not looking at the chart correctly. It wasn’t met to be a marking timing mechanism. You have to look at it like its continual.The lesson there is that if you combine that with a good market diversification, the important thing is that you never get completely in or completely out of stocks.
But to hell with all that, too much explanation, let’s just tell people that it’s doom time again. If you are managing money, I think you need to explain a little bit more. You owe that to your clientele.
Charts has the tendency to over simplifying things. You can’t just wait there until it comes down to PE 6x or something. Stocks just don’t drop because the chart said so. You need a catalyst. A recession would do it but it looks like the U.S. is doing well and that should help Canada. My money is on rising interest rates. Rates will need to go above 2% or more for people to get out of stocks. People are sitting on dividend yield of 3% for now, so why get out. My worried is how are we going to pay all that debt back once interest rate rise? We have taken on a lot of debt but its costing nothing. But that can’t last forever. All that need will need to be renewed one day and it might be a much higher rate. Budgets are already strained and nobody is asking how are we going to pay it back. But again, what do I know.
Right now stocks are on fire because of Trump. Which has me worried. It seems like the market only listened to the good stuff Trump had to say and ignore the bad stuff. The good stuff: tax cuts, regulation cut, and massive infrastructure spending. The bad stuff: possible trade war, protectionism policy, disrupting diplomacy etc…. And Trump’s personality is very volatile. But he has a good business team in board so that’s reassuring.
Stocks could be high for a while.The last couple major dips (5-10% drop), like in August 2016, Jan-Feb 2016, Brexit…was only a blip on the radar. The stocks came roaring back. there are too many specialized funds that take advantage of the dips. While you are trying to make sense of what’s happening stocks are back up. The best move was doing nothing.
The market anticipates very big things from the Trump administration. However market anticipations are often wrong. Trump will not get everything he wants and the market could take it the wrong way. But there is also some real improvement in the economic data underneath the shifts, reflecting economic forces that have been underway for years. And this resetting of expectations is evident in market data beyond the always erratic stock market.
Every decade or so there’s a massive storm like in 2000 and 2008. This is the key to real returns. It’s to buy when nobody wants everybody is selling. When there’s “blood on the street”. That’s easy to say (or write). You need nerve of steel to do that. It wasn’t evident in 2008-2009, after stocks were down 50% that the smart thing to do was to buy stocks. After weren’t we on the brink of a financial collapse? There will be another downturn one day to profit from.
This is my 3rd post on Uber. You can read part 1 here and part 2 here.
This isn’t much of a post but instead a link to Business Insider. They have a great piece on Uber’s finance with tables and charts. It appears that they pieced together a bunch of leaks from various sources. It’s not complete and there are holes in the data but it pretty much confirm a lot about we thought about Uber’s financial state, which is aggressive growth combined with mega losses.
Let’s say you are on the road and you need a quick, healthy, fast meal. If you had to choose between A&W, McDonald’s, Wendy’s, Tim Hortons, and Subway, you would probably hop for the last one. Subway has always positioned itself as a healthier alternative. So all the time that you went to Subway because you though you were making a healthier choice, well you are in for a slap in the face. It turns out that the chicken in your Subway chicken sandwich might not contain very much chicken meat at all.
Trent University and the CBC’s marketplace conducted a DNA analysis of the poultry in several popular grilled chicken sandwiches and wraps found at those popular fast food joints. The study revealed that in the case of two popular Subway sandwiches, the chicken was found to contain only about half chicken DNA. In testing, Subway’s oven roasted chicken and the chicken strips in its Sweet Onion Chicken Teriyaki sandwich clocked in with just 53.6% and 42.8% chicken, respectively. The results stood up after extra rounds of sampling.
So it looks like chicken, might taste like chicken, but it’s not chicken. So what is it? An unadulterated piece of chicken from the store should come in at 100 per cent chicken DNA. Seasoning, marinating or processing meat would bring that number down, so fast food samples seasoned for taste wouldn’t be expected to hit that 100 per cent target.
Here are the results:
In the tests, most of the meat from Subway’s competitors was shown to contain 85 to 90% chicken DNA.“Subway’s results were such an outlier that the team decided to test them again, biopsying five new oven roasted chicken pieces, and five new orders of chicken strips,” CBC News explained. Surprisingly, A&W and Wendy’s topped the chart. Now I didn’t expected that. McDonald’s and Tim Hortons did well. So if you are limited in your options, you know you are getting at least 85% chicken. McDonald’s has been working very hard at cleaning its reputation in the last few years. I wish they did the study 10 years (I’m sure its out there) to compare the progress they made.
Naturally, Subway disagree with the results. Subway claimed to use only 100% white meat chicken in their chicken products, they did admit to using soy as a stabilizer. They are going to check with their suppliers. I wonder if A&W and Wendy’s are going to ride high with the results with some kind of marketing campaign. Wendy’s is delicious, but its delicious for all the wrong reasons. You committing a sin eating there, but it’s a sin that makes you feel good (well just at first when you are eating). Now the quality of their chicken is superior to Subway!!??? “Sorry hunny, I’m skipping Subway today for Wendy’s, I want to eat healthy today”. I smell class action lawsuit for misleading consumers…
Subway’s chicken also caused a stir in late 2015 following a study by the environmental group Friends of the Earth, which awarded the franchise an F for using antibiotics in their meat. In response, Subway announced that they would be removing poultry raised with antibiotics from its 27,000-plus of its U.S. locations by the end of 2016.
We want high returns from our investments, but we want much more. We want to nurture hope for riches and banish fear of poverty. We want to be number 1 and beat the market. We want to feel pride when our investments bring gains and avoid regret that comes with losses. We want the status and esteem of hedge funds, the warm glow and virtue of socially responsible funds, and the patriotism of investing in our own country. We want good advice from financial advisors, magazines, and the Internet. We want financial markets to be fair but search for an edge that would let us win, sometimes fair and at other times not. We want to leave a legacy for our children when we are gone. And we want to leave nothing for the tax man. The sum of our wants and behaviors make financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and other times popping them.