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.

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Inside John Malone’s World

Credit: Barron’s. John Malone and Greg Maffei / Illustration by Michael Hoeweler

Barron’s has done a big article on John Malone’s Liberty empire. Barron’s took a deep dive into the world of Liberty and it’s various moving parts. Malone has been one of the greatest capital allocators of our time and investors that has followed him through the years has tremendously benefited.  Malone has been one of the subject in the famous book The Outsiders by William N. Thorndike (must read).

Article: John Malone_s Liberty is a different kind of media empire—and its stocks look attractive – Barron’s

The Cost of Shareholder Value

Why Gotham’s Greenblatt Likes ‘Gushing’ Cash-Flow Stocks

Good video by one of the market’s great, Joel Greenblatt. Joel also wrote one of the best book on investing ever with one for the worst title ever: You Can Be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits.

“We try to stick to companies gushing free cashflow. Huge returns on capital, meaning they deploy their capital well.

That avoids some of the value traps from ‘traditional’ value. I think that brings up the point – we don’t really think of value as low price-to-book, low price-to-sales investing. We’re actually valuing businesses based on cashflow, like a private equity investor would.

So if you’re trying to figure out what a company’s worth and buy it for less, at a bigger discount, that will never go out of favor even if value as defined by companies like Morningstar, which is low price-to-book or low price-to-sales investing. That may or may not stay in vogue. It may be out of favor sometimes, in favor, it may not even outperform the market going forward.

That doesn’t mean that much to me because those have been correlations that have worked with more than your fair share of companies that are out of favor. I imagine they’ll come back a some point. We’re actually valuing businesses based on cashflows. That’s what stocks are, ownership shares in businesses.”

The Warren Buffett Cocktail

 

The Gift of Stock

I wonder how they feel about their “gift” now.

Courtesy of Raoul Pal, co-founder of Real Vision, via Twitter:

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 Itunes, Google. First 23 minutes is a recap on Brookfield Asset Management and Tesla. Weed talk at the 23 minute mark.

Enjoy!

Brian

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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 (CGC, WEED). The hysteria got a new boost when Coca-Cola (KO) confirmed 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.

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

• Podbean
• iTunes/Apple
• Play Google
• Stitcher
• PlayerFM

What’s Wrong, Warren?

Below is the article published on Warren Buffett on December 27, 1999. The dot-com bubble of the late 90s was a wild time for the stock market. People quit their jobs and became millionaires day-trading tech stocks. Buffett didn’t want anything to do with the high-flying stocks. Chimps were having better returns.

On December 27, 1999, Barron’s published a piece entitled, “What’s Wrong, Warren?” which suggested “Warren Buffett may be losing his magic touch.”

A bullish BRK analyst (Russ) in the article was comparing Yahoo to Berkshire. “Berkshire’s market value is less than Yahoo‘s, yet Berkshire could earn $2 billion after taxes in 2000, while Yahoo will be lucky to make $200 million.” Berkshire now is valued at $83 billion, while Yahoo has a capitalization of $120 billion. Russ believes that Berkshire could double over the next several years.”

In December 1999, Yahoo’s market cap was worth 120 billion and BRK 83 billion. Last year Verizons bought Yahoo for $4.5 billion and Berkshire is now worth over $500 billion.

It was probably not Barron’s shiniest moment.

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Reposted from Barron’s
By Andrew Bary

After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.

Shares in Buffett’s Berkshire Hathawayare set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor’s 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.

At around $54,000 a share, Berkshire’s Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company’s famed investment portfolio, which includes such stocks as Coca-Cola, Gilletteand American Express.

But there’s more to Berkshire’s weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire’s chairman and chief executive, may be the world’s greatest investor, but he hasn’t anticipated or capitalized on the boom in technology stocks in the past few years.